By: Riley Pollard, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently
holds this position. This article was written by myself, and it expresses my
own opinions. I am not receiving compensation for it and I have no business
relationship with any company whose stock is mentioned in this article.
Summary
• L’Oreal SA Unsponsored ADR (OTC:LRLCY) manufactures and sells
beauty and hair products. It is the top ranked beauty manufacturer by revenue
worldwide and operates through four segments: Professional Products, Consumer
Products, L’Oréal Luxe and Active Cosmetics.
• LRLCY is geographically spread
out over 130 countries, with a 12% share of the €175
billion beauty market. Their product lines consist of skin care (31.8% of FY18
sales), makeup (27.4%), hair care and colorants (27.1%), and perfumes (9.3%).
• LRLCY
reported FY2019 sales growth of 8% on a like-for-like basis, making 2019 their
‘best year for sales growth since 2007’.
• LRLCY
acquired Mugler brands and Azzaro fragrances from Clarins Group in late 2019,
adding market share to their existing perfume business which contributed 9% of
group sales in FY2018 and grew 9% in FY2019.
• Through
M&A and new product lines, LRLCY has strategically positioned themselves to
capitalize on changing consumer preferences within “new-markets” (including the
Asia-Pacific region), which consists of ~45% of group sales.
Key points:
L’Oréal is an extremely
established brand. In addition to their namesake, they own well-known brands
such as Maybelline, Lancôme, Garnier and Essie and they continue to grow their
portfolio. Some of their newest additions and segment transformations are
expected to stimulate the most growth in 2020.
LRLCY is
optimistic about the Asia-Pacific region, which represents one-third of total
sales (FY2019). China is maintaining consistent growth while India, Malaysia,
Indonesia and Vietnam are all producing double-digit growth. The region overall
saw 25.5% growth during FY2019. LRLCY is looking to capitalize on demand for
skin-care products and growth in e-commerce (up 52% in 2019) globally, but
especially in China. Their recent acquisition of the Mugler and Azzaro perfume
brands was also done with the Asia-Pacific region in mind, as they are looking
to penetrate the underdeveloped Asian perfume market.
LRLCY has also
been transforming their L'Oréal Luxe segment, which increased profitability by
50 basis points in 2019. The segment saw 13.8% like-for-like growth in FY2019,
with well-known Lancôme, Yves Saint Laurent, Giorgio Armani and Kiehl’s brands
at the helm. In December of 2019, LRLCY signed a long-term license agreement
with Prada (PRDSY) that will allow them to create, develop and distribute
luxury beauty products under the Prada name, starting in 2021. A similar
agreement was signed with Valentino in 2018 and will take effect in 2020.
While LRLCY has
primarily seen growth across the globe, demand for makeup in the US has slowed.
Although the US is not their biggest market, it still contributes ~25% of sales
annually. In an attempt to turn things around, LRLCY appointed Stéphane
Rinderknech, the head of L'Oréal China, as president and CEO of L’Oréal USA in September 2019.
L’Oréal is
considered the most valuable personal care brand in the world, and they have
the numbers to prove it. LRLCY has consistently outpaced the 5.5% growth rate
of the global beauty market, most recently with their reported 8% growth during
FY2019, and seem primed to continue to do so.
What has the stock done lately?
Unsurprisingly, LRLCY has not proven immune to the
effect of the Coronavirus on the market. The stock is down 10.67% YTD and 7.19%
in the last 3 months. The stock saw a dip to $55.58 on January 31st
before rebounding to over $60 the first week of February, following LRLCY’s Q4
earnings release. It’s been a downhill battle since then, although the price
has yet to cross its 52-week-low threshold ($50.54). LRLCY closed at $53.33 on
February 28th.
Past Year Performance:
LRLCY’s stock price has grown 4.77% over the past year,
experiencing a low of $50.54 and a high of $61.09. The stock has moved closely
with the S&P 500, thus producing much less optimistic YTD returns. While strong growth and earnings reports
usually signal optimistic future performance growth, the Coronavirus may throw
a wrench in those plans. Management expects a period of disturbance followed by
resumed consumption stronger than before, similar to what they experienced with
SARS.
Source: FactSet
My Takeaway:
LRLCY was pitched and added to the international AIM fund in November
2015 at a price of $35.48, with an initial price target of $43.11. Since then, LRLCY
has well surpassed its price target. While the Coronavirus poses a threat to
(hopefully short-term) growth, I believe that LRLCY has primed themselves for
growth in new markets once global markets rebound. We may experience a few
bumps and blemishes in the near future, but LRLCY is a quality holding and
remains a valuable addition to the AIM International Fund.
Source: FactSet
