L’Occitane Earnings: Step-Up in Marketing Expense To Weigh on Near-Term Margin; Shares Undervalued

While L'Occitane reported better-than-expected fiscal 2023 results (year ended March 2023), it provided disappointing fiscal 2024 operating margin guidance as it decided to spend an additional EUR 100 million on marketing. In our view, the market is overreacting as the stock is down 18% in next-day trading. In our view, incremental investment is important as it can help L'Occitane drive more awareness and rebuild pricing power over time. To us, the key question is whether such an investment will hurt longer-term profitability, and management answered it by maintaining medium-term guidance for fiscal 2026. We increased our revenue growth assumption for fiscal 2023, but lowered the margin forecast. We maintain our fair value estimate for L'Occitane at HKD 37 as our long-term assumptions remain largely unchanged. We believe the market's reaction to L'Occitane's guidance is not warranted. With shares trading at 14 times price/earnings, we continue to view L'Occitane as an attractive investment.