VALUATION HIGHLIGHTS

1. Skin Care constitutes 42% of the Trefis price estimate for L'Oreal's stock.
2. Hair Care constitutes 21% 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 has witnessed gains of 15% from levels of $75 in early January 2021 to around $85 now, vs. an increase of about 35% for the S&P 500 over this roughly three-year period.

However, the increase in LRLCY stock has been far from consistent. Returns for the stock were 25% in 2021, -25% in 2022, and 40% 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 2021 and 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'Oreal's Skin Care Revenue: Skin Care is L'Oreal's largest segment and sales have risen from $9.16 billion in FY '17 to $16.5 billion in FY '22. We currently forecast L'Oréal's Skin Care sales to reach $28.7 billion by the end of our forecast period. There could be a downside of more than 10% to the Trefis price estimate if the Skin Care revenues remain flat at the current level.

L'Oreal's Hair Care Revenues: Hair Care is L'Oreal's second largest segment and sales have roughly hovered between $8 billion and $10 billion since FY 2007, all the way to FY 2022. However, we expect sales to gradually rise in the lower single-digits going forward, to rise to around $15 billion by the end of our forecast period. There could be a downside of more than 10% to the Trefis price estimate if the Hair Care revenues remain flat at the current level.

BUSINESS SUMMARY

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 on the basis of price range and distribution channel into: Professional, Consumer, Luxury, and Active products.

1. 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.

2. 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).

3. 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.

4. Active Products

Constitute 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.

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.

SOURCES OF VALUE

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.

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 ~$40 billion) is much larger than Revlon ($4 billion), Avon ($10 billion), and Estee Lauder ($15 billion). Therefore, L'Oreal has more money to spend on marketing, which is an extremely important 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 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.