Turn to Profit First After Six Consecutive Quarter Losses, Natura May be Out of the Global Top Ten Beauty Companies Rankings

Avon’s parent company Natura released its third-quarter financial report for 2023, revealing a net revenue of 7.517 billion Brazilian Reais, marking a 10.5% year-over-year decrease. The net revenue for the first three quarters amounted to 22.611 billion Brazilian Reais, reflecting a 6.3% decline. With the profits from Aesop’s sale, the third-quarter net profit reached 7 billion Brazilian Reais, marking the first profitable quarter after six consecutive losses. After completing Aesop’s sale, Natura actively seeks to sell off another significant asset, The Body Shop. This move might lead Natura, ranked eighth in last year’s WWD global beauty companies listing, to drop out of the top ten global rankings.

Turn to profit for the first time after six consecutive quarters of losses

On November 13th, the Brazilian beauty giant Avon’s parent company Natura released its third-quarter financial report for 2023. The company’s consolidated net revenue for the quarter stood at 7.773 billion Brazilian Reais, reflecting a 0.7% year-over-year decrease at constant currency rates and a 10.5% decrease at constant currency rates. For the first three quarters, Natura recorded a net revenue of 22.611 billion Brazilian Reais, indicating a 6.3% decline in constant currency terms.

Notably, Natura achieved a net profit of 7 billion Brazilian Reais in the third quarter, a significant improvement compared to the 5.6 billion Brazilian Reais loss in the same period last year. This marks Natura’s first quarter of profitability after six consecutive quarters of losses. The company attributed this profit to the capital gains from the sale of Aesop, a transaction completed in the third quarter. Excluding this and other one-time items, the underlying net profit reached 745 million Brazilian Reais, significantly improving from the 198 million Brazilian Reais loss in the third quarter of 2022.

Breaking down the business segments, Natura &Co Latam, the primary brand, achieved a net revenue of 5.232 billion Brazilian Reais in the third quarter, showing a 2.5% increase at constant currency rates but a 9.4% decline in Brazilian Reais. Natura cited a substantial 38.7% decline in net revenue for Home & Style products at constant rates, especially evident in the Latin American Spanish-speaking regions with sales dropping by 41.6% and 37.6%, respectively.

Avon International recorded a net revenue of 1.456 billion Brazilian Reais, marking a 2.3% decrease at constant currency rates and an 11.6% decrease in Brazilian Reais. Natura indicated that this was primarily impacted by higher pricing and product structure, almost entirely offsetting the anticipated impact of decreased active representatives. The beauty category saw a year-over-year growth of 1.8%, while Home & Style continued to decline due to a continuously reduced product assortment.

The Body Shop reported a third-quarter net revenue of 830 million Brazilian Reais, declining by 13.2% at constant currency rates and 15.0% in Brazilian Reais. The integrated sales from core distribution channels (stores, e-commerce, and franchising) showed a high single-digit decline at constant rates in Q3-23, slightly lower than Q2-23, primarily affected by store closures (111 stores closed in the past 12 months, accounting for 4.5% of the total stores from the previous year). Retail sales from core distribution channels demonstrated a 5.0% decrease in comparable store sales.

Importantly, Natura’s third-quarter net cash (excluding leasing) stood at 700 million Brazilian Reais, starkly contrasting the net debt of 10 billion Brazilian Reais in the third quarter of 2022. Natura attributed this positive cash position to the proceeds from the sale of Aesop. Even with seasonal inventory buildup in the third quarter for the holiday season, the underlying free cash flow (adjusted for debt management and excluding proceeds from Aesop) remained largely neutral.

Fábio Barbosa, Group CEO of Natura &Co stated, “The proceeds from the sale of Aesop, closed in late August, enabled us to quickly advance in our liability management plan, with more than half of our debt already prepaid by the end of the quarter. This is an important step to unlock sustainable value for our investors and deliver on our financial priorities of maintaining a strong capital structure, strict financial discipline on costs and expenses, and boosting cash conversion. On the latter, we reached a neutral cash generation this quarter despite the normal seasonal cash consumption to build up inventories for the holiday season.”

In terms of specific business performance, The Body Shop exhibited the poorest results, showing a double-digit decline in net revenue, whether calculated at constant currency rates or in constant currency terms. Moreover, over the past year, The Body Shop has closed as many as 111 stores. The increase in operational costs has prompted Natura to seek the sale of The Body Shop, aiming to further strengthen its balance sheet, optimize company operations, and save costs.

Seeking once again to sell its subsidiary asset, The Body Shop, to enhance its capital structure

Starting from the first quarter of 2022, Natura began experiencing consecutive losses, extending to six quarters of losses by the first half of this year. The company, a Brazilian beauty giant, achieved profitability in the third quarter of this year for the first time, mainly due to the capital gains from selling Aesop. Natura attributed its previous string of losses primarily to supply chain issues stemming from the Russia-Ukraine conflict, which escalated costs and heightened short-term liquidity pressures. The debt concerns traced back to the acquisition of Avon in 2019.

In 2019, Natura acquired the entirety of Avon’s equity at a rate of 0.3 shares of Natura for every Avon share. Calculated based on the price at the time of the transaction, Avon Group’s current market value is approximately $2 billion. According to Natura, including Avon Group’s debt, the total transaction amount reached $3.7 billion.

However, post-acquisition, Avon’s performance hasn’t been impressive. In 2020, Avon’s net revenue grew by a mere 2.9% year-over-year, while at fixed exchange rates, it plummeted by 18%. In 2021, Avon’s net revenue dropped by 6.09% to 3.4 billion Brazilian Reais. In 2022, Avon’s revenue continued to decline, down by 9.9% at fixed rates and 22.9% in Brazilian Reais. The three-year acquisition of Avon did not yield a turnaround in performance for Natura.

A recent report by Standard & Poor’s Global Ratings revealed a decline in the profits Natura derived from Avon over time. “Avon continues to underperform in the third year of the turnaround since its acquisition. The benefits of commercial, administrative, and systems synergies have been weaker than expected, which raise some concerns about the long-term viability of Avon’s brands and business model,” S&P Global Rating’s analysts Flavia M Bedran and Luciano D Gremone said.

The debt issues arising from the Avon acquisition began impacting Natura from 2022 onwards. By the end of the first quarter of 2022, Natura had current assets of 14.749 billion Brazilian Reais, while its current liabilities amounted to 14.286 billion Brazilian Reais, resulting in a liquidity ratio of just 1.03, signifying a sudden surge in short-term debt pressure. By June of this year, Natura’s liquidity ratio remained at a high level of 1.36, providing some relief in short-term debt pressure but still retaining significant strain.

As of June this year, Natura’s total liabilities reached 30 billion Brazilian Reais against total assets of 50.594 billion Brazilian Reais. The high debt-to-asset ratio leads to elevated financing costs and substantial annual interest expenses, affecting the company’s profits and contributing to Natura’s six consecutive quarters of losses.

In April of this year, international rating agency Moody’s downgraded Natura &Co Holding S.A.’s overall bond rating to Ba3 and adjusted its overall outlook from stable to negative.

Given this backdrop, although the sale of Aesop generated positive cash flow for Natura in the third quarter, the company still faces relatively tight cash flow and debt concerns. Consequently, in the third quarter, Natura continued seeking asset sales to alleviate the issues stemming from its balance sheet.

Natura CEO Fábio Barbosa said, “Finally, we recently announced updates related to The Body Shop sale process and we will keep the market informed of any relevant news. This is another important step to continue to streamline our business, a journey started in the second half of 2022. We are confident that our enhanced capital structure, combined with a laser-focus strategy on our key priorities, will allow us to unlock significant value for our shareholders in the future through both topline growth and margin expansion.”

In reality, the sale of Aesop was a move of necessity for Natura, considering Aesop was one of its standout brands in recent years. In 2022, at fixed exchange rates, Aesop’s net revenue surged by 21%, reaching 2.72 billion Brazilian Reais (548 million USD). By the second quarter of 2023, Aesop’s net revenue hit 759 million Brazilian Reais (153 million USD), marking a 14.2% year-over-year growth in reported currency, making it the only brand showing growth. The capital gains from successfully selling Aesop resulted in ‘repaying more than half of the debt ahead of schedule by the end of the quarter,’ stated Natura CEO Fábio Barbosa. This necessity drove Natura to reluctantly part ways with Aesop.

However, the sale of The Body Shop was a more routine decision. Considering its performance in the third quarter, The Body Shop exhibited the poorest results. Over the past year, The Body Shop closed as many as 111 stores, while retail sales from core distribution channels demonstrated a 5.0% decrease in comparable store sales.

May drop out of the global top ten beauty companies rankings

In WWD’s ranking of the top 100 global beauty companies in 2022, Natura held the eighth position, preceded by L’Oréal, Unilever, Estée Lauder, Procter & Gamble, Shiseido, LVMH, and Beiersdorf.

Over recent years, Natura has gradually fallen behind other international beauty giants, most notably reflected in its declining performance. In the first three quarters of this year, it achieved a net revenue of 22.611 billion Brazilian Reais, marking a 6.3% year-over-year decrease. Comparatively, in terms of revenue, Natura’s decline sets it notably behind other international beauty giants.

For other industry leaders, as the impact of the pandemic gradually recedes, most witnessed revenue growth, except for Estée Lauder affected by reduced travel retail, and Shiseido impacted by Japan’s government discharge of nuclear wastewater. In contrast, Natura’s revenue not only declined but completed the sale of Aesop, a revenue-generating asset, which will inevitably have a significant impact on Natura’s performance in 2023.

However, the decline in performance is not merely superficial; it reflects underlying issues in Natura’s market positioning and its less proactive approach to digital transformation.

Firstly, the lack of proactive international market expansion is one of the reasons for Natura’s decline.

According to the latest financial reports, Brazil remains Natura’s largest market, with its revenue share growing from 34% in the second quarter of 2022 to 39% in the third quarter of 2023. Revenue from regions outside Latin America has decreased from 34% to 32%. Particularly in North America, which hosts the world’s largest cosmetics market, Natura’s revenue share is only 4%. In the Asia-Pacific region, where the second-largest market, China, is located, the revenue share is merely 6%. Moreover, a significant portion of Asia’s performance was contributed by Aesop, and following Aesop’s sale, the business in Asia might further shrink.

In comparison, other beauty giants such as L’Oréal and Estée Lauder have a more balanced global presence. The latest third-quarter 2023 reports reveal that L’Oréal’s largest market is Europe, with a revenue share of 31.86%, followed by North America at 27.18%, and North Asia, including China, at 25.18%.

Estée Lauder’s fiscal 2024 first-quarter revenue share from the Americas reached 34.34%, Asia-Pacific at 30.06%, and Europe, the Middle East, and Africa at 35.59%. Their business layouts globally are more balanced than Natura’s.

Even Shiseido, a Japanese beauty company, has revenue shares exceeding 10% in regions outside Japan and China in EMEA and the Americas, indicating a more reasonable market positioning than Natura.

Natura’s revenue share from regions outside Latin America has decreased from 34% to 32%, reflecting a continued contraction in international market business. As an international beauty conglomerate, a more balanced market presence allows for more equitable development space, mitigating performance growth risks from regional incidents.

Secondly, the lack of proactive digital transformation has contributed to Natura’s declining performance.

Since its inception, Natura has operated primarily through a direct selling model, a model also prominent in Avon, which it acquired. Even in 2023, direct sales remain Natura’s main sales method. The company directly employs sales representatives to sell products, enabling direct consumer engagement to understand consumer needs promptly and produce better products or provide more personalized services accordingly.

According to their third-quarter report, a substantial 82% of their revenue comes from traditional direct selling, with 11% from retail (own stored and Franchise) and only 6% from digital.

As consumers increasingly transition to digital shopping, the rise of new retail impacts traditional retail. Simultaneously, competition from international brands like L’Oréal, Estée Lauder, and Shiseido places pressure on direct-selling giants like Avon and Natura. Furthermore, significant increases in store rent and labor costs have compounded their challenges. These factors make it increasingly difficult for Avon and Natura to adapt to the current market environment. Especially during global crises like the pandemic, traditional direct selling faces severe setbacks.

It’s evident that Natura’s development diverges from market trends; the absence of proactive digital transformation, the adherence to traditional direct selling, and a lack of active international market expansion have made Natura’s recent years challenging.

In summary, a broader brand portfolio across multiple product categories can cater to diverse consumer demands, fortify the company’s resilience against individual product performance declines, and a more balanced market presence allows deeper participation in global market collaborations, ensuring more robust performance resilience during regional conflicts, pandemics, and other unforeseen events. Digital transformation facilitates adapting to changing consumer consumption patterns.

It’s apparent that compared to international beauty giants, Natura falls significantly short in brand portfolio and international market positioning. Following the sale of Aesop, Natura will likely fall further behind other beauty giants and may drop out of the global top ten rankings.



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