EUR 850.00 For Business Accounts Only

Morningstar | Premiumization Trends Continue to Fuel L'Oréal's Top Line in 3Q; Shares Fairly Valued

L'Oréal's Luxe division (36% of sales) continued to drive sales in the third quarter, with midteens growth in the segment leading to 7.5% consolidated like-for-like sales growth. Growth in this high-end segment was largely attributable to the firm's largest makeup and skincare brands, including Lancôme, Yves Saint Laurent, Giorgio Armani, and Kiehl's. From our vantage point, this evidences that the material brand equity of these offerings (which underlies our wide moat rating for the firm) remains healthy. Top-line momentum also persisted in the active cosmetics division (8% of sales), with like-for-like sales up 13% due to strong performance for brands like La Roche-Posay (double-digit growth at the end of September), Vichy, SkinCeuticals, and CeraVe.

While results in the professional products (12% of sales) and consumer products (44% of sales) divisions were more tepid, with like-for-like sales up by just a low-single-digit percentage in each business, we attribute this to ongoing softness in the Western European cosmetics market, particularly in the U.K. As evidence, aggregate sales in Western Europe declined by roughly 1% on a like-for-like basis. We have already modeled low-single-digit growth in these segments in our full-year outlook. As a result, we aren't expecting a material change to our EUR 176 per share fair value estimate or longer-term outlook of mid-single-digit sales growth and high-teens operating margin on average over the next five years, and we'd still suggest investors await a more favorable entry point.

From a geographic perspective, developing markets continued to lead growth, with particularly robust performance in Asia-Pacific (like-for-like sales up 26%) and Eastern Europe (up 12%) as per capita beauty consumption in these regions rises. According to management, when indexed to developed beauty markets like North America, Western Europe, or Japan, per capita consumption stands around just 20% in Asia and 35% in Eastern Europe. E-commerce, up 38% during the quarter and now contributing nearly 10% of sales, has also propped up growth in these regions. We expect Western Europe to account for less than 30% of revenue by the end of our forecast period versus north of 35% before 2015, as outsize growth in developing regions continues.