L’Oréal Earnings: Performance Shines, Led by Derma Skincare and Mass-Market Products

Wide-moat L’Oréal OR posted better-than-expected first-half results that showcased the beauty product maker’s strong brands and balanced exposure to premium and value segments globally. Revenue grew 12% and EPS up 11%, exceeding our estimates of 11% and 9%, respectively, and we will nudge up our 2023 preprint projections to incorporate the earnings update. We are maintaining our 10-year forecasts for high-single-digit sales growth and low-20s average operating margins. Shares trade in a range we’d consider fairly valued.

First-half sales grew 12% (13% like for like), outperforming the 10% growth in global beauty market (per management disclosure), which we attribute to differentiated products in derma skincare (up 30%), and strong brands and distribution in mass products (up 13%). As derma skincare (16% of sales) delivers the best operating margins among segments (29% versus corporate average at 23%), its strong growth bodes well for overall profits. Meanwhile, we expect the mass segment (37%) will continue to benefit from the turnaround in Latin America, as well as more lab collaboration with colleagues in the premium segment.

Following several years of double-digit expansion, the luxury segment’s (38% of sales) below-average performance (sales up 6%) is worth noting. We don’t view this as indicating a reversal of the premiumization trends in beauty and believe high-end demands remain intact in North America and Europe, which management reaffirmed. Rather, luxury performance was held back by weak post pandemic recovery in China (23% of L’Oréal’s sales) where beauty purchases were heavily skewed to the high end. North Asia sales (80% of which are from China) barely grew 1%. Encouragingly, management noted a double-digit rebound in China sales in the second quarter, and we expect the country will likely become less of a drag as consumer recovery gets a lift from supportive government policies.