L’Oreal: Sales Momentum Points to Another Beautiful Year

Powered by double-digit sales growth in both consumer products and dermatological beauty (formerly known as active cosmetics), wide-moat L’Oreal’s OR 2023 first-quarter sales put it on track to exceed our full-year forecast. The firm recorded 14.6% sales growth (13% like for like) in the quarter, above FactSet consensus of about 8% and outpacing our 6% sales growth estimate for the year. Given this strong start and our expectation that consumer spending in China is recovering, we expect to revise our 2023 estimates and lift our EUR 326 fair value estimate by a low-single-digit percentage. However, we believe L’Oreal’s current valuation more than reflects its sales and margin expansion opportunities.

After posting sales growth rates above 30% in both 2021 and 2022, L’Oreal’s dermatological category (16% of the quarter’s sales) recorded stellar 35% quarterly sales growth (31% like for like). While the firm did not release information on profitability, dermatological is its highest-margin category (segment margins around 25%), so this result bodes well for its bottom line. Meanwhile, luxury (36% of sales) recorded more modest sales growth of 8%, but this was in line with our full-year expectation and understandable given that virus-related restrictions in China were in place until January. Indeed, L’Oreal reported double-digit sales growth in all zones except north Asia (includes China), where growth was a scant 1%. Moreover, the luxury segment will get a boost from the addition of Aesop (see our April 4 note).

Consumer (37% of sales) and professional (11% of sales) reported sales growth of 16% and 10%, respectively, in the quarter. We view the performance of consumer as especially impressive given concerns over inflation and weakening economies in North America and Europe. In the long run, we view L’Oreal’s consumer division posting modest annual sales growth rates of 2%-3.5%, but these estimates could prove conservative if its products continue to gain share.