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Summary of Q124 sales A strong start to the year for L''Oreal. While LFL sales growth was boosted by EUR130m by an IT phasing impact, adjusting for this, LFL sales growth at +8.1% was materially ahead of consensus expectations (VA cons: +6.0%; Bloom cons: +6.6%). Looking at the regional development and taking the aforementioned phasing impact into account, all regions were broadly in-line with consensus expectations with the exception of Europe which was significantly ahead of consensus expectations (+12.6% LFL sales growth vs. VA cons. at +7.4% and Bloom cons. at +8.0%). News We highlight that Travel Retail Asia dragged group LFL sales growth by c.230bp. Earnings We revise our FY24e/FY25e/FY26e EPS by c.+1-2%. Investment thesis While L''Oreal is a great company with a great long-term growth runway, we are mindful that its valuation is also great. Rating / target price We maintain our Neutral rating. Our TP moves from EUR445 to EUR450. 15 questions for management Given the Daigou clampdown, some expenditure must have been repatriated to mainland China, why is market growth there so weak (+1%)?
L'Oreal L'Oreal S.A.
Summary of Q4/FY23 results Most unusually, a material LFL sales miss from L''Oreal in the quarter. Q4 LFL sales growth at +6.9% was materially below VA/Bloom. consensus (+9.1%/+9.6%). As to the source of the miss, it was principally driven by North Asia (-6.2% vs. VA consensus at +0.4%) and, to a lesser extent, Europe (+11.6% vs. VA consensus at +14.6%). As to FY profits, the delivery was broadly in-line with consensus expectations with EBIT margins expanding by +30bp and FY EPS (fd) at EUR12.08 coming c.-0.5% below VA consensus. DPS increased by 10% to EUR6.60. News We highlight that L''Oreal commented than January has been a ''very good'' month. Earnings We revise our FY24e/FY25e/FY26e EPS by c.-2%. Investment Thesis While L''Oreal is a great company with a great long-term growth runway, we are mindful that its valuation is also great. Rating / target price We maintain our Neutral rating. Our TP moves to EUR445 from EUR460. 15 questions for management Given that the daigous were meeting Chinese domestic demand, is it not very concerning that the mainland market was flat last year, should growth not have accelerated as opposed to decelerate?
A class action lawsuit on hair relaxers Only four days after an Oct-22 U.S. National Institute of Health report showing that frequent use of hair relaxers was associated with higher uterine cancer risk, an American woman sued multiple companies including L''Oreal. The lawsuit developed into a class action in Feb-23 and presently counts more than 7,800 pending cases. The science shows correlation not causation The study found statistical evidence that women who frequently used hair straighteners were more than twice as likely to develop uterine cancer than women who did not use those products. We note however that the link was one of correlation not causation. The lawsuit is still in its early phase There has been neither a trial scheduled, nor a case settled. In the current discovery and pretrial phase of the class suit both parties are currently exchanging information and responding to requests. Next steps include a Science Day and the preparation of the plaintiffs'' Fact Sheets. L''Oreal''s view: it sees neither scientific nor legal merit in the claims According to official statements by L''Oreal, it is ''confident in the safety of the products'' and believes that the lawsuits ''have neither legal nor scientific merit''. Could this be material for L''Oreal? While determining the future ramifications of a class action of this nature is very difficult, within we explore as best we can the likelihood that this could turn out to be material in a L''Oreal share price context.
L’Oréal reported Q3 2023 revenue slightly below consensus but above our expectations. The softer rebound in the Chinese beauty market and the impact of Beijing’s crackdown on Daigou on Asian travel retail led to a decline in North Asia. However, the US and Europe delivered exceptional performances, fuelled by robust Consumer Product and Dermatological Beauty demand. Despite China’s weakness, we maintain that L’Oréal’s greater diversification in business and geographical presence bolsters its resilience relative to its rivals.
Summary of Q323 sales LFL sales growth at +11.1% was broadly in-line with consensus expectations (VA cons: +11.1%, Bloom. cons: +11.5%) with a material miss in North Asia (-4.8% vs. VA cons at +15.0%) being largely offset by strength in the other regions (all of which were materially ahead of VA consensus expectations). News We highlight that L''Oreal booked a EUR57m insurance credit in Q3 and this boosted LFL sales growth by an estimated c.+60bp. Earnings We revise our FY23e/FY24e/FY25e EPS by +0.2%, +1.6% and +1.5% respectively. Investment thesis While we can see some attraction in L''Oreal at this stage of the inflationary cycle, given its current valuation level relative to both Staples and Luxury peers we struggle to argue for a further material re-rating. Rating / target price We maintain our Neutral rating and EUR420 target price. 15 questions for management Can you please confirm that the EUR57m Vichy insurance credit was included within LFL sales growth?
L’Oréal posted another consensus-beating first half, driven by its best-ever half year growth from the Consumer Product division and the unwavering dynamic of the Dermatological beauty division. The better margin progression in the Dermatological beauty division fully offset the 80bps margin contraction in L’Oréal Luxe division. The group will continue to benefit from the ongoing recovery in Chinese demand and its dominance of the booming dermo-cosmetics market, and achieve another year of growth in sales and profits in 2023.
Summary of Q2/H123 results Q2 LFL sales growth at +13.7% was materially ahead of consensus (VA: +11.9%) with Europe being exceptionally strong (+20.8% vs. VA cons. at +12.9%). L''Oreal cited a remarkable H1 performance in Germany-Austria-Switzerland, France and the UK. H1 margins expanded by +30bp (VA cons: +30bp) with +120bp gross margin expansion being offset by a 90bp increase in AandP, and this helped to deliver a +0.8% EBIT beat / +2.1% EPS beat (both vs. VA cons). News While L''Oreal estimates that there are couple of months of inventory to come out of Hainan, it is a market which represents less than 3% of group sales. Earnings We revise our FY23e/FY24e/FY25e EPS by -0.8%, -1.4% and -1.6% respectively (primarily FX). Investment thesis While we can see many attractions in L''Oreal, we struggle to envisage a further re-rating sufficiently material to warrant a more constructive stance on the shares. Rating / target price We maintain our Neutral rating. Our TP moves from EUR450 to EUR440 (multiple reduction). 15 questions for management What was the Hainan sales development in Q1/Q2 and what is your expectation for the remainder of the year?
L’Oréal published another stronger-than-expected start to the year. All regions reported double-digit growth except for North Asia, due to the reduction of stock-in-trade in China at the very beginning of the year. The group experienced balanced growth in terms of geography and business. A fully recovery for beauty product consumption in China and a gradual recovery in Chinese travel spending will further drive the group’s top-line for the rest of the year.
L’Oréal has just reported a consensus-beating start to the year. The impressive acceleration in make up and strong demand for dermo-cosmetics in North America, South Asia and Latin America offset the decline in China early this year. The group saw Chinese consumer demand resume from February and is confident that it will benefit from the sustained strong appetite of Chinese consumers for beauty products and a gradual recovery in Chinese tourist spending for the rest of the year.
Summary of Q123 sales A strong start to the year for L''Oreal with +13.0% LFL sales growth coming materially ahead of consensus expectations (VA: +7.3%, Bloom: +8.1%). Encouragingly, all regions were materially ahead of consensus expectations with the exception of North Asia where sales in China were particularly weak at the start of the quarter due to the health situation. We also note that the +13.0% LFL sales growth achieved in Q1 reflected a +5.2% contribution from volume and a +7.8% contribution from valorisation. News We highlight that L''Oreal saw sales in China decline by -20% in January, but rebound to DD growth in February, March and April. Earnings We revise our FY23e/FY24e/FY25e EPS by c.+3-4% (primarily driven by increased organic revenues in FY23e). Investment thesis While we can see many attractions in L''Oreal, given the magnitude of the recent China re-opening driven re-rating, we struggle to envisage a further re-rating sufficiently material to warrant a more constructive stance on the shares. Rating / target price We maintain our Neutral rating. Our target prices moves from EUR388 to EUR450 reflecting both our estimate revisions and recent sector / market re-rating. 15 questions for management If April growth trends in China had been in place throughout Q1, what impact would this have had upon LFL sales growth at the group level?
The beauty giant publishing an encouraging set of FY22 results, with both the top-line and the profitability beating the consensus and our expectations. Benefiting from the advanced omnichannel development, a strong acceleration in skincare as well as the solid leadership in fragrance, the group experienced a stronger-than-expected year-end performance across its three major markets despite the tougher trading environment in China. We believe the group’s structural advantages, best-in-class R&I capability and solid leadership in the promising fragrance market are enabling it to continue to outperform industry.
Summary of Q4/FY22 results Q4 LFL sales growth at +8.1% was c.1.0% ahead of VA consensus, with North Asia (+4.9% vs. VA cons. at +2.6%) being the principal driver. Excluding North Asia, we estimate that Q4 LFL sales growth was +9.6%, in-line with consensus expectations (VA: +9.9%). Turning towards the FY profits delivery, it was broadly in-line; EBIT margins at +40bp YOY were c.10bp below VA consensus and EPS was c.1.3% ahead of VA consensus. The dividend, while in-line with our own expectation, was c.4.6% ahead of VA consensus. News We highlight that the beauty market grew at ~6% in FY22 and L''Oreal expects +4%-5% market growth in FY23, but hopes for more. Earnings We leave our FY23e/FY24e/FY25e EPS broadly unchanged (+/-1%). Investment Thesis While our FY23e LFL sales growth is materially ahead of consensus, we believe that the market is unlikely to increase its view on the structural growth profile and it is this that is key to a further re-rating. Rating / target price We maintain our Neutral rating and EUR388 target price. 15 questions for management Why do you expect that the beauty market will decelerate in a year in which China re-opens?
The Staples re-opening play The market has rightly seen L''Oreal as being the principal China re-opening play in European Staples. While others (notably Remy Cointreau) also offer material exposure, L''Oreal does not have complications such as the US Spirits industry normalisation to contend with. In this report we take a deep dive into L''Oreal in China to consider what the future may hold. L''Oreal''s ''China'' exposure is rather bigger than it initially appears While L''Oreal disclosed that the CNY accounted for c.20% of sales in FY21, we believe that this excludes Hainan and HK. Including estimated exposures to these areas, we estimate that a more ''holistic'' definition of China would cover c.27% of FY21 sales. Re-opening is clearly a positive, but assessing the potential is difficult While China re-opening is clearly a positive, assessing the potential upside is difficult. L''Oreal has its highest Luxe market share in China, hence it has relatively benefited from the Chinese consumer being trapped domestically (until FY22, L''Oreal''s growth in China was very strong). Our best guestimate is that it could lift global beauty market growth by c.+3% We believe it is best to estimate the impact of China at the global level. Assuming the global beauty market returns to its pre-Covid run-rate, this could accelerate global beauty market growth by c.3%. Partly in recognition of this, we tweak up our FY23e LFL growth (to 8.4% from 7.5%) and now stand +2.5% above VA consensus. As to the shares: we believe re-opening has been well priced While we are mindful that there is nothing like high quantum LFL sales growth with upside risk to consensus to support valuations in Staples, with L''Oreal being the best YTD performer in European Staples, we believe that the re-opening benefit has been well priced. Having missed the re-opening bounce, we do not have appetite to chase it now. We maintain our Neutral rating.
L’Oréal published consensus-beating Q3 22 revenue. All divisions reported better-than-expected quarterly growth except for L’Oréal Luxe. The luxury segment has suffered from the lower demand in Skincare in China due to the ongoing COVID-19-related restrictions and sourcing difficulties in fragrance. The ongoing “zero-COVID” policy will not disappear in China overnight and, coupled with intensified inflationary pressure in some western countries, this will continue to result in a challenging trading environment going forward.
Q3 sales growth penalised by China FY22 sales should grow 10%
Summary of Q322 sales Q3 LFL sales growth at +9.1% was modestly above consensus expectations (VA cons: +7.7%, Bloomberg cons: +8.3%). All divisions and regions were above (VA) consensus expectations, with the exception of Luxe and North Asia where sales were impacted by the repeated lockdowns in China and Hainan. With respect to China and Hainan, we note that L''Oreal commented while the market declined by -3% in terms of sell-out, it grew sell-out at +7.8%. News We highlight that L''Oreal commented that there has been no sign of consumer downtrading apart from in the UK (some trading down, spacing visits to salons, less premium skin care) and in US professional (spacing visits to salons). Earnings We revise our FY22e/FY23e/FY24e EPS by c.+1%. Investment thesis While L''Oreal is arguably the best long-term play in European Staples, it trades at an exceptionally high valuation relative to market. Rating / target price We maintain our Neutral rating. Our target price moves from EUR380 to EUR360 (reflecting a reduction in target multiple given recent market weakness). 15 questions for management You commented that you remain very bullish on the long-term opportunity in China, did you take geopolitical risks into account when making this comment?
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