Body Shop auction could be hurt by profits slide

By

Sandra Halliday

Published
Jun 8, 2017

L’Oréal’s plan to sell its ethical beauty retailer The Body Shop could be hurt by falling profits at the UK-based operation, according to reports.

The Body Shop is believed to have seen its profits falling in the latest year with expectations of earnings dropping to just €65m on an Ebitda basis for 2017. That is a significant fall from the €80m it earned in the prior year and is not much over half of the €113m it made as recently at 2013.

L’Oréal has owned the business for 11 years and signalled its intention to offload it earlier this year. It is believed to have received bids so far from CVC Capital Partners, from Italy’s Investindustrial and from China-based Fosun.

L'Oréal's management board met this week to look at the bids, but with earnings sliding, it is unclear whether the prospective buyers will want to rethink what they are prepared to pay. It already appears that China’s Renhe Pharmacy considered making an offer but decided against it.

Sky News reported that the situation has arisen not just because potential bidders have been hard to find. Sources said that some investment banks simply would not provide finance for potential buyers to power a takeover bid due to the sliding profits at the firm and also because of plunging cashflow.

So why is the firm in such a weak position? The Body Shop has suffered as its USP - a combination of an ethical, anti-animal testing stance and its use of ‘natural’ ingredients - has become less of a standout feature in recent years. Numerous companies from the mass-market to the high-end have embraced both its ethical and natural stance and a raft of newer names doing just that have created a real buzz among the Millennial and Gen Z demographics that The Body Shop needs in order to prosper.

Over 40 years old, The Body Shop is clearly generating much less excitement despite its ongoing commitment to ethical retailing and its very vocal campaigning.

It makes sense for L’Oréal to be pursuing an exit strategy as it focuses instead on its high-performing power brands, on acquiring dynamic companies that are enjoying strong growth, and on getting a good return on its £650m-plus investment in the British firm.

However, while L’Oréal is expected to come up with a shortlist of two bidders after its current deliberations, the target price of €800m is now seen as unlikely to be achieved.

And whoever makes the shortlist, analysts also said that there could be complications over the ethical stance of the potential new owners. The Body Shop has very publicly renewed its anti-animal testing campaigning this year and some industry-watchers told Sky News that a Chinese bidder could run into problems given the country’s poor record on the use of animals in cosmetics product testing.