Company Reports

Wide-moat L’Oreal posted a solid sales update for the first quarter, reaffirming our view on the global beauty maker’s long-term prospects underpinned by strong brands, innovation track record, and a balanced exposure to premium and mass segments. Revenue increased 9.4% like-for-like, driven by continued strength in derma skincare and successful product releases in premium hair care and high-end fragrances, and we think the firm remains on track to deliver a 7.4% sales expansion in 2024. We maintain our 10-year projection for high-single-digit annual sales growth and low 20s average operating margin and view shares as overvalued.

As the largest beauty product maker globally, L’Oreal has built an impressive collection of top-selling beauty brands balanced across core categories (skin care, makeup, hair care, and fragrance) that straddle the premium and mass segments. We believe its strong brand differentiation based on innovation, marketing, and consumer experience, coupled with scale-based cost advantages, should support a durable competitive edge, enabling the firm to maintain excess returns for more than 20 years. As such, we award L’Oreal a wide economic moat rating.

We don’t plan any material changes to our EUR 388 fair value estimate after absorbing wide-moat beauty maker L’Oréal’s 2023 results that slightly missed our forecasts. We think L’Oréal remains well positioned in both premium and mass beauty for the long term thanks to a strong brand portfolio and tight channel partnerships globally. In particular, we expect its derma skincare and high-end fragrances to continue fueling sales expansion thanks to strong product efficacy and expanding distribution. We are maintaining our 10-year projections for high-single-digit sales CAGR and a 20% average operating margin. Shares remain overvalued after an 8% fall on the report.

Wide-moat L’Oréal posted a strong sales update for the first nine months that reaffirmed our favorable view on the beauty maker’s long-term prospects underpinned by strong brands, innovation, and a balanced exposure to premium and mass segments. Revenue grew 9.4% (12.6% like for like) for the period, on the back of broad-based strength across categories and geographies (excluding travel retail in China), and we view the firm as remaining on track to deliver the 10.6% sales expansion we forecast for 2023. Our 10-year projections for high-single-digit sales growth and low-20s average operating margins also remain in place. Shares trade in a range we’d consider fairly valued.

As the largest beauty product maker globally, L’Oreal has built an impressive ensemble of top-selling beauty brands balanced across core categories (skin care, makeup, hair care, and fragrance) that straddle the premium and mass segments. We believe its strong brand differentiation based on innovation, marketing, and consumer experience, coupled with scale-based cost advantages, should support a durable competitive edge, enabling the firm to maintain excess returns for more than 20 years. As such, we award L’Oreal a wide economic moat rating.

Wide-moat L’Oréal posted better-than-expected first-half results that showcased the beauty product maker’s strong brands and balanced exposure to premium and value segments globally. Revenue grew 12% and EPS up 11%, exceeding our estimates of 11% and 9%, respectively, and we will nudge up our 2023 preprint projections to incorporate the earnings update. We are maintaining our 10-year forecasts for high-single-digit sales growth and low-20s average operating margins. Shares trade in a range we'd consider fairly valued.

We are raising our fair value estimate for L’Oreal to EUR 376 (from EUR 336), which implies a 31 times multiple against our 2024 earnings estimate. The increase is driven by higher annual sales growth assumptions (7.0% versus 6.2% in the prior model), alongside faster growth (7% versus 6% previously) in earnings before interest (excluding tax) in the decade following the 10-year explicit forecast period. That said, we view L’Oreal shares as slightly overvalued, trading at an 8% premium to our intrinsic valuation, and would wait for a better risk/reward opportunity before building a position in this name.

As the largest beauty product maker globally, L’Oreal has built an impressive ensemble of top-selling beauty brands balanced across key categories (skin care, makeup, hair care, and fragrance) that straddle the premium and mass segments. We believe its strong brand differentiation based on innovation, marketing, and consumer experience, coupled with scale-based cost advantages, should support a durable competitive edge, enabling the firm to maintain excess returns for more than 20 years. As such, we award L’Oreal a wide economic moat rating.

We believe L’Oreal has secured a wide moat, fortified by a mix of market-leading brands, entrenched relationships with retailers, and a scale-based cost advantage. L’Oreal is the world’s third-largest advertiser, which we think affords it a degree of negotiating power. We expect these benefits to endure for the next 20 years, prompting its wide moat designation.

Powered by double-digit sales growth in both consumer products and dermatological beauty (formerly known as active cosmetics), wide-moat L’Oreal’s 2023 first-quarter sales put it on track to exceed our full-year forecast. The firm recorded 14.6% sales growth (13% like for like) in the quarter, above FactSet consensus of about 8% and outpacing our 6% sales growth estimate for the year. Given this strong start and our expectation that consumer spending in China is recovering, we expect to revise our 2023 estimates and lift our EUR 326 fair value estimate by a low-single-digit percentage. However, we believe L’Oreal’s current valuation more than reflects its sales and margin expansion opportunities.

In its largest-ever acquisition, L’Oreal announced it has signed an agreement (expected to close in 2023’s third quarter) to buy Aesop, a luxury skin, hair, and body care brand, from Natura & Co. Natura shopped it around over the past few months and reportedly drew interest from wide-moat LVMH and others. The all-cash sale to L’Oreal values Aesop at $2.525 billion, or 4.7 times 2022 sales of $537 million. While seemingly a high price, it aligns with current and historical valuations of L’Oreal itself and reflects the potential for Aesop and the luxury beauty market. Indeed, it was only a few months ago that wide-moat rival Estee Lauder bought Tom Ford for $2.3 billion (net), or approximately 2.5 times sales.

We believe L’Oreal has secured a wide moat, fortified by a mix of market-leading brands, entrenched relationships with retailers, and a scale-based cost advantage. L’Oreal is the world’s third-largest advertiser, which we think affords it a degree of negotiating power. We expect these benefits to endure for the next 20 years, prompting its wide moat designation.

L’Oréal overcame COVID-19 impacts in China and difficult macroeconomic conditions in Europe and North America to post 2022 results that largely met our estimates. While the near-term outlook is clouded as these external pressures continue, we believe the firm has good momentum across its vast product portfolio and is poised to benefit from the growth of the beauty market and global middle class. Our wide-moat rating on L’Oréal is based on the power of its brands, its relationships with retailers, and the cost advantages that come with being the largest producer of beauty products. We expect to lift our EUR 318 fair value estimate on the company’s shares by a mid-single-digit percentage but would look for a more attractive entry point.

After wide-moat L'Oreal reported third-quarter revenue, we do not plan to materially revise our EUR 318 fair value estimate. We believe the shares are fairly valued. Sales in the first nine months of the year increased 20.5% (approximating our 19.8% estimate for 2022), driven by a 12.0% gain in like-for-like sales, an 8.1% currency boost, and a 0.4% contribution from acquisitions. We maintain our long-term outlook for mid-single-digit sales growth as inflation, which should recede in the coming quarters, is temporarily lifting growth above this level.

We believe L’Oréal has secured a wide moat, fortified by a mix of market-leading brands, entrenched relationships with retailers, and a scale-based cost advantage. L’Oréal is the world’s third-largest advertiser, which we think affords it a degree of negotiating power. We expect these benefits to endure for the next 20 years, prompting its wide moat designation.

Wide-moat L’Oreal reported first-half like-for-like sales growth of 13.5%, balanced between volume and price/mix. This tops our 10.4% full-year LFL estimate despite COVID-19-related lockdowns in China during April and May. Per the firm, the global beauty market grew 6% during the period, indicating it achieved sizable share gains. Further, despite initial signs of economic softening, Luxe (37% of period sales) was resilient with 16% LFL growth and remains robust through July.

The global beauty market has realized 4%-5% annual growth over the past decade (excluding the pandemic), and we expect a modest acceleration to 5% in the next 10 years as China becomes a bigger portion of the mix (from 19% of the global market in 2021 to 29% in 2031 by our estimate) and as makeup continues to recover post-pandemic. China should continue to be a driving force of growth for years to come, as consumers in this region are just beginning to expand into makeup, fragrance, and haircare, although the skincare market is more developed. Further, as other emerging markets (Brazil, India, Mexico) experience rising incomes, this should boost their per capita consumption of beauty, providing additional growth potential beyond China.

We believe L’Oréal has secured a wide moat, fortified by a mix of market-leading brands, entrenched relationships with retailers, and a scale-based cost advantage. L’Oréal is the world’s third-largest advertiser, which we think affords it a degree of negotiating power. We expect these benefits to endure for the next 20 years, prompting its wide moat designation.

We are impressed with L’Oréal’s 13.5% like-for-like first-quarter sales growth, which tops the 8% growth of the global beauty market (company estimates), with management reporting market share gains in all geographic zones and product divisions. The strength was driven by the post-pandemic recovery in makeup, L’Oréal’s ongoing momentum in active cosmetics (an 18% like-for-like boost), and market share gains in the professional division, given investments in e-commerce. This growth is notable considering many challenges faced during the quarter, such as stay-at-home orders in many large cities in China, and supply-chain constraints prohibiting L’Oréal from filling all orders. Product shortages were especially pronounced in the U.S., where backlogs at shipping ports prevented the import of necessary raw materials, but this bottleneck should improve in coming months as cargo is now moving through terminals at faster rates. The firm is also navigating inflation well, with consumers not pulling back on beauty purchases in any markets. However, with inflation continuing to accelerate, we suspect L’Oréal’s 2022 gross margin may now contract slightly (compared with our preprint expectation for a 10-basis-point gross margin increase to 74.0%). Management expects it can offset this pressure with a modest pullback in marketing expenses, and we do not think this would impair its strong brands (an important pillar of its wide moat) given last year’s surge in marketing investments to 32.8% of sales from the 30.6% average over the three prior years.

We believe L’Oréal has secured a wide moat, fortified by a mix of market-leading brands, entrenched relationships with retailers, and a scale-based cost advantage. L’Oréal is the world’s third-largest advertiser, which we think affords it a degree of negotiating power. We expect these benefits to endure for the next 20 years, prompting its wide moat designation.