RPT-UPDATE 3-L'Oreal fights back with cheap creams, cost cuts

Tue Feb 17, 2009 9:08am EST

(Repeats to additional Reuters codes)

* Plans to launch cheaper products, to cut costs

* Expects to improve gross margins in 2009

* Operating margins and Q4 sales miss expectations

* Shares up 1.2 pct after early drop of as much as 3 percent

(Recasts, adds details, management comments, updates shares)

By Astrid Wendlandt

PARIS, Feb 17 (Reuters) - L'Oreal (OREP.PA) plans to fight consumer gloom by introducing cheaper creams and cutting costs as it braces itself for a tough first half, particularly in luxury cosmetics, it said on Tuesday.

The world's biggest beauty products group, whose slogan is "because you're worth it," said it hoped to produce a "decent" result in 2009 and hoped to improve gross margins.

However demand was likely to remain unpredictable in the United States and traditional growth markets such as Russia and the Middle East.

The owner of Body Shop, Vichy and Garnier creams missed its internal sales growth target of 4 percent for 2008 and generated operating margins slightly below expectations.

Looking at 2009, L'Oreal said it expected to beat the global cosmetics market which it forecast would continue to grow after gaining 2.9 percent in 2008 in terms of sales.

L'Oreal shares, which fell as much as 3 percent in early trade, later recovered as investors cheered the group's cost-cutting efforts and aggressive product pipeline.

The stock was up 1.2 percent at 53.51 euros in early afternoon trade, while the DJ Stoxx European Personal and Household Goods index .SXQP was down 0.3 percent.

The volume on L'Oreal shares already represented 100 percent of the stock's 90-day average daily volume, compared with 34 percent for France's CAC 40 index .FCHI.

The Paris-based group said it had cut 500 jobs in the United States and had launched its first hiring freeze in western Europe since 1974.

Coupled with the closure of plants, the measures would lead to a significant reduction in costs but it give no figures.

"I think the first quarter is going to be particularly difficult, especially in luxury," L'Oreal Chief Executive Jean-Paul Agon told investors at the group's annual results presentation in Paris.

L'Oreal said it would this year introduce moisturising creams costing between 5 and 10 euros, along with smaller-sized perfume bottles and new anti-ageing products and creams for men.

It added that its new "Powermascara" launched in December was a best seller.

BETTENCOURT QUESTION

Agon said he had met on Monday with Liliane Bettencourt, the 86-year-old billionaire daughter of the group's founder who owned 30 percent of L'Oreal.

He said she was in good health, quashing speculation she was feeling poorly, and she had not spoken about plans regarding her stake, worth 9.5 billion euros.

Food group Nestle (NESN.VX) has a 29 percent lock-up in L'Oreal which expires on April 29 and has first right of refusal if Bettencourt wants to sell shares.

"We have no news about Nestle's intentions," Agon added.

The maker of Lancome lipstick and Biotherm creams saw a 0.6 percent decline in fourth-quarter sales, disappointing investors who expected on average a rise of around 1 percent.

"The results are far worse than the already very low expectations of the market," said Andrew Wood, an analyst at brokerage Bernstein.

The group's operating margin slipped to 15.5 percent in 2008 from 16.6 percent in 2007. Nine analysts polled by Reuters had on average expected an operating margin of 15.8 percent.

Earlier this month, U.S. beauty products groups Estee Lauder (EL.N) and Elizabeth Arden (RDEN.O) unveiled restructuring plans to address the slowdown in consumer spending which they predicted was unlikely to end soon.

Hit by adverse trading conditions, L'Oreal posted a 1.2 percent rise in full-year net profit to 2.06 billion euros, excluding exceptional items, slightly below average expectations of 2.07 billion based on the Reuters poll.

At the end of August, L'Oreal had said it expected a "substantial increase" in net profit for the full year.

L'Oreal stock has lost around 14 percent since Jan. 1, while the French CAC 40 index of blue chips .FCHI has lost nearly 10 percent and the DJ Stoxx Personal and Household Goods .SXQP index has gained just over 1 percent.

L'Oreal trades on multiple of about 14 times forecast 2009 earnings, in line with its peers, according to Reuters data. (Additional reporting by Pascale Denis; Editing by David Holmes) ($1=.7908 Euro)

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