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L'Occitane 'bullish' on China in tough global retail market

French skincare brand reports 59.4% decline in first-half net profit

A L'Occitane store in Hong Kong's busy Causeway Bay shopping district. The city is the company's fourth-largest market in terms of sales. (Photo by Dean Napolitano)

HONG KONG -- L'Occitane International, the French cosmetics and personal-care products company, said it was optimistic on its outlook for mainland China, despite what it called a "challenging" global retail environment.

"We're still very bullish on China," Andre Hoffmann, vice chairman and managing director, said at a press conference in Hong Kong on Monday.

"Today, China is the No. 3 market globally for the L'Occitane group," Hoffman said. "We expect by the end of the fiscal year it could reach the No. 2 market status after Japan," surpassing the U.S.

The comments came as the Hong Kong-listed company reported a drop in fiscal first-half net income for the period ended Sept. 30.

Net sales in China for the first half were 60 million euros ($70.7 million), up 18.2% from a year earlier, boosted primarily by a 15.8% increase in same-store sales, the company said in a statement, adding that a marketing campaign featuring Chinese singer Lu Han "continued to draw traffic both online and offline."

Janis Lai, L'Occitane's investor relations manager, and Andre Hoffmann, the company's vice chairman and managing director, at Monday's press conference in Hong Kong. (Photo by Dean Napolitano)

While the company maintains its own e-commerce website in China, Hoffmann noted that "it really can't compete in terms of traffic and awareness with the major marketplaces like [Alibaba Group Holding's] Tmall."

"It's better that we focus our energy and investments to build up the brand through Tmall," he said.

L'Occitane said first-half net profit fell 59.4% to 10.7 million euros compared with 26.4 million euros in the same period a year earlier.

Thomas Levilion, executive director and group deputy general manager of finance and administration, attributed the drop to unfavorable exchange rates, one-off costs and seasonal effects.

Those included expenses related to the opening of two new flagship stores in London and Paris, marketing and promotional costs in preparation for the important Christmas shopping season, and a tax credit of 6.5 million euros in the year-earlier period.

Revenue for the first half, which was first announced last month, was 548.2 million euros, down 0.6% from 551.7 million euros a year earlier.

L'Occitane said 11% of its total sales came from mainland China, up from 9.2% a year earlier. Sales in Japan represented 18.1% of sales, while the U.S. was second with 11.5%.

Net sales in Hong Kong, L'Occitane's fourth-largest market, were 51.1 million euros, representing 9.3% of its total revenue for the first half.

Despite the rise of e-commerce, Hoffmann said retail outlets are still a crucial part of the company's strategy because it allows customers to test fragrances, creams and other products in its stores.

Growth in L'Occitane's budget for digital marketing -- including social media, bloggers and through key opinion leaders (known as KOL) -- continued to take dominance.

Hoffman said that while the company maintains a traditional marketing budget for television, print media and outdoor advertising, "the shift in our company over the past five years has been quite dramatic."

Globally, L'Occitane spends 60-70% of its marketing budget on digital promotion. "We do belive that trend to continue," Hoffman said.

The results were released after the market closed on Monday. Shares of the premium skincare brand, which are listed in Hong Kong, closed down 2% to HK$14.66. By comparison, the benchmark Hang Seng Index rose 0.2%.

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