Oriflame Cosmetics S.A. (ORIsdb.ST) is named after the red French royal medieval banner, which rode into war behind Charlemagne. This Luxembourg-based company may need some battlefield courage as it faces chaos in its key Eastern European markets, especially the volatile Ukraine. Can lipstick and skin creams prevail?
Oriflame, which was founded in Sweden and trades on the Nordic Exchange, generates 50% of its business from the Baltics and former Soviet republics called the Commonwealth of Independent States. Political and economic uncertainty mean customers are more likely to stock up on essentials and less likely to splurge on cosmetics.
That could be one reason why analysts are lowering their earnings estimates for Oriflame. The StarMine negative Predicted Surprise of 8% could be an indicator that analysts may not have lowered their estimates enough and the company may report an earnings miss when it reports quarterly results on August 18.
Source: Eikon/StarMine
ROA in retreat
As Oriflame goes up against more established brands, it has seen its trailing 4Q return on net operating assets fall gradually for the last five years. RNOA has fallen to 28% from 48% just five years ago. The two RNOA components are operating profit margin and net operating asset turnover, both of which are at five-year lows. Although the Ukraine crisis has affected performance, it looks like the company was struggling with margins and efficiency measures even before the crisis, which just exacerbated the problems.
Source: Eikon/StarMine
Can’t cover this with powder
As you can see, analysts have been lowering quarterly earnings estimates for Oriflame, and the I/B/E/S consensus estimate is now €0.25, down from €0.31 just a couple of months ago. The StarMine SmartEstimate is even lower at €0.23, which indicates that the estimates may not have been taken down enough. The lower SmartEstimate is an indication that the company is likely to miss estimates.
Source: Eikon/StarMine
Not pretty
Analysts are not just lowering earnings estimates for the current quarter, but for the whole year and next year, too – as seen in the chart above. They have also lowered estimates for revenue and EBITDA. That is one reason Oriflame scores so poorly on the Analyst Revisions Model (ARM) with a score of 2 and could be an indicator of continued analyst pessimism. There are currently 10 sell recommendations for Oriflame and just two buy recommendations.
Oriflame uses a multilevel marketing strategy to sell to customers, and boast a sales force of more than two million. However, the direct-sales model may not be effective any more, as women are busy with work and family and online ordering is so easy.
CEO Magnus Brännström did not mince words when he said the company is facing “challenges of exceptional nature in our two largest markets, Russia and Ukraine. There is no doubt the company is facing very tough conditions.” As a result, Oriflame announced it would be suspending dividends for one quarter. It looks like earnings may just go up in flames.
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