Skin-care is back. That's the message from both L'Oreal SA and Estee Lauder Cos. It's one Nestle SA CEO Mark Schneider and activist investor Dan Loeb should be paying close attention to.
Demand for products that primp the skin is giving the two cosmetics giants a second wind as concern was growing that the selfie-induced craze in colored makeup had reached its peak. That helped L'Oreal to beat sales estimates this week, and Estee Lauder benefited in a similar way.
The important thing, as Deborah Aitken of Bloomberg Intelligence notes, is that this is a second and more profitable engine of expansion. Face masks and the like have wider profit margins.
This shift matters to Dan Loeb, the activist investor who has been pressing Nestle to offload its 23 percent stake in L'Oreal. The French cosmetic producer's shares are near their record high, valuing the holding at 25 billion euros ($29 billion).
L'Oreal could use its strong balance sheet -- it has little debt and could liquidate its own 9 billion-euro stake in Sanofi -- to buy back Nestle's holding without sacrificing too much financial flexibility to do other deals.
Schneider has left the door open to an eventual deal -- but has indicated he was in no rush to decide. That's partly because Nestle already had so much on its plate: he's wrestling with sluggish sales growth. Schneider's decision won't be determined by one quarter's sales numbers.
But with make-up demand still booming and skincare showing signs of a recovery, his window to make a decision has lengthened. Schneider just needs to act before the industry really does hit peak lipstick.
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