Morningstar | L’Oréal’s Higher-End Segments Help It Finish 2018 on High Note, but Shares Aren’t a Bargain
Wide-moat L’Oréal finished 2018 on a strong note, with 8.6% comparable sales growth during the fourth quarter leading to full-year growth of 7.1%. The Active Cosmetics (8% of sales) and Luxe (35% of sales) segments continued to be the key drivers of these gains, chalking up 15% and 12% like-for-like sales growth, respectively, during the quarter. We expect these businesses to lead growth longer term as well (with each segment averaging high-single-digit growth over the next five years) as industrywide premiumization trends persist.From a geographic perspective, 26% like-for-like sales growth in the Asia-Pacific region helped offset relatively tepid performance in Western Europe (30% of sales; 0.9% growth), where the mass-market beauty environment remains sluggish. We anticipate developing markets will continue to post outsize gains, as per-capita beauty expenditures rise in tandem with incomes; management estimates the annual beauty spend per head in new markets remains under one fifth of that in mature markets, at around $33.
We maintain L’Oréal will invest in value-added innovation and advertising to support this top-line expansion, as evidenced by substantial investments in research and development (over EUR 900 million for the year, or 3% of sales) and advertising and promotion (over EUR 8 billion, or 30% of sales). We expect combined spending on research and development and advertising to remain around one third of sales over the long run.
On a full-year basis, results largely aligned with our expectations, with 3.5% revenue growth, 18.3% operating margin, and diluted earnings per share of $7.08 comparable to our expectations of 3.3%, 18.4%, and $7.09, respectively. As a result, we aren’t anticipating a material change to our EUR 182 fair value estimate, which incorporates mid-single-digit sales growth and high-teens operating margin on average over our forecast, and would suggest investors wait for a more attractive entry point.
L'Oreal acts as a holding company. Through its subsidiaries, Co. plays a strategic coordination role and scientific, industrial and marketing coordination role on a global basis. Co. develops, manufactures and commercializes products for Skin care, Hair care, Make-up, Perfumes, Toiletries and deodorants, and Oral cosmetics. Co. has three branches: Cosmetics, Body shop and Dermatology. Co.'s principal activities comprise four divisions: Professional Products, Consumer Products, L'Oreal Luxe and Active Cosmetics. The Body Shop branch offers various cosmetics and toiletry products. The Dermatology branch offers topical dermatology prescription, and corrective and aesthetic dermatology.
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