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Investment Overview for L'Oreal (OTC:LRLCY)
WHAT HAS CHANGED?
L'Oreal witnessed a marginal top line growth (0.6%) in the first half of 2016, and its lukewarm growth was mainly due to currency headwinds and impairment charges worth €447 million. Though most of its acquired brands are growing solidly, brands such as China's Magic Holding and Clarisonic are still struggling and that led to the impairment charges. L'Oreal's performance is improving in the erstwhile sluggish North America, though Western Europe still remains weak. The company's acquisitions and constant innovations are helping it remain on the top of its game. We expect L'Oreal to continue being the beauty leader in the near future and believe the setbacks on its way are mostly macroeconomic or temporary.
L’Oreal’s acquisitions have been strategically significant in nature and can give the company the scope to further expand its market share and profitability. L’Oreal’s annual sales for 2015 were €25.3 billion reflecting a year-on-year growth of 12% (4% in like-for-like terms). L’Oreal’s Western Europe and North American regions witnessed significant improvements, while Brazil is still reeling under economic problems. L’Oreal’s digital sales have been impressive and L'Oreal's initiatives in China are paying off. L’Oreal’s Luxe segment, the most successful division for 2015.
- Strategic Acquisitions
- In January 2016, L’Oreal launched a stretchable skin sensor called My UV patch. The product, which is currently in beta form, is designed as a wearable, and it will help educate users about their exposure to ultraviolet rays. The patch will be released under the company's dermatological skincare brand, La Roche-Posay. Guive Balooch, L'Oreal's Global VP of Technology Incubator, has indicated that this might be a start for the company to bring more sophisticated hardware and software technologies into its products. My UV Patch is the first attempt by a beauty company to introduce wearables among beauty users.
- Also in January 2016, L'Oréal USA, the biggest subsidiary of L'Oréal Group, signed an agreement for acquiring key assets from Raylon Corporation, a full-service family owned wholesale distributor of salon professional products. This is L'Oréal's first acquisition for the year 2016, and this is the company's initiative to further strengthen its professional products segment and distribution coverage against rising competition.
- L’Oreal is currently conducting research towards connecting its makeup products through the Internet of Things. The Internet of Things is the network of objects or “things” which can collect and exchange data with the help of their embedded electronics, software, sensors, and network connectivity. The successful implementation of this technology will allow L’Oreal to give connectivity to its makeup products, such as lipsticks, nail polishes, or mascaras. This, in turn, will help the company to better track its consumers.
- In September 2014, L’Oreal signed an agreement to acquire Brazil based Niely Cosmeticos, the largest independent hair care and hair coloration company in the country. The company earned 405 million Brazilian Reals (140 million euros) in 2013. Aimed at the middle class mass market, Niely products have a large penetration in Brazil, with a wide distribution network including retailers and wholesalers, supermarkets, pharmacies, and perfumery chains. L’Oreal aims to improve its largest division, the consumer products, through this acquisition.
- In June 2014, L’Oreal acquired NYX Cosmetics, a high-growth mass market makeup cosmetics brand with presence in more than 70 countries, with the aim of recovering the slow growth seen in the North American market. The company is a direct competitor to Estee Lauder's M-A-C brand of makeup cosmetics. NYX displayed almost 70% growth in sales in the first half of 2015.
- In April 2014, L'Oreal completed the acquisition of Magic Holdings in China. To counter this strengthening competition from domestic players and retain their market share, global beauty companies have been on an 'acquire-to-grow' strategy in the Chinese market. Magic Holdings is the leader in the Chinese facial care market, with annual revenues that grew 14% on a constant currency basis to reach $220 million in 2013. The acquisition of Magic Holdings indicates L'Oreal's stance against domestic competition.
- In April 2014, L'Oreal completed the acquisition of Decléor and Carita from the Japanese group Shiseido. The brands have been integrated into L'Oreal’s Professional Products Division, a category where L'Oreal has been a major player for more than 100 years. The acquisition would ensure L'Oreal's entry into new distribution channels in the professional beauty segment, such as day spas, resorts, and destination spas, which specialize in skin care.
- Research & Development Focus
- In April 2015, L’Oreal entered into a skin tissue research agreement with the bio-printing technology firm, Organovo. The research will involve L’Oreal’s skin cell technology along with Organovo’s proprietary NovoGen Bioprinting Platform. The agreement will provide L’Oreal with exclusive rights to use the skin tissue models for the development, manufacturing, testing, evaluation, and sale of non-prescription cosmetic, beauty, dermatology and skin care products, and nutraceutical supplements.
- In December 2014, L'Oreal announced the acquisition of Israel-based hair research start-up, Coloright. Coloright develops hair-fiber optical reader technology and it will be a part of L’Oreal’s international Research and Innovation network.
- Distribution Expansion
- L’Oreal had been on the lookout for more robust distribution channels in the African region. Distribution remains unstructured and hence cumbersome in Africa. In a move to further expand its African presence, in March 2015, L’Oreal signed an agreement with CFAO, the specialized distributor from Cote D’Ivoire, to cover the production and distribution of cosmetics in the Ivory Coast. The partnership will bolster L'Oreal's distribution network as CFAO will be the sole distributor of L'Oreal products in French speaking West Africa.
L'Oreal's Market Share of Global Hair Care Market: Hair Care Market Share for L'Oréal declined from 24.3% in 2009, to 22% in 2012, and was around to 24%, 23%, and 20% in 2013, 2014, and 2015 respectively. The company pulled out its Garnier brand from China in a bid to focus exclusively on prestige beauty products in the region. In April 2014, L'Oreal completed the acquisition of Magic Holdings in China, which is the company's largest acquisition in the Chinese market till date. Magic Holdings is the leader in the Chinese facial care market, with annual revenues that grew 14% on a constant currency basis to reach $220 million in 2013. The acquisition of Magic Holdings indicates L'Oreal's stance against domestic competition. We currently forecast L'Oréal's share of the Hair Care market to reach 21% by the end of our forecast period. There could be a marginal downside to the Trefis price estimate if the market share remains flat at the current level.
L'Oreal's Market Share of Global Skin Care Market: L'Oréal's Skin Care Market Share expanded from 12.3% in 2009 to close to 14% in 2014 before declining to around 12% in 2015. We currently forecast L'Oréal's share of the Skin Care market to grow to about 14% by the end of our forecast period. There could be a marginal downside to the Trefis price estimate if the market share were to remain flat at the current level.
L’Oreal 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’Oreal reports and segments its products range on the basis of price range and distribution channel into: Professional, Consumer, Luxury, and Active products.
- Professional Products constitute ~15% of net sales and are meant for professional hair care by stylists at hair salons. The main brands include: L’Oreal Professional, Kerastase, Matrix, Mizani, and Redken.
- Consumer Products constitute approximately 50% of cosmetics sales and are sold through mass volume retailers and drugstores. Consumer products include makeup, skin care and hair care products, competitively priced and distributed through mass-market retailing channels. The main brands include: Garnier (skin and hair care for men and women), L’Oreal Paris (skin care, makeup, hair care, and hair colors under Studio-Line, Dermo-Expertise, and Elseve product lines), Maybelline New York and Softsheen-Carson (hair care for African ethnic descent consumers).
- Luxury Products constitute about 30% of cosmetics sales and comprise prestigious brands and premium service through department stores, upscale perfumeries, travel retail outlets, as well as free standing stores and e-commerce websites. The main brands include Lancome, Biotherm, and Kiehl’s.
- Active Productsconstitute about 8% of cosmetics sales and include dermo-cosmetic (cosmetics with medicinal ingredients and recommended by pharmacists and dermatologists) skin care products sold exclusively through pharmacies, specialty drugstores, medi-spas, and even dermatologists. The main brands are La Roche-Posay, Skinceuticals, Vichy, and Sanoflore.
- The Body Shop
constitutes about 1% of net sales and includes a chain of over 3,100 free standing ‘The Body Shop’ stores in over 60 countries across the globe. Acquired in 2006, The Body Shop range of cosmetics is well known for its products based on natural ingredients and the brand’s strong ethical commitments and fair-trade practices.
L'Oreal also has ~ 9% stake in Sanofi Aventis (as of December 31, 2015), the dividend from which contributes significant value to L'Oreal's stock.
Despite L’Oreal’s global presence, about 35% of its cosmetics revenue comes from Western Europe and over 25% from North America. Asia accounts for about 23% of its cosmetics sales. Latin America and Eastern Europe currently contribute around 8% and 6%, respectively.
L'Oréal's main competitors include other major global beauty care products manufacturers such as Revlon, Estee Lauder, Avon, Shiseido, and Procter & Gamble, among others.
Leading market share in Skin Care, Fragrances, and Makeup
L'Oreal 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.
Second largest market share in hair care, the second largest product segment (after skin care) within beauty care
Hair care is a stable and growing market, and L'Oreal commands the second largest share in the segment, after Procter & Gamble. Hair care accounts for about 20.5% of L'Oreal's net sales.
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'Oreal spends more on R&D as a percentage of sales as compared to its competitors. This has helped L'Oreal remain a leader in the cosmetics market.
On the basis of revenue, L'Oreal (at ~$30 billion) is much larger than Revlon ($2 billion), Avon ($9 billion), and Estee Lauder ($11 billion). Therefore, L'Oreal has more money to spend on marketing, which is an extremely important factor for success in the cosmetics industry.
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 of 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 towards 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.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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