LRLCY - L'Oreal: Encouraging Growth Across Consumer Products Division

2023-10-23 21:02:39 ET

Summary

• L'Oréal has seen strong growth in its Consumer Products division, with like-for-like sales increasing by 13.4% in Q3 2023.
• The division was boosted by successful new product launches in the Makeup category and strong growth in the fragrance category.
• The stock's P/E ratio is trading at 2019 levels, indicating cautious investor sentiment, but if earnings continue to rise, the stock could see further upside.

Investment Thesis: I take a bullish view on L'Oréal based on continued strong growth across the Consumer Products division.

In a previous article back in February, I made the argument that L'Oréal ( LRLCY ) could continue to see upside going forward, owing to strong sales performance and an attractive P/E ratio.

Since then, the stock has descended to a price of $80.31 at the time of writing:

The purpose of this article is to assess whether L'Oréal has the ability to see a rebound in growth from here taking recent performance into consideration.

Performance

When looking at the most recent financial results for L'Oréal, we can see that like-for-like sales have continued to see growth - with performance for Q3 of this year up 2% on that of last year:

When looking at Q3 2023 results in more detail, we can see that Consumer Products - the largest division by sales - saw a 13.4% increase in like-for-like sales over that of the same quarter in the previous year. This was up by 14.5% for the nine months of 2023 as compared to last year - which marked the best nine months on record for the division.

In particular, the division was lifted by Makeup which saw a boost from new launches such as Falsies Surreal Mascara by Maybelline New York and Fat Oil Gloss by NYX Professional Makeup, which benefited from collaboration with Barbie the Movie.

In addition, Luxe saw like-for-like growth of 6.1% on the basis of strong growth across the fragrance category as a result of the success of Paradoxe by Prada and Born In Roma by Valentino.

My Perspective

As regards my take on the above results and the implications for the growth trajectory of the stock going forward, the continued strength that we have been seeing across Consumer Products is quite encouraging. I take the view that if the company can continue this growth trajectory, then we could stand to also see higher like-for-like sales in Q4 as compared to that of last year.

With regards to L'Oréal's valuation from an earnings standpoint, we can see that the P/E ratio is trading at a similar range to that of 2019, while earnings per share are markedly higher since then.

We can see that the stock was trading around the $60 range in 2019 and has since ascended to just above $80.

However, I take the view that the fact that the P/E ratio is trading at 2019 levels indicates that investors are perhaps being cautious with the stock, which may be influenced by broader market sentiment. Should we continue to see a rise in earnings, then I take the view that price has the capacity to follow suit and we could see the stock rebound to prior highs of just below the $100 level.

In terms of the potential risks to L'Oréal at this time, we could see upside potentially plateau form here if the strong growth that we have been seeing across the Consumer Products division starts to moderate. For instance, we have been seeing across the Chinese market that the recovery has been uneven and has not fully compensated for a slowdown in spending across North America and Europe.

Moreover, with increasing competition from local brands in the Chinese market, there is a risk that we might see consumers turn towards less expensive domestic offerings. In particular, we have been seeing lower imports of cosmetics and skincare products over the past couple of years. Additionally, it was also reported that Singles Day in China on November 11 (which marks the largest shopping day in the world) will see domestic products featured up to over 40% - double that of last year.

From that standpoint, I maintain optimism that L'Oréal can continue to see growth - but will be paying close attention to performance across the Chinese market to determine whether this can be sustained.

Conclusion

To conclude, L'Oréal has continued to see strong growth across Consumer Products. While future growth will be significantly dependent on performance across the Chinese market, I continue to take the view that L'Oréal has the capacity for further upside and take a bullish view on the stock.

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