Global Players Hint Worst Might Be Over

While executives remain extraordinarily cautious, there is a growing sense that things may have bottomed out across the board.

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Is the recession’s tide finally ebbing?

It seems to depend on the sector. Luxury firms like Hermès and Tiffany continue to feel the squeeze; the world’s largest beauty company, L’Oréal, is coming under increasing pricing pressure from consumers reluctant to buy more expensive shampoo, and the second-largest discount retailer, Carrefour, is still working on a massive restructuring to prepare for an eventual upturn.

But while executives remain extraordinarily cautious, there is a growing sense at those firms, as well as companies ranging from J. Crew to Guess, that things may have bottomed out across the board.

“We previously said that we planned our business cautiously for 2009,” said Mark Aaron, vice president of investor relations at Tiffany & Co., which reported a 29.7 percent drop in second-quarter profits on Friday. “It appears to us that the tide may be slowly turning in our favor.”

Others aren’t so certain. “I don’t expect any significant improvement,” said Patrick Thomas, chief executive officer of Hermès International, which also reported a profits fall in the first half on weaker sales of watches, tableware and perfumes. “I don’t think the crisis is over at all.”

But then he added the second half could be “marginally” better than the first, an indication market conditions may have pulled out of the nosedive they’ve been in for the last 18 months.

Even those glimmers of optimism were enough to buoy analysts worldwide — both Tiffany’s and L’Oréal’s stocks rose sharply on Friday despite the two companies’ lower profits and the fact L’Oréal reported lower gross margins in the second quarter. That indicates consumers remain extremely price sensitive, at least when it comes to beauty and personal care products.

“While the numbers showed that operating conditions are still difficult, we were reassured by the fact that growth seems to have bottomed in first-quarter 2009 and that margins were not nearly as bad as feared, as management has kept a tight grip over the cost base,” Eva Quiroga, an analyst at UBS, said of L’Oréal.

It isn’t only the analysts who are bullish either. Even ceo’s have begun to talk expansion and growth rather than cutbacks and retrenchment, plotting new store openings and trying to grab even more market share. “We estimate today we are only reaching about one person in five on the planet, and we would like to double that figure as quickly as possible,” said Jean-Paul Agon, L’Oréal’s ceo.

The French beauty giant’s earnings exceeded analysts’ expectations, causing the firm’s stock to bump up 7.4 percent on the Paris Bourse to 69.50 euros, or $99.68 at current exchange, by its close on Friday. Some financial institutions, such as UBS and Bank of America-Merrill Lynch, have upgraded their recommendations on L’Oréal’s stock.

In the half ended June 30, L’Oréal’s net profits, excluding nonrecurrent items after minority interests, reached 1.21 billion euros, or $1.61 billion, down 3.6 percent. The firm’s net profits declined 13.7 percent to 1.086 billion euros, or $1.448 billion.

These came on first-half revenues of 8.769 billion euros, or $11.69 billion, a 1.4 percent year-on-year gain. On a constant basis, sales fell 3.2 percent.

“We are particularly impressed that this EBIT margin improvement was achieved with A&P spending up 30 basis points [to 30 percent] year-on-year as a percentage of sales and R&D spending up 10 basis points [to 3.3 percent],” stated The Royal Bank of Scotland in a research note. “We believe that the decision to continue investing in brand equity is the correct one and bodes well for medium-term sales growth. Gross margins were down 120 basis points year-on-year [to 70.2 percent of sales]. We believe this partially reflects more price-sensitive consumer behavior.”

Globalization is expected to accelerate and boost company growth, he said. Agon emphasized the fact that business in the “rest of the world” zone generated 32 percent of the company’s sales in first-half 2009, but the aim is to reach 50 percent “in the near future.”

When asked about whether L’Oréal is open to making acquisitions, Agon explained, “We are ready and willing to make a strategic acquisition if one should emerge on the market.”

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