L’Oreal’s First Half Profit Jumps 30%

L’Oreal, the world’s biggest cosmetics company said first half net earnings in January-June were EUR761.1 million, up from EUR587.1. Operating profit soared 28% at EUR1.02 billion on a 5.6% gain in revenue to EUR7.37 billion.

Company chairman Lindsay Owen-Jones shrugged off the company’s record of 17 straight years of double-digit net profit growth and said only that the first-half performance was “extremely encouraging” for the full year. “Despite an unpredictable economic climate, 2002 should be a very good year for L’Oreal,” Mr. Owen-Jones said.

Sales growth, productivity gains, success in cutting inventory ratios and “strict management” of the currency factors that curbed revenue to the lower end of expectations were the simple answers behind the net profit leap.

“I improve profit margins by giving people better products with better margins than others in the business,” Mr. Owen-Jones said, referring to a “permanent conquest” of margins.

As well as cutting the value of inventory to 15.3% of first-half revenue from 18.4% a year earlier, he explained that L’Oreal has a strategy of upgrading and rationalizing production facilities after it acquires new business. L’Oreal traditionally doesn’t chase big acquisitions but instead extracts growth from existing operations and bolt-on buys.

“After we’ve made an acquisition, generally within 18 months we’ll have made a step-up in production facilities in the new business that will allow us to close a factory,” bringing production synergies and economies of scale, Mr. Owen-Jones said.

The executive cited the example of the Colorama business it bought in Brazil in 2000, from which the company is now supplying Latin America having closed down its plant in Argentina. Similarly, L’Oreal is supplying the Japanese market with Maybelline brand products manufactured in China now that its plant there has reached certain production quality standards.

“There’s no particular reason why the margins trend should stop,” Mr. Owen-Jones said, explaining that investment in the last 10 years in the full consolidation of L’Oreal USA and a major drive to develop brands in emerging markets had created room for margin development. “I see very considerable potential there for some time.”