Wednesday, March 4, 2020

A Current AIM International Equity Holding: L’Oreal SA ADR (LRLCY, $53.33): “Beauty is in the Eye of This Shareholder”

L’Oreal SA Unsponsored ADR (LRLCY, $53.33): “Beauty is in the Eye of This Shareholder”
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.


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