L’Oréal: Getting Ready for 2024 Slowdown?

Company Update (OR FP) (Buy): We review L’Oréal again after Ulta Beauty’s shock warning last week; shares are at a multi-month low.

Highlights

• Ulta’s warning last week sent L’Oreal shares back to their level a year ago.

• But it was not as bad as headlines and has only modest relevance for L’Oréal.

• Lower inflation means growth will naturally slow in 2024; H1 will be worse.

• EPS CAGR can be high-single-digits or 10%+, depending on China/India.

• At €412.70, we see a 30% total return (10.3% p.a.) by end of 2026. Buy.

Introduction

We revisit L’Oréal after Ulta Beauty shocked the market with warnings of a industry slowdown at JPMorgan’s Retail Round-Up Conference last week (April 3). Ulta Beauty’s shares have fallen 14.8% since then, and L’Oréal shares have also fallen 4.2%, which means the latter are currently at their lowest level since last November:

L’Oréal Share Price (Last 1 Year)

Source: Google Finance (06-Mar-24).

We last published research on L’Oréal in March 2023. While the company has been Buy-rated in our coverage since an upgrade In March 2022, its relatively high valuation (34x P/E when we last wrote about it) led us to focus on other opportunities, and L’Oréal has not been included in our “Select 15” model portfolio. Since March 2023 month-end L’Oréal shares have gained only 1.8% in U.S. Dollars, while “Select 15” has gained more than 30%, validating our choice. (However, our addition of a small Estée Lauder position in September is showing a loss at present.)

Ulta Beauty’s comments has only modest relevance for L’Oréal (and Estée Lauder). The “warning” was not as bad as media headlines have suggested, Ulta is U.S.-only and has a different sales mix, and it has company-specific challenges.