PARIS (Reuters) – Shares of L’Oreal, the largest cosmetics manufacturer in the world fell Thursday after higher marketing expenses weighed on profitability. These increased costs overtook forecast-beating sales figures and market share gains.

North American demand drove the sales giant to increase 11.2% over the fourth quarter. It reached 9.09 billion euros ($10.40billion) compared with the 8.74 billion euros forecasted by analysts in Refinitiv.

Investors were closely monitoring the company’s expenditure on promotions and advertising. The result was a slight increase in the annual operating margin to 19.1%. It is slightly lower than what the market consensus had cited. Credit Suisse (SIX) Analysts ahead of the Results

The stock dropped by 3% around 0925 GMT. This was among the lowest performers of France’s blue-chip.

Evercore analyst pointed out second-half profit lagging sales. The result was a 50 basis point decrease in operating margin.

In a note to clients, they stated that the lack of operating leverage and an arguably modest return on the increase – which translated into sales gains in line with peers – could suggest diminishing returns for incremental marketing (overspending).

The company’s long-term approach to marketing is well-known. However, Bernstein analysts noted that the investment in advertising was a “very large step up on a larger sales basis”.

L’Oreal cut advertising and launched fewer products in the wake of the 2020 pandemic. Last year, it recommenced spending on marketing and developing new products.

Credit Suisse analysts claimed that fears about China’s slowdown “did become a reality”, though the company stated in a Wednesday statement that China growth was still half the rate of pre-pandemic levels.

Nicolas Hieronimus is the chief executive officer of L’Oreal. He told analysts on a call that China’s performance was slowing in the second quarter due to the high comparison base, headwinds from Omicron and other factors. But he added that the outlook for the medium-term future was excellent.