L’Occitane: Management Lifts Fiscal 2023 Margin Guidance

Narrow-moat L’Occitane’s 00973 fiscal fourth-quarter (ending March 2023) trading performance mildly exceeded expectations, and management lifted its full-year adjusted operating profit margin (excluding impairments) guidance to 15% from 14%. Overall, we slightly raised our fair value estimate to HKD 37.00 from HKD 36.60, and we continue to view shares as very undervalued. We believe L’Occitane has a strong competitive positioning and favorable growth prospects. Investors should find the current market valuation of 13 times price to fiscal 2024 earnings attractive.

In the fourth quarter, sales grew 20.6% on a constant-currency year-over-year basis, marking a noticeable acceleration from the 4.5% recorded in the third quarter. Management attributed stronger growth to 1) recovery of the travel retail channel; 2) China reopening; and 3) strong sales at its recently acquired brand Sol de Janeiro. Sales in April remain solid, with all the group’s brands delivering double-digit growth.

While management will only provide guidance for fiscal 2024 at its annual results briefing in late June, we modestly lifted our earnings forecast by 5% to account for better sales leverage going into this year. Long-term, rising per capita personal care spending, particularly in developing markets, and premiumization trends should continue to drive industrywide sales growth. With a diverse portfolio of brands (L’Occitane en Provence, Elemis, Grown Alchemist, Sol De Janeiro, and so on), L’Occitane caters to consumers of different ages and needs, which should enable the firm to gain market share over the next five years, in our view.