PARIS — PARIS -- L'Oreal SA lost investors when the world's largest cosmetics maker acquired the less profitable Body Shop last year. Now, amid a growing appetite for greener cosmetics, the acquisition has given L'Oreal an edge that should help push the stock higher.
Sales at the unit will grow three times the French company's pace by 2010 as more consumers seek products that use natural ingredients and aim to limit their environmental impact, according to an estimate by Oddo Securities.
That will outweigh the drag of Body Shop's lower margins on L'Oreal's immediate profitability.
"There is a definitive green movement," said Tina Gill, a researcher at Organic Monitor, a London firm that compiles data for clients including L'Oreal and Procter & Gamble Co. "Consumers' expectations have become much higher in the last couple of years."
Body Shop, which doesn't test products on animals and has pledged to be carbon neutral by 2010, attracts customers who are increasingly aware of the environmental impact their cosmetics have on their skin and the planet.
P&G;, which makes Cover Girl and Max Factor cosmetics in Hunt Valley, lacks a major environmentally friendly line.
Body Shop sales will increase 24 percent in the next three years, Oddo estimates. By comparison, revenue growth at P&G;'s beauty division will slow from 7.6 percent this year to 4.5 percent by the end of the decade, Bank of America analysts forecast.
Body Shop, founded in 1976 by Anita Roddick, started as a single store selling skin lotions and shampoo.
Roddick, who died in September, also promoted fair trade to provide workers in developing nations with a living wage, buying plant-based oils, essences and other ingredients from communities in developing countries. The company hasn't used PVC in products since 1993 and uses recycled plastics in its bottles.
L'Oreal, which has its headquarters in Paris, bought Body Shop for $1.33 billion.
"Mid- to long-term, L'Oreal has really scored a winner," said Harold Thompson, an analyst at Deutsche Bank AG. "I think they took all their competitors by surprise."
L'Oreal, whose brands span from mass-market Garnier shampoos to luxury Armani makeup and Lancome perfumes, is adding about 110 new Body Shop outlets this year and will keep the expansion pace next year.
"I like Body Shop because they are against animal testing," said Sophie Delannoy, a nurse shopping in a Body Shop in central Paris. "They also practice fair trade, which is important to me."
Body Shop's expansion will offset its impact on profit, analysts estimate.
Operating profit margin at Body Shop, which sells products through more than 2,300 stores in 57 countries, will reach 9.9 percent this year, compared with a 16.8 percent for the rest of L'Oreal, estimates Vanessa Laurence, analyst at Oddo with a "buy" recommendation on the stock.
"We were all very surprised when L'Oreal announced it was buying the Body Shop," said Alice Lhabouz, a fund manager at Meschaert Asset Management in Paris who helps manage about 2 billion euros in assets including L'Oreal shares.
"I don't think Body Shop's margins will ever match those of L'Oreal, but it boosted L'Oreal's sales and there are certain synergies in raw material costs."
L'Oreal isn't stopping at Body Shop. Last year it bought Sanoflore, a producer of organic creams and essential oils based on plants from southern France. The products are sold in pharmacies.
Body Shop may have to switch to purely organic products. Although its creams and makeup boast natural extracts, they also contain chemical additives such as parabens and phthalates that disqualify products from getting a fully "organic" label.
"Body Shop does not fit the organic definition even though its products contain high levels of natural substances," Gill said. "They may have to become more organic in the future if they want to keep their customers."
Waiting for her change at Body Shop's cash register, Sophie Delannoy's daughter Julie said she was a little worried that the brand would abandon its principles after it was sold to L'Oreal.
"L'Oreal obviously looked at the market and saw growing demand for natural cosmetics," she said. "But they didn't change, so I'll keep buying their products. It's good for my health, and it's good for the Earth."