Perhaps big is beautiful after all. Glossier-than-expected first-quarter performance at L’Oréal was powered by some of the French personal care group’s “billionaire brands”. Sales surged 7.7 per cent as a result of double-digit growth from top names such as Lancôme and Giorgio Armani. These sell more than €1bn of skin care, make-up and perfumes a year.
There was a theory that ecommerce would make it easier for small, niche beauty brands to compete, harming established players. But the biggest brands come out top of internet searches. If a voice-operated device such as Alexa is asked to order a mascara, it will opt for a top seller like Yves Saint Laurent or Maybelline. Algorithms are reinforcing L’Oréal’s lead.
The benefits of scale are reflected in a deluxe valuation. After rising nearly a quarter over the past year — as the French market moved sideways — the shares are priced at 31 times forward earnings. That is more than a third higher than the 10-year average. One reason is that activist investor Third Point is putting pressure on consumer group Nestlé to sell its 23 per cent stake in L’Oréal. The beauty company could then buy up and cancel that stake.
There are risks too. Sales in Europe and North America are sluggish. Asia makes up for this with impressive like-for-like growth of 23 per cent. Sales in the region now exceed those to western Europe. However, that creates exposure to Chimerican tensions. Trade jitters sent the shares down 13 per cent at one point last year.
The group should still benefit from the fondness of young Chinese women for luxury beauty products. Clear, unblemished skin is highly valued, as demonstrated by a controversy over a freckled Chinese model in a recent Zara campaign. A desire for a flawless face means heavy spending on skin care and a reluctance, in tougher times, to trade down to cheaper brands. That should help L’Oréal keep up its polished appearance, even as the economy slows.
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