L’Oréal: Derma Skincare and Mass Market Products Drive Strong Sales, as Luxury Remains a Laggard

Wide-moat L’Oréal OR posted a strong sales update for the first nine months that reaffirmed our favorable view on the beauty maker’s long-term prospects underpinned by strong brands, innovation, and a balanced exposure to premium and mass segments. Revenue grew 9.4% (12.6% like for like) for the period, on the back of broad-based strength across categories and geographies (excluding travel retail in China), and we view the firm as remaining on track to deliver the 10.6% sales expansion we forecast for 2023. Our 10-year projections for high-single-digit sales growth and low-20s average operating margins also remain in place. Shares trade in a range we’d consider fairly valued.

Derma skincare (sales up 27%) and mass products (up 11%) were the standouts for the period. We believe a strong innovation pipeline, coupled with an ensemble of trusted brands (La Roche-Posay and CeraVe in particular) among skin doctors and consumers alike, should continue to support L’Oreal’s leadership in the fast-growing derma skincare category. Meanwhile, we attribute L’Oreal’s ability to deliver double-digit mass product sales growth amid consumer belt-tightening to expanding distribution in emerging markets such as Latin America and South Asia and the breath of its offerings across skincare, color cosmetics, fragrance, and hair care. The luxury segment was again the laggard (sales up only 3%), which is hardly surprising given that travel retail in China remained in a reset mode, and we think sentiment among high-end consumers in North America and Europe also cooled in recent months (as luxury leather goods and watch makers confirmed in recent earnings updates). While we continue to see premiumization as a tailwind for high-end beauty demand over the longer term, we expect L’Oreal’s luxury segment sales growth to normalize to a high-single-digit trajectory in the coming years, down from the low teens achieved in the recent past.