Chantal Marx
In 1909, Eugene Schueller founded the company that was to become the L'Oréal Group after developing one of the first safe and effective hair dyes that he formulated, manufactured, and sold to Parisian hairdressers. The business grew rapidly from then, both organically and acquisitively, with organic growth centred upon science and innovation. In the 1930's the company began expanding internationally and in the 1950's the company ventured into skincare with an arrangement with Vichy which it later acquired in 1980. Notably, L'Oréal also acquired Lancome in 1954 and Garnier in 1965. In 1973, the company entered the healthcare market when it assumed controlling interest in Synthélabo, a company specialising in cardiovascular medications which, after combining with over-the-counter specialist Metabio-Joullie in 1980, became the third largest pharmaceutical company in France.
The company continued to grow rapidly in the last two decades of the twentieth century, acquiring Redken in 1993 and Maybelline in 1996, among others, and in 2001 it began cleaning up its portfolio and divesting from sub-scale and unprofitable businesses and lines. In 2005, the company entered the men's skincare market. Recent acquisitions have included dermatological brands CeraVe, AcneFree, and Ambi (2017) and luxury Australian-based skincare specialist, Aesop (2023).
L'Oréal has been listed on the French Stock Exchange since 1962.
L'Oréal's largest market is Europe, followed by the United States (US) and China. Skincare makes up the largest part of its sales, followed by Make-up and Haircare.
Dominant market position in a defensive sector
L'Oréal boasts market-leading positions in three of its four major segments being Luxury, Dermocosmetics, and Professional. It holds the number two market position in "Mass" after Unilever. The company is the overall leader in the broader beauty market with an estimated 15% market share in 2023. Since 2017, the company has outpaced growth of the broader market and in the Covid-19 induced decline seen in the broader market of -8%, L'Oréal only saw a decline in sales of 4% on a like-for-like basis.
The opportunity in dermatology
The company is very optimistic on continued strong growth in dermatology products over the next decade. Indeed, this market is expected to grow at a compounded annual growth rate (CAGR) of 7.0% over the next decade. The company has several well-known brands in this category and its major market segments currently contribute roughly equal value in revenue (being the US, Europe and Emerging Markets).
In particular, growth in CeraVe (US) has been very strong, particularly among men. There is still a substantial opportunity in the male skincare market and CeraVe has ascribed some of its early success to the products having no smell and being regarded as "no fuss", which speaks to this market.
With dermatology still being quite localised, management believes there is still an opportunity to cross sell via rolling out mono-market brands to other regions and expanding product set (like developing dermatology branded dandruff shampoo).
High growth in fragrance
Perfumes currently make up approximately 13% of revenue for L'Oréal and the company still foresees high growth in this category going forward. Being more indexed to fragrance is positive and adds defensiveness from a volume and price/mix perspective. Fragrance only tends to decline in big cyclical downturns and customers rarely trade down.
There are some interesting developments in the Asia Pacific margin as it relates to fragrance use as well. Japanese people have historically not used perfumes (although it is picking up) and the industry assumption was that it will not pick up in China either, however, this has not been the case. The category is appealing to young people who are seemingly interested in high-end fragrances and are keen to have a unique smell, which has resulted in customers buying three or more perfumes and "layering" or "customising" their smell.
Shareholder and board structure
L'Oréal's two largest shareholders are the Bettencourt Meyers Family (the family of L'Oréal's founder) and Nestlé.
Nestlé has been invested in L'Oréal since 1974 when it first acquired a stake at the request of Liliane Bettencourt, the daughter of founder Eugene Scheuller, with the aim of preventing the potential nationalisation of the company. Since April 2009, both Nestlé and the Bettencourt family were free to sell their shares (each with first right of refusal until April 2014). After this date, both parties have been free to offer the shares to any third party.
Nestlé did sell 48.5 million shares to L'Oréal in February 2014 that were cancelled by the company and its stake reduced from 29.4% to 23.3%, while the Bettencourt family ownership increased from 30.6% to 33.31%. In December 2021, Nestlé sold a further 22.26 million L'Oréal shares to L'Oréal that were also cancelled. Nestlé now owns 20.1% of L'Oréal and retains two positions on the board. Like what was the case in the 2014 transaction, the reduced number of shares in issue pushed up the now Bettencourt-Meyer stake to 34.7% from 33.3% and the family now has three representatives on the board.
The balance of the board of directors is made up of CEO and Chairman, seven independent directors, and two directors representing employees. The board is 50% independent.
Financials
Investment case summary
Risks
Consensus views
Valuation
