Across the globe, per capita consumption of beauty products is on the rise, driven by a steady gain in the purchasing power of the middle class, particularly in emerging markets where L’Oréal sourced 48% of 2020 revenue. Consumers in Eastern Europe and Latin America spend one third of the level that developed market consumers spend on beauty, while consumers in Asia and the Middle East spend only 20%. One trait of L’Oréal that sets it apart from its peers is its wide-reaching, well-balanced portfolio across mass, prestige, salon, and medical/dermatological channels. 

The firm is adept at pivoting resources to the best opportunities, helping stabilize sales. During the pandemic, L’Oréal allocated resources to the most resilient channels (e-commerce, dermatological), categories (skincare) and geographies (China), allowing it to greatly outperform the market. In 2020, L’Oréal’s like-for-like sales contracted just 4% despite the widespread closure of stores and salons, half that of the 8% drop of the global beauty market. This diversification has also served it well in recessionary climates. Heading into the great recession of 2008 and 2009, L’Oréal was reporting high-single-digit revenue growth. In 2008 and 2009, revenue decelerated to 2.8% and negative 0.4%, respectively, before rebounding to 11.6% in 2010.

Financial Strength

After digesting L’Oreal’s third-quarter sales, increasing fair value estimate to EUR 233 from EUR 225 to account for material outperformance in the professional and active cosmetics segments. After a 4% drop in like-for-like sales in 2020, as salons and most retailers were closed for a portion of the year because of the pandemic, organic revenue will rebound 14% in 2021, then normalize at a mid-single-digit pace thereafter. L’Oréal traditionally carries a very low level of debt, generally less than cash on hand. The business generates a significant amount of cash, and as such, internally generated cash flow has been sufficient to fund the business’ needs. 

Over the past three years, free cash flow (cash flow from operations less capital expenditures) as a percentage of sales averaged 17%, comparable to our 16% average annual expectation over the next five years. The company prides itself on its long history of annual dividend increases, which will persist with the exception of 2020 due to the pandemic, with our model calling for high-single-digit increases in annual dividends in 2021 and thereafter, maintaining a 50% payout ratio throughout the course of our 10-year explicit forecast. The firm to spend 4.5% of sales on capital expenditures each year, generally in line with the historical average.

Bulls Say’s

• With 48% of revenue sourced from emerging markets, L’Oréal is ideally positioned to benefit from growth of the expanding middle class.
• L’Oréal is the only beauty company with exposure across mass, prestige, professional, and medi-spa, and the firm’s leading positions in these channels make L’Oréal a valued partner for retailers.
• L’Oréal has a strong management team with an excellent track record for competently executing the firm’s strategy, which has led to its defensible competitive edge, stability of earnings given diverse market exposure, and consistent ROICs above WACC.

Company Profile 

L’Oréal, founded in 1909 by Eugene Schueller when he developed the first harmless hair colorant, is the world’s largest beauty company. It participates primarily in skincare (39% of 2020 revenue), makeup (21%), haircare (26%), and fragrance (9%). L’Oréal is a global firm, with 27% of its revenue sourced from Western Europe, 25% from North America, and 48% from emerging markets (35% Asia-Pacific, 5% Latin America, 6% Eastern Europe, and 2% Africa/Middle East). The firm sells its products in many channels, including mass retail, drugstores/pharmacies, department stores/perfumeries, hair salons, medi-spas, branded freestanding stores, travel retail, and e-commerce. The firm’s top selling brands are Lancôme, Yves Saint Laurent, Maybelline, Kiehl’s, L’Oréal Paris, Garnier, and Armani.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.