L'Oreal SA is a French company which manufactures, markets, and distributes health and beauty products. Brands owned by the Group which are well known by consumers include L’Oreal Paris, Garnier, Maybelline New York, Lancome and La Roche-Posay.
L’Oreal Luxe which is a company owned by the Group, produces perfumes for Ralph Lauren, Yves Saint Laurent, Giorgio Armani and Diesel to name a few.
It might come as a surprise to many that even The Body shop is owned by L’Oreal. However, it is also true that due to the continuous disappointment of The Body Shop’s contribution to the Group’s profitability, in 2015 management will restructure the business by closing down those stores which are unprofitable and revitalize its product ranges and store offerings.
L’Oreal generates circa 60% of its sales from North America and Western Europe. The rest is generated from emerging markets. These are being targeted aggressively by management to increase the Group’s revenues. The Group is expected to continue on its path. The following are what in my opinion are the main growth drivers for 2015 and beyond:
Targeting of the Middle Class
Accelerated expansion of the middle class coming from developing countries – According to a study by the OECD, the global middle class will increase form 1.8bln in 2009 to 3.2bln in 2020. L’Oreal has set strategic positions in developing markets to take advantage of this.
Growth through Acquisition
Management is focusing on purchasing leading local brands in emerging markets to increase their market share. The current low interest rate environment would make M&A and buybacks cheaper for the Group.
The Group has exposure to Russia, Mexico, Brazil, India and China to be present in the developed world and take advantage of an improvement in global growth.
Increased focus on Marketing
L’Oreal’s business model is dependent on marketing. Management continue to invest in marketing hubs around the world to be able to continue to increase its market share. At the moment management are focusing on advertising digitally (eg the introduction of the ultimate virtual beauty advisor).
Scientific Breakthroughs
Although this is hard to forecast, L’Oreal have a history of coming up with new products in the cosmetics business. I am of the view that this will continue in the future.
Foreign Exchange Tailwinds
Weakening of the Euro will contribute positively to the Group’s top line figure. In 2013 sales before adjusting for forex increased 6.0% however due to the strong Euro, only a 2.3% increase was reported. This is expected to reverse going forward as the Euro weakens.
US Economic Growth
In the US, economic growth is expected to increase in the coming years benefitting the cosmetics sector as consumers spend more. This is positive for L’Oreal because circa 25% of the sales of the Group are generated in North America.
Other positives for shareholders
The Group had a dividend pay-out ratio of 50.6% in 2014. Management also commented about this and said that they are committed to return cash to shareholders.
L’Oreal should be a core holding in a diversified portfolio. Apart from the positive points mentioned above, the company’s management track record provides confidence for the long term investor.
Disclaimer:
This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.