Morningstar | Strength in Asia Pacific Continues to Drive L’Oréal’s 1Q Sales Performance; Shares Rich
Wide-moat L’Oréal began 2019 on solid footing, posting 7.7% like-for-like sales growth in its first-quarter sales update. The highlight of its business remains the Asia-Pacific region (32% of sales), which experienced 23% like-for-like sales growth. This remains well above the roughly 1% growth seen in Western Europe (29% of sales) and North America (25%), where mass-market performance remains lukewarm. We expect the Asia-Pacific region will continue to support industry momentum over the coming years, given rising per-capita incomes and a penchant for higher-end beauty offerings (we estimate premium fare accounts for around 47% of the beauty market on average in developed Asian countries, versus 40% in the U.S.).From our vantage point, L’Oréal’s continued success in this region is partly attributable to its strategy of approaching product innovation on a regional basis, which we surmise allows the firm to better tailor its brand set to align with local consumer tastes. We forecast combined spending on advertising and research and development to hover around a third of sales longer term, which is comparable to the 25%-plus rate averaged across its peer set.
From a category perspective, the Active Cosmetics (10% of sales) and Luxe (35% of sales) businesses each posted low-teens growth, thanks to strength in Asia and more than 15% sales growth in the Lancôme, Yves Saint Laurent, Giorgio Armani, and Kiehl’s brands. We expect these categories to remain key contributors to growth (given category-wide premiumization trends) and forecast high-single-digit growth in each segment on average over the next five years. We aren’t anticipating a significant change to our EUR 192 fair value estimate as we evaluate these results, and are holding steady on our long run outlook, which calls for mid-single-digit revenue growth and around 19% operating margin on average over the next five years. As such, we'd suggest investors wait for a more favorable risk/reward opportunity.
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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