L’Occitane Earnings: Sol De Janeiro Almost Tripled Its Sales; Shares Undervalued

Narrow-moat L’Occitane’s 00973 fiscal secondquarter (ending September 2023) trading performance mildly exceeded expectations, but management maintains its full-year guidance. Overall, we keep our fair value estimate at HKD 37 and continue to view shares as very undervalued. We believe L’Occitane’s portfolio of brands has a strong competitive positioning and favorable growth prospects. Investors should find attractive the current market valuation of 16 times price to fiscal 2024 earnings.

In the second quarter, sales grew 25% on a constant currency year-over-year basis, accelerating from the 20% growth recorded in the first quarter. The strong performance was driven primarily by the newly acquired brand Sol de Janeiro, which grew by a whopping 189%. Heading into the crucial third quarter, which traditionally represents the most substantial period for the company, management has observed a slight slowdown in growth during October, indicating a softness in performance. That said, we still expect L’Occitane to deliver its guidance for the full year, which targets 17% sales growth and 12% operating margin.

Although sales continue to expand at decent rates, they would have grown more if travel retail, especially in Asia, had recovered faster. Management mentioned that travel retail in both Korea’s and China’s Hainan has been underdelivering, and we attribute that to the slower-than-expected rebound in Chinese international travelers. The company maintains a cautious stance toward competition, again highlighting the highly promotional environment, especially in China. We like L’Occitane’s commitment to balance between excessive discounting and ensuring maintained sales growth.