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L'Oreal 2Q & 6 month number - still very profitable

Cosmetics and the application thereof is thousands of years old. The ancient Greeks, the ancient Egyptians all applied make-up in different forms, as did the Chinese and the Japanese. It is not a new phenomenon. In the recent era, in Europe and the Americas, the rise of make-up can be directly linked to a rise in urbanisation, more urban related activities (eating out, visiting hotels, seeing plays and the opera and the like) gave rise to the fashion industry being more accessible and more sought after for "ordinary people".

People were being seen outside of the fields and forests, and normal upper-middle income people would want to look good. For one another of course, this applies more to modern day society than at any given time. In an era of Instagram and selfies, the need to look better has never been more important. There are multiple reasons that woman wear makeup, including the need to look older or younger, to enhance beauty, to get a clearer complexion, to look attractive, to raise confidence. There can be a multitude of reasons. L'Oreal is not just a cosmetics business, they are huge in the hair business.

L'Oreal is a market leader, being the biggest consumer business in their space globally, bigger than Proctor & Gamble by around one-fifth (that division) and over three time the sales of Estee Lauder. Their footprint is pretty breathtaking, nearly 83 thousand employees across 140 countries, selling 32 brands across the portfolio. They hold over 35 thousand patents, having registered nearly 500 alone last year, and comfortably over 10 thousand over the last decade and a bit. The company runs 44 factories and 153 distribution centres worldwide. It is a big business. The company reported their first half numbers for the current financial year last week, not much fanfare and rah-rah involved, the company is after all French.

A couple of tables, remembering that all of these numbers are in Euros of course. This is for both the second quarter and the first half simultaneously. Herewith the sales and profits:



You can see how incredibly profitable the business is, what is always astounding is that their advertising budget is an amazing 30 percent of total revenues, 29.4 percent to be exact. Byron once described this as spending more on telling you how awesome the product is than on making the product awesome. R&D actually represents 3.2 percent of all sales. I suppose with a lot of competition, you have to make sure that you are under the nose of your customer all of the time. And then per product line, which is the most profitable? You can see by a country mile that the consumer products makes up the bulk of that.



The Body Shop stunk up the joint, as you can see, it swung to a loss there. It is small though. The luxury market from coats to watches, handbags to jewellery and everything in-between (which includes this business) has been under pressure globally. We really like the sector, we think that the stock price is well placed to take advantage of an ever increasing and swelling middle class globally. The stock price in Dollars has underperformed, we expect that it is just a matter of time before the market re-rates the stock. Stay the course, this is the cream of the crop.


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