VALUATION HIGHLIGHTS

1. Skin Care constitutes 41% of the Trefis price estimate for L'Oreal's stock.
2. Hair Care constitutes 20% of the Trefis price estimate for L'Oreal's stock.
3. Fragrance constitutes 18% of the Trefis price estimate for L'Oreal's stock.

WHAT HAS CHANGED?

L'Oréal ADR Performance

LRLCY stock hasn't seen any meaningful change from levels of $75 in early January 2021 to around $77 in late-October 2024, vs. an increase of about 50% for the S&P 500 over this period.

However, the performance of LRLCY stock has been far from consistent. Returns for the stock were 27% in 2021, -24% in 2022, and 41% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that LRLCY underperformed the S&P in 2022.

Fiscal 2023 Earnings

L'Oréal reported its 2023 results earlier this year. The company saw sales rise to €41.2 billion, up from €38.3 billion in fiscal 2022. It saw operating profit margins rise from 19.5% in 2022 to 19.8% in 2023. The bottom line stood at €11.52 versus €10.61 in 2022.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

L'Oréal's Skin Care Revenue: Skin Care is L'Oréal's largest segment, and sales have risen from $10.6 billion in 2019 to $17.8 billion in 2023. We currently forecast L'Oréal's Skin Care sales to reach $33 billion by the end of our forecast period. There could be a downside of more than 15% to the Trefis price estimate if the Skin Care revenues were to see slow growth to levels around $20 billion.

L'Oréal's Hair Care Revenues: Hair Care is L'Oréal's second-largest segment, and sales have risen from $9.1 billion in 2019 to $10.5 billion in 2023. However, we expect sales to gradually rise in the mid-single-digits going forward, to over $15 billion by the end of our forecast period.

There could be a downside of more than 5% to the Trefis price estimate if the Hair Care revenues remain flat at the current level.

BUSINESS SUMMARY

L'Oréal is the largest manufacturer of cosmetics in the world. It manufactures and sells makeup, fragrances, skin care, and hair care products through over 30 global brands. It caters to consumers across all income levels and distribution channels spanning mass volume retailers and drugstores, to upscale perfumeries, pharmacies, department stores, company-owned stores, and e-commerce websites.

L'Oréal reports and segments its products into four categories: Makeup, Skin Care, Hair Care and Fragrances.

SOURCES OF VALUE

Leading market share in Skin Care, Fragrances, and Makeup

L'Oréal has the largest market share in the Skin Care segment, the largest and fastest growing segment within Beauty Care (on account of anti-aging skincare and skin care for men), as well as in the Fragrances and Makeup segment.

Highest R&D as percentage of net sales and marketing expenses in the beauty care industry which ensures market leadership

Launching new and innovative products is crucial to growing or even maintaining share in the beauty care industry. L'Oréal spends more on R&D as a percentage of sales as compared to its competitors. This has helped L'Oréal remain a leader in the cosmetics market.

On the basis of revenue, L'Oréal (at ~$45 billion) is much larger than Revlon ($2 billion), Avon ($10 billion), and Estée Lauder ($16 billion). Therefore, L'Oréal has more money to spend on marketing, which is a critical factor for success in the cosmetics industry.

KEY TRENDS

Booming Skin Care due to anti-aging creams

Anti-aging creams and anti-cellulite skin care products are in high demand among the aging populations in developed countries, notably Japan (oldest demographic), the U.S., and Western Europe. A big chunk of L'Oréal's skin-care business comes from anti-aging products. The anti-aging market comprises those products that can treat multiple signs of skin aging at one time, and is a fast-growing segment under the anti-aging beauty products.

Growth of natural products categories and "Masstige" segment as well as male product lines

There is a growing demand for natural / organic products in most countries, a trend led by the developed markets in the U.S. and Western Europe. Additionally, there is an increased preference for less synthetic, eco-friendly, and more natural products and packaging.

There is a growing trend toward the so-called "Masstige," or premium brands sold at lower prices through mass distribution. In addition, beauty care products focused on men is the latest niche being targeted by most players globally. In developed markets, particularly in the U.S. and Western Europe, the introduction and extension of the men's product lines is a major source of growth.