WEEKLY STOCK COMMENT: L'OREAL
Roy Davidson, 15 November 2018
Founded in France in 1909, L’Oréal (OR) operates exclusively in the global cosmetics market. Now present in 140 countries on all five continents, the company has a market leading position in a global market which is estimated to be US$203bn in sales.
Cosmetics are a particularly robust market, which sees strong growth in good economic times, but also proves to be relatively resilient in times of economic challenges. Over the past several years, the market has grown by a respectable ~4% per year, but the market even managed to grow by 1% in 2009 (at the height of the global financial crisis). L’Oréal management attributes the strength and resilience of the global cosmetics market to its supply driven nature, where consumers are always on the lookout for quality, performance, and perceived results. Put differently, the cosmetics consumer is always on the lookout for quality and novelty value, and thus puts a premium on leading edge technology, trends, and new ideas.
L'Oreal has a very impressive track record. In our view the company's success and ongoing market share gains come from a combination of the following factors: 1) Management’s commitment to innovation and its willingness to invest in market leading research and development (R&D); 2) An Omni-channel approach to sales and marketing, whereby the company interacts with customers via traditional brick and mortar physical locations, on-line channels, social media, live web chats, and mobile applications; 3) A strategy of selling into all major channels, all major categories, and at all price points; 4) An industry leading ability to identify trends and aggressively position the company’s brands and products in order to benefit from changes in customer preferences.
All attractive markets come with challenges, and cosmetics are a highly competitive business. Here L’Oréal seems to have found an interesting solution. The company has a well proven track record of identifying and acquiring up and coming brands as a means of defending its market positioning and fostering organic growth. Recent examples of this strategy include the company’s acquisition of Urban Decay (sales up 300% from 2012 – 2015) and NYX Cosmetics (sales up over 125% in a year).
L'Oreal provides a direct exposure to the European market where it often pays to be more selective given the regions’ predominance of banks. L'Oreal is a high quality company with resilient and growing cash flows and is a leader in ethical practices and sustainability.
Risks to OR include:
- economic downturn
- product recalls
- increased competition