G - CM-CIC Market Solutions

Transcription

L'Oréal
GARP
PERSONAL GOODS
3 May 2016
200
Prospective value (04/2020)
184.0
Current value
150.0
Entry Price
140.0
Price (€)
158.6
Closing at 02/05/2016
180
160
Price
Prospective value (4Y)
Entry Price
140
Bloomberg Ticker
OR FP
Market cap. (€m)
87,903
Enterprise Value (€m)
76,018
Net Debt 2016 (€m)
-2,199
Leverage 2016 (ND/EBITDA)
Nb shares (m)
ns
120
100
80
554.2
Daily traded volume (€m)
61.4
Free Float (%)
42.6
Source: CM-CIC Market Solutions, FactSet
60
40
20
0
05/11
05/12
05/13
05/14
05/15
“All is order and beauty”
WHY DO WE CARE?
Growth set to accelerate in 2016. Over the last 30 years, L’Oréal’s lead in selective circuits and its number three ranking in consumer products
have allowed it to dominate a beauty products market where growth averages 4% per annum. The rebound of the Consumer Products division in
2016, ending two successive years of underperformance, is set to push organic growth up to 4.5%, a sustainable level over the medium term.
Increased profitability. The group’s reputation is built on the steady improvement in its performance. It now ranks as the sector’s most
profitable player, thanks to the impact of its size on fixed expenses, an efficient business model and strict profitable growth criteria. The
operating margin will not be dampened by forex in 2016, and is poised to firm by 90bp to 17.5%. The prospect of an improvement in the product
mix, a deflationary advertising market and digital optimisation will enable the margin to exceed nearly 18% in the medium to long term.
Resumption of M&A activity in the wind. After a phase of acquisitions and global expansion of its brands in the 1980s and 90s, L’Oréal has
sought, under the stewardship of Jean-Paul Agon, to acquire smaller brands enabling it to adapt to changes in demand very swiftly. After the
market’s relatively calm period over the last 18 months, the group can be expected to return to the M&A trail with two key aims: strengthen its
market share in Asia and Latin America, and continue to integrate digital native brands.
The sector’s re-rating looks excessive. The regular growth profile of the global consumer goods (HPC) market, particularly the beauty market
at roughly 4% in a context of low interest rates, raised the sector’s valuation multiples. Relatively speaking, L’Oréal has seen its premium fall vs
its peers for three reasons: 1) growth in revenues has normalised; 2) its operating leverage seems relatively limited; 3) more marginally
speaking, its financial stake in Sanofi slightly underperformed its own. A target EV/EBIT multiple of 15x in 2020 seems adequate against a
backdrop of interest rate normalisation. Based on these assumptions, our prospective value estimate for 2020 comes out at EUR184, i.e. a
present value of EUR150 per share and an entry point of EUR140. The implicit IRR comes to 5.5%.
VALUE ASSUMPTIONS
Prospective Value of EUR184 (IRR: 5.5%)/Entry point of EUR140 (-11%)
Normalised and prospective results. We see 2016 EBIT totalling roughly EUR4.5bn and around EUR5.5bn in 2020. We have not identified
significant restructuring potential. Achieving the recovery of The Body Shop is the only challenge at the moment; with a limited leverage at group
level.
Debt and balance sheet adjustments. With net cash of roughly EUR2bn as of end-2016, L’Oréal boasts a robust financial position. It should
also be borne in mind that the group holds a 9% stake in Sanofi, worth about EUR9bn.
Relevant multiples. With a 2016 EV/EBIT of 18x adjusted for the 9% stake in Sanofi, the share is trading 20% above its historical multiples, but
in line with its peers. An EV/EBIT multiple of 15x would in our view be an appropriate reflection of the group’s fundamentals.
Prospective valuation and entry point. Our prospective valuation in 2020 is EUR184 per share, or a present value of EUR150 per share
(assuming a cost of capital of 7.9%) and an entry point of EUR140 (based on an IRR of 10%). The implicit IRR works out at 5.5%, breaking
down as a dividend yield of 1.8% and an annualised capital gain of 3.7%.
CATALYSTS AND RISKS
Is it really worth it?
Catalysts. Improvement in the top-line growth and profitability profile in 2016 with better momentum of the Consumer Products division; growth
of middle classes in emerging markets; M&A to strengthen operations in Asia and Latin America.
Risks. Renewed underperformance by the Consumer Products division; changes in consumption patterns (naturalness); regulatory change
(ingredients); long currency positions in emerging markets for the selective circuits division.
Due diligence. Market analysis; competitive analysis; meetings with company representatives.
Next events. Publication of interim 2016 earnings at end-July 2016.
Arnaud Cadart
Financial Analyst
+33 1 53 48 80 86
[email protected]
NB: the disclaimer is at the end of the document and on our website: http://www.cmcicms.com
GARP
L'Oréal
BLANK PAGE
All of our research and disclaimers are available on our website at the following address: http://www.cmcicms.com
2
GARP
L'Oréal
CONTENTS
INVESTMENT CASE ..................................................................................................................................................................................... 4
FRANCHISE ANALYSIS ................................................................................................................................................................................. 8
GROWTH DRIVERS ................................................................................................................................................................................... 15
NORMALISED PROFITABILITY ..................................................................................................................................................................... 17
SOURCES & USES OF FREE CASH FLOW ..................................................................................................................................................... 25
NET FINANCIAL DEBT AND BALANCE SHEET ADJUSTMENTS ........................................................................................................................... 27
NORMALISED VALUATION MULTIPLES ......................................................................................................................................................... 29
DISCOUNTED CASH FLOW ......................................................................................................................................................................... 31
FROM ENTERPRISE VALUE TO INTRINSIC VALUE ......................................................................................................................................... 32
PROSPECTIVE VALUATION ......................................................................................................................................................................... 33
MANAGEMENT, GOVERNANCE, SHAREHOLDER STRUCTURE ........................................................................................................................ 34
APPENDIX 1: GLOBAL BEAUTY PRODUCTS MARKET ..................................................................................................................................... 36
APPENDIX 2: MARKET SHARES OF THE GROUP AND KEY COMPETITORS BY GEOGRAPHIC REGION .................................................................... 37
APPENDIX 3: 25-YEAR PROFILE ................................................................................................................................................................. 39
LATEST INVESTMENT OPPORTUNITIES REPORTS
27/04/2016
14/04/2016
13/04/2016
08/04/2016
31/03/2016
16/03/2016
14/03/2016
04/03/2016
GARP - DANONE: PREDATOR OR PREY (28P)
GARP - VALEO: THE PERFECT EXAMPLE OF A GARP CASE (40P)
GROWTH - DIRECT ENERGIE: AN EXEMPLARY GROWTH STOCK (28P)
INTRINSIC VALUE - VINCI: THE DIVIDEND IS A NICE SECURITY BLANKET FOR THE SHARE (16P)
INTRINSIC VALUE - METRO: PLANNED DEMERGER OF THE GROUP (8P)
INTRINSIC VALUE - PERNOD RICARD: INNOVATION DRIVES GROWTH (16P)
GARP - SOPRA STERIA GROUP: IN THE BIG LEAGUES NOW (40P)
INTRINSIC VALUE - DASSAULT AVIATION: BUSINESS MIX RECONFIGURED TO MORE DEFENCE, SOUND BALANCE SHEET (40P)
INVESTMENT OPPORTUNITIES TEAM
FRANCE
Marc Gouget
+33 (0)1 53 48 80 82
[email protected]
Alexandre Gérard
+33 (0)1 53 48 80 93
[email protected]
GERMANY
SPAIN
Jochen Rothenbacher
+49 69 58997 415
[email protected]
Victor Peiro Perez
+34 91 436 7812
[email protected]
3
GARP
L'Oréal
INVESTMENT CASE
L’Oréal has for many years benefited from a growing market, an efficient organisation and an aggressive acquisition strategy,
recording a remarkable improvement in its economic performance. The group has the assets needed to regain market share
and speed up its profitable growth in 2016. Stronger consumption in mature markets and ongoing expansion in emerging
markets offer the beauty market visibility on growth of roughly 4%, which combined with low interest rates, drove up sector
multiples by 20% from 15x to 18x adjusted EV/EBIT. The current valuation henceforth looks demanding and offers an implicit
IRR of 5.5% within four years. The DCF valuation method (WACC at 7.9%) is consistent with the prospective method for a
present value of EUR150 per share and an entry point of EUR140, via an IRR requirement of 10%.
Strategic growth avenues
Over the last 30 years, L’Oréal’s well-balanced blend of marketing culture, innovation and acquisitions has allowed it to dominate a
global beauty products market that is growing by roughly 4% per annum. A major player in Europe and North America, the group needs
to strengthen its market share in Asia and Latin America.
Consumer Products (47% of revenue and EBIT in 2015, margin of roughly 20%)  Unusual loss of market share
L’Oréal ranks third worldwide in this circuit behind Unilever and P&G. Momentum in this division is critical to achieving the goal of
conquering a billion additional consumers by 2020, one of management’s key commitments. It has recently underperformed its
reference market due to competitive pressure in shampoo in emerging markets, a price war in the French market and the entry of niche
players. In the short term, new initiatives should help recover lost market share. The prospect of growth in segments where L’Oréal’s
differentiation is most pronounced (make-up, skincare) and acquisitions in emerging markets should give the group’s model a firmer
footing in these areas with better growth outlooks.
Professional Products (13% of revenue and EBIT in 2015, margin of roughly 20%)  Find new sources of growth
L’Oréal is the world leader of a hairdressers’ circuit dominated by three players. Facing mature markets in Europe and North America, it
has sought to expand its brand portfolio into 1) emerging markets and 2) beauty salons, where the group is well placed to emerge as a
natural leader. A new generation of salons (spas, nail bars, eyebrow bars, etc.) is spurring growth in what for the last 10 years has been
the group’s most sluggish division.
L’Oréal Luxe (29% of revenue and 30% of EBIT in 2015, margin of roughly 21%)  Space is the ultimate luxury
L’Oréal Luxe ranks second in selective circuits behind Estee Lauder, but ahead of the new entity formed by Coty and P&G. The division
houses a blend of directly owned brands and others operated under licence, as is the case for the group’s various rivals. The group
operates a mix of global and niche brands. The division has reaped the full benefit of growth in emerging markets over the last 10 years.
Its well-balanced portfolio, combining perfumes, skincare and cosmetics, guarantees it a consistent performance despite the very
segmented nature of demand in the various geographies and cultures.
Active Cosmetics (7% of revenue and 8% of EBIT in 2015, margin of roughly 23%)  The source remains abundant
L’Oréal’s smallest division stands out by being its fastest growing and most profitable. The group is a world leader in a market
dominated by French suppliers and enjoys significant demand for active cosmetics, with growth of over 5% in 2014 and 2015, driven by
the growing appetite of consumers for products satisfying demand in respect of health, beauty and safety.
The Body Shop (4% of revenue and 1% of EBIT, margin of roughly 6%)  Formulate a new anti-ageing treatment
The Body Shop is the group’s only direct sales banner, acquired in 2006. It has built its reputation on the sale of cosmetics using natural
ingredients from fair trade, allowing it to lay claim to a strong ethical commitment. The acquisition has been a disappointment. Its
expansion outside English-speaking countries has diluted margins, and the brand is struggling to rejuvenate itself in response to
competition from high street stores (Kiko, e.l.f, etc.). However, there is little likelihood of a disposal in the short to medium term.
Operating leverage  Limited: the company is close to optimum, in the cosmetics divisions at least
L’Oréal stands out by virtue of the steady improvement in its economic performance. It ranks today as the most profitable group in the
perfumes and cosmetics segment of the HPC sector. Its size enables it to absorb its fixed expenses (R&D, manufacturing facilities,
sales force, logistics bases) with ease, its industrial model has been perfected over the last 10 years, its product mix is higher than many
peers and the group enforces strict profitable growth criteria. At this stage, we have not identified significant restructuring potential.
Achieving a recovery for The Body Shop remains on the cards but entails a limited risk. The operating margin will not be dampened by
exchange rates in 2016, and is set to increase by 90bp to 17.5%. The prospect of an improvement in the business mix, a deflationary
advertising market and digital optimisation could allow the margin to rise to nearly 18% in the medium to long term.
L'Oreal SA: Growth drivers (Rating - From 1: Low to 10: High)
Speculative appeal
Shareholder support
Management quality
Market growth
10
9
8
7
6
5
4
3
2
1
0
Valuation appeal
Earnings visibility / Recurrence
Historical EPS growth
Ability to benefit from growth
Existence of actual investment projects
M&A influences
Financial flexibility
Operating leverage
Expected EPS growth
Source: CM-CIC Market Solutions
4
GARP
L'Oréal
Acquisitions  The resumption of M&A activity is likely after a lull of 18 months
The sector saw few major deals in the 10 years preceding the Coty-P&G merger. The prosperity enjoyed by sector players combined
with digitisation favouring speed and agility over size does not necessarily argue for consolidation. After a relative pause in the last 18
months, L’Oréal could be tempted to return to the M&A trail to achieve two goals: strengthen its operations in emerging markets and add
digital-native brands to its portfolio.
Debt and liquidity  A particularly sound financial structure
L’Oréal returned to a net cash position in 2015 (EUR618m), reversing the net debt it reported after acquiring 8% of its capital from
Nestlé in 2014. After the usual adjustments made in accordance with our methodology (lease payments, pension commitments, etc.),
net financial debt stands at EUR2,320m, representing adjusted gearing of 0.4x. These commitments are small in comparison with the
interest in Sanofi (worth EUR9bn at the time of writing). The group’s strong FCF generation (estimated at roughly EUR3bn in 2016) and
a sound financial structure give it flexibility to juggle internal growth, acquisition opportunities and increased shareholder returns.
Prospective valuation and entry point:  A challenging valuation
HPC sector multiples have inflated by 20% over the last 10 years, amidst falling interest rates and the conquest of consumers in
emerging markets. L’Oréal’s valuation has appreciated in absolute terms but deteriorated in relative terms. The market premium has
melted over the past few years on the back of the underperformance of the Consumer Products division and overexposure to Europe.
Our prospective valuation in 2020 is EUR184 per share, or a present value of EUR150 (cost of capital of 7.8%) and an entry point of
EUR140 (IRR of 10%). Based on the current share price, the IRR is 5.5% (dividend yield of 1.8% and annualised capital gain of 3.7%).
Management, governance, shareholders  Synonymous with order and beauty
L’Oréal is a veritable management school. It places a premium on continuity and training its own elite. The five chairmen that have seen
it through the century since its establishment all spent their entire careers within the group. Jean-Paul Agon still has five years to serve
as Chairman of the Board of Directors. The group’s control by the Bettencourt family (33% of capital) looks more secure than ever. Its
purchase of 8% of its capital from Nestlé (23% of capital) laid to rest speculation about a takeover or a sale to an HPC giant. The group
practices the policy of one share equals one voting right.
Risk profile  Limited
The risk profile is limited due to: 1) the quality of the brand portfolio; 2) the group’s leadership in a growing market; 3) the rigorous
management; and 4) the long-term commitment of the Bettencourt-Meyers family. The market is exposed to a desire for naturalness and
make-up to an ageing population. More specifically, the group is exposed to: 1) falling barriers to entry (Consumer Products) and the
emergence of niche players; and 2) past charges (which it denies) of collusion by competition authorities in Europe, the area where it is
the most powerful, for conduct dating back more than 10 years.
L'Oreal SA: What we like & dislike
+
● Family-owned company, ensuring long-term investment horizon and strong shareholder support
● Very experienced management team
● Worldwide leadership, underpinned by very strong positions in Europe and undisputed leadership in selective segments
● Focus on a resilient Beauty market
● Ongoing transition to Digital
● Strong track record in successful M&A integration
● Opportunities to gain market share in emerging markets: n°2 in Asia, n°2 in China and n°3 in India
● Good opportunities to capitalize on the brand image and on strong R&D to be innovative
● Financial flexibility to seize M&A opportunities
● Underperformance of Consumer Products division for the last two years, due to stronger competition from local and global players
● Uncompleted integration of The Body Shop, a factor of margin dilution
● L'Oréal Luxe's dependency on the global economic context
● Antitrust regulation
● Profitability in North America
● Need for market share gains in Asia and Latam, requiring employment of Capital through M&A
● Current valuation, historically high
L'Oreal SA: 10-year EPS revision history (EUR) - Earnings forecasts reliability - From first forecast in year ''Y-2'' to publication in ''Y+1''
7,0
Percentage of years of positive earnings surprise: 36%
6,0
Average deviation: -2%
5,0
4,0
3,0
2,0
1,0
0,0
-2
-1
Y +1 -2
2005
-1
Y +1 -2
2006
-1
Y +1 -2
2007
-1
Y +1 -2
2008
-1
Y +1 -2
2009
-1
Y +1 -2
2010
-1
Y +1 -2
2011
-1
Y +1 -2
2012
-1
Y +1 -2
2013
-1
Y +1 -2
2014
-1
Y +1
2015
5
GARP
L'Oréal
L'Oréal: revenues by Geographic Region (2015,%)
6
L'Oréal: revenues by Operational Division (2015,%)
3
7
8
4
13
Western Europe
33
Professional Products
North America
Consumer Products
Asia-Pacific
Latin America
22
L'Oréal Luxe
29
Active Cosmetics
Eastern Europe
The Body Shop
47
Africa, Middle-East
27
Sources: CM-CIC Market Solutions, L'Oréal
L'Oréal: revenues by Business Segment (2015,%)
L'Oréal: EBIT margin by Operational Division (2015,%)
25
4
23
20
10
20
Skincare
30
17
Consumer Products
L'Oréal Luxe
Haircare
Hair colourants
10
Active Cosmetics
The Body Shop
Perfumes
20
21
15
Make-up
13
20
5
Other
24
Corporate
6
Group
0
-3
-5
L'Oréal: Capex by Operational Division (2015,%)
L'Oréal: Opérating expenses and EBIT as % of revenues (2015,%)
5
4
12
17
29
Cost of sales
R&D
Consumer Products
29
Advertising and promotion
L'Oréal Luxe
22
Active Cosmetics
3
51
SG&A
EBIT
The Body Shop
29
L'oréal: Simplified corporate structure
L'Oréal
Consumer Products
L'Oréal Luxe
Active Cosmetics
The Body Shop
13% of sales / 13% of EBIT
Source: CM-CIC Market Solutions, L'Oréal
Management
Board of Directors
Shareholder structure
%
Capital
Jean-Paul Agon
Chariman & CEO
Number of members
Laurent Attal
VP R&D
o/w independent members
Christian Mulliez
CFO
o/w women
Nicolas Hieronimus
VP MD Selective
Company savings plan
Marc Menesguen
MD Consumer
Free float
Date
33
7
Nestlé
23
6
Treasury stocks
1
Vot. rights
33
23
-
1
1
43
43
Company profile
Buy /
No. of
Transaction
Amount
Sell
shares
price
EURm
Jean-Paul Agon
29/03/16
SO
70,000
78.06
5.46
Jean-Paul Agon
23/03/16
Sell
385
157.01
0.06
Jean-Paul Agon
10/03/16
Sell
50
160.00
0.01
Jean-Paul Agon
25/02/16
Sell
2,700
157.59
0.43
Jean-Paul Agon
18/02/16
Sell
2,610
155.00
0.40
Jean-Paul Agon
18/02/15
SO
20,000
78.06
1.56
Sources: CM-CIC Market Solutions, AMF
Bettencourt Meyers
Insider trading activity
Corporate Officer
15
L'Oréal SA engages in the manufacture and sale of beauty and hair products. It operates
through the following segments: Professional Products, Consumer Products, L'Oréal Luxury,
and Active Cosmetics. The Professional Products segment manufactures products which
are used and sold in hair salons. The Consumer Products segment offers beauty and care
products for men and women which are sold in mass market retail channels. The L'Oréal
Luxury segment markets high-end skin care and beauty products in selective retail outlets
such as department stores, perfumeries, and travel retail. The Active Cosmetics segment
offers dermocosmetic skincare products which are sold in pharmacies and specialist
sections of drugstores. The company was founded by Eugène Schueller in 1909 and is
headquartered in Paris, France.
Source: CM-CIC Market Solutions, Factset
6
L'Oreal SA: Investment due diligence check list
Low
Average
Market Structure & Momentum
● Secular growth trends
● Barriers to entry
● Bargaining power of suppliers
x
L'Oreal has a large segmented offer and advertising expenses are equivalent to ~30% of sales
Large and diversified client base but the brand image is also very important and has an impact on sales
The offer is largely segmented and diversified. L'Oréal also worked to anticipate new trends with strong R&D
x
L'Oreal has a leading position in almost all its markets except for Consumer Products (Unilever and P&G)
x
● Industry consolidation
x
Each division is dominated by 3 or 4 main players
● Industry fragmentation
x
There are both global and local players in all division, less fragmented in the Professionnels Products div.
● Technological content
x
The group registered 497 patents in 2014
● Regulatory framework
x
French antitrust regulator recently imposed heavy fines on L'Oreal (EUR189.5m in 2014)
Steady growth for the Cosmetics divisions, except for L'Oréal Luxe, which was hit hard in 2008
x
● Seasonality
Revenue Profile
Strong positioning with a mix of structurally growing resilient mkts, more cyclical mkts and fast growing mkts
L'Oréal is a key player for cosmetics suppliers
● Industry rivalry
Sunscreen for the summer and gifts for Christmas
x
● Recurrence
x
The Consumer Products division is a resilient activity
● Predictability
x
L'Oréal is the number one cosmetics group worldwide
● Business understandability
x
Five divisions clearly seperated with their own clients and distribution channels
● End-customer diversification
x
Large customers for each divisions
● End-market diversification
x
There are many kinds of retailers depending on the product's division (ie pharmacies for Active Cosmetics)
● Geographic diversification
x
L'Oreal is present in 140 countries
● Supplier diversification
x
● Organic growth
Profitability and
Cash-flow Generation
Comments
x
x
● Threat of substitute products
Balance Sheet
and Liquidity
High
x
● Bargaining power of buyers
● Cyclicality
Investment Considerations
GARP
L'Oréal
In the average of Consumer Products players
x
● Acquisitive growth
x
● Pricing power
x
Strategic acquisition in diversified markets and geographic zones
● Fixed-cost structure
x
Best absorption in the sector (cf size)
● Raw material dependency
x
The composition of the product may be a sales argument
● Capex intensity
x
~4.5% of sales
● Return on capital
x
Avg ROE = 16% and ROCE = 25%
● Free cash flow generation
x
FCF-to-Sales of 13% thanks to a strong operational leverage.
● Margin resilience
x
Critical size in all divisions
● Industrial organisation
x
The activity is divided between four cosmetics operational division + The Body Shop
● Recovery potential
x
L'Oréal has a resilient business model and it's the worldwide cosmetics leader
● Leverage
x
Adjusted NFD / Adjusted EBITDA of 0.4x
● Liquidity
x
The company has a net cash position every year (except for 2014 because of share buy-back program)
● Debt structure quality
x
The gross financial debt is largely Commercial Paper (65% of the debt)
● Working capital intensity
Working Capital intensity of 4%
x
● Off-balance sheet items
x
Operating leases: EUR2115m; Pension liabilities: EUR610m; Provisions: EUR213m
● Franchise sustainability
x
The group control almost all its brands. There are only 4 long-term franchises in the Luxury Division
● Valuation attractiveness
20% above 20-year valuation multiples
x
● Operating history consistency
x
● Speculative interest
x
● Accounting complexity
x
L'Oréal is the cosmetics worldwide leader
Very detailed reporting
● Management track record
x
● Management incentives
x
● Insider trading activity
ROCE stable around 25%
Jean-Paul Agon has spent his entire career with L'Oréal
x
● Analyst coverage
x
The stock is covered by 36 analysts
● Stock liquidity
x
Average daily volume over the last 12 months: 721k shares / EUR112,9m
● Stock volatility
x
Raw Beta: 0,97 | Adjusted Beta: 0,98 | 24-month daily annualized Volatility: 23,1%
Source: CM-CIC Market Solutions, L'Oréal, Factset
L'Oreal SA: ROCE & ROE (%)
25
ROE (%)
ROCE (%)
20
15
10
5
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E 2016E 2017E 2018E 2019E 2020E
L'Oreal SA: Historical growth drivers
Revenue growth (%)
2009
2010
2011
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
-0.4
11.6
4.3
10.4
2.2
-1.9
12.1
1.8
4.5
4.6
4.6
4.6
o/w organic (%)
-1.1
5.6
5.1
5.5
5.1
3.6
4.0
4.5
4.6
4.6
4.6
4.6
o/w scope (%)
1.8
0.4
0.6
0.7
1.0
0.9
1.1
0.1
0.0
0.0
0.0
0.0
-1.1
5.6
-1.3
3.8
-3.3
-3.0
7.0
-3.1
-0.2
0.0
0.0
0.0
2009
2010
2011
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
-1.5
5.6
5.0
5.5
5.3
3.8
4.1
4.6
4.6
4.6
4.6
4.7
-3.3
4.1
2.5
2.1
2.2
2.6
3.4
2.9
3.0
3.0
3.0
3.0
3.2
5.5
4.5
5.0
4.9
1.7
2.5
4.2
4.0
4.0
4.0
4.0
o/w L'Oréal Luxe
-9.0
7.0
8.2
8.3
6.8
7.1
6.1
5.9
6.0
6.0
6.0
6.0
o/w Active Cosmetics
-1.5
4.7
3.2
5.8
7.8
8.7
7.9
5.5
6.0
6.0
6.0
6.0
0.7
-1.1
4.2
4.9
1.6
3.1
1.5
2.8
3.0
3.0
3.0
3.0
o/w forex (%)
Organic growth by Operational Division (%)
Cosmetics Total
o/w Professional Products
o/w Consumer Products
The Body Shop
7
GARP
L'Oréal
FRANCHISE ANALYSIS
Over the last 30 years, L’Oréal’s well-balanced blend of marketing culture, innovation and acquisitions has allowed it to
dominate a global a beauty products market that is growing by roughly 4% per annum. A major player in Europe and North
America, the group now needs to strengthen its market share in Asia and Latin America.
Strong franchises that may be strengthened in Asia and Latin America
L’Oréal owns or operates under licence over 30 international brands, covering most of the spectrum of beauty products: hair care and
colouring, skincare, make-up and perfumes. The group limits its presence in the personal care market to speciality products (babies,
sensitive skin); it is absent from dental hygiene. Brands are operated within divisions dedicated to their specific distribution circuit. The
group covers most distribution circuits worldwide, with the exception of door-to-door sales, namely the professional segment (hair and
beauty salons), retail, selective circuits and pharmacies. L’Oréal also has a chain of distribution outlets with The Body Shop.
This organisation focuses on the needs of each consumer and the ecosystem it addresses. Brands are geared towards the commercial
momentum of their markets, sharing manufacturing facilities structured by division, with HR, administration and R&D conducted at group
level. L’Oréal has won the leadership of the global cosmetics market by having the right blend of 1) marketing culture and control of
distribution networks, 2) a tradition of innovation that has led to the filing of 30,000 patents in the last 100 or so years and 3) the
construction of a portfolio of complementary brands through acquisitions. The group’s steady organic growth (5% per annum over the
past 20 years) has been driven by an active external growth policy (EUR8bn spent over the last 15 years). It now has 13% of a global
market worth nearly EUR200bn. L’Oréal operates in 69 countries, and markets its products in 140.
L'Oréal - 2015 - Sales contribution by region
New
Markets
40%
L'Oréal - 2015 - EBIT contribution by region
Western
Europe
33%
Western
Europe
37%
New
Markets
38%
North
America
27%
North
America
25%
The broad trend in the global beauty products market has benefited from increased purchasing power and greater urbanisation –
obviously at a higher pace in emerging countries – to achieve growth averaging nearly 4% annually. However, growth rates are
contrasted between the various distribution circuits. Door-to-door sales are in relative decline given growing access to modern
distribution (growth of roughly 1%). The professional circuit is still underdeveloped in Asia, where its growth is below that of the broader
market (growth of roughly 1.5%). Consumer products are enjoying growth on the back of the emergence of new middle classes and the
expansion of distribution networks (growth of roughly 4%). Luxury goods and active cosmetics are enjoying stronger demand, especially
from Asia (growth of roughly 5%). E-commerce has been gaining momentum quickly for the last 10 years, and now accounts for 6% of
global demand. It is growing by roughly 20% per annum.
As shown in Appendix 2, the group has strong franchises in mature markets, with market share of 17%, mainly in Western Europe
(20%) and North America (14%). Japan is the only market to have remained relatively immune to the French group’s growth over the
last 50 years (2% market share). L’Oréal is also the leader in Eastern Europe (13%), but ranks as an outsider in Latin America (8%) and
Asia (9%), two areas where its market share has been eroded by the emergence of local players. Its overall market share in emerging
markets is close to 10%.
By product group, while market share is low in personal care (< 5%), it is particularly impressive in make-up (20%), hair care (23%) and
sunscreens (24%); it also exceeds 10% in deodorants and perfumes. L’Oréal’s main focus remains the women’s market. In the buoyant
men’s market, its offer is dominated by L’Oréal Men Expert, Biotherm, Kiehl’s and perfumes.
This rundown shows the group’s very strong franchises in a growing market, although a loss of market share in the Consumer Products
division has cast a shadow over the rest of its activities.
L'Oréal - Beauty market share by region - 2015
20%
20%
W Europe
15%
10%
14%
13%
12%
NorthAm
9%
8%
MEA - Partly
E Europe
APAC
5%
LatAm
2%
0%
Japan
2011
2012
2013
2014
2015
Source: L'Oréal
8
GARP
L'Oréal
Consumer Products – 47% of revenue and EBIT  Unusual loss of market share in 2014 and 2015
● Activity: The Consumer Products division designs, manufactures and markets products at affordable prices for retail distribution. Its
momentum is key in the group’s goal of conquering a billion new consumers by 2020. After the construction in the 1980s and 90s of a
global brand portfolio aimed at satisfying the broadest spectrum of demand from people of Western European descent (L’Oréal, Garnier,
Maybelline), the group has over the last 10 years stepped up its acquisitions of regional brands and redeployed its research efforts to
meet the more specific needs of 1) people of Asian or African ancestry, and 2) people whose demands are focused on more specific
concepts, largely in urban environments..
L'Oréal - Estimated Sales by Brand - Consumer Products - 2015
Est. Sales
(EURm)
% of
Division Sales
% of
Group Sales
Comments
L'Oréal Paris
4,455
38
18
WW top beauty brand sold in retail outlets. Concept of Premium generalist
Garnier
3,100
26
12
2nd largest brand of the L’Oréal Group. Focused on natural ingredients and affordable prices
Maybelline
2,900
24
11
World’s leading cosmetics brand. Inspired by the New York lifestyle
275
2
1
Provide beauty to consumers of African descent
80
1
0
US nail polish brand
NYX
130
1
1
Digital native US Make-up brand. Affordable prices
Magic Holdings
200
2
1
Chinese specialist in cosmetic facial masks
Niely Cosmeticos
100
1
0
Brazilian haircare brand acquired in 2015
Others
604
5
2
Mainly Lascad, hygiene in France (Mennen, Cadum, Mixa, Narta, Ushuaia, Dop , etc.)
11,844
100
47
Softsheen.Carson & Carol's daughter
Essie
Total
N°1 division of the group in terms of contribution to consolidated sales
● Competitive environment: The group ranks third worldwide behind Unilever (Dove) and P&G (Pantene, Olay), two dominant players
in the shampoo segment, which also enjoy a lead in emerging markets. The division boasts strong positions in Europe and North
America, but is weak in emerging markets. Since 2011, the division’s growth has been in line with industry performance at 3.5% (midway between Unilever and Beiersdorf (+6%), the best performers, and P&G (0%)) but lost ground in 2014 and 2015. Globally, the
division recorded an organic revenue CAGR of 2% in 2014 and 2015, vs 4% for the corresponding divisions of Beiersdorf (Nivea) and
Unilever. In Europe and North America, L’Oréal proved resilient, despite the retail market being under pressure and its lag in digital
communication. The biggest challenges were in Apac and South America which are attractive emerging markets and the scene of a
fierce battle between HPC majors and big local brands that are in a position to offer quality, innovative products with attractive
packaging and competitive prices (Amore Pacific, Jahwa, O Boticario, etc.).
● Entry barriers & franchise sustainability: The division is most exposed to heightened barriers to entry resulting from technology: 1)
social networks multiply the signals sent to consumers, and influencers such as bloggers and vloggers are challenging classic
advertising; and 2) information technologies also facilitate exchanges. Distribution networks are increasingly coming under challenge
from distance selling through large specialists (Amazon, Tmall) that can offer an exceptionally broad range, down to the smaller
integrated brands. This duel “disintermediation” (media, distribution) has facilitated the emergence of smaller players – although they still
represent a small portion of the market – in niche products.
L'Oréal vs peers : Organic growth - Consumer Division - Basis 100 in 2011
125
CAGR : 6%
Unilever P. care
CAGR: 5%
120
Colgate O. P. H.
115
CAGR: 3%
110
CAGR: 3%
Beiersdorf Cons.
L'Oréal GP
Henkel Beauty
CAGR: 1%
105
J&J Skin care
CAGR: 0%
P&G Beauty
100
2011
2012
2013
2014
2015
Sources: Companies
● Risk profile: In emerging countries, the market continues to offer outstanding medium- and long-term potential. Major brands will
continue to enjoy clear leadership. In mature markets, the division is highly exposed to personal care and beauty aisles in large
supermarkets, which offer a poor buying experience, topped off by competition from Kiko, MAC and e.l.f. The division has faced charges
of price fixing in the past. Besides litigation in Spain, Belgium and Germany, L’Oréal has been investigated by the French consumer
protection authority, which found that it had coordinated the selling policy of various players to retailers, making concerted price
increases between 2003 and 2006. L’Oréal was fined EUR189m, but has appealed. Lastly, the division’s brands are less vulnerable to
e-commerce than distributors, but the future will see large groups continue 1) their investment in digital communication, and 2) their
acquisitions of emerging brands in a bid to gain market share.
L'Oréal - Consumer Products Sales - Geomix (left, 2015, %), Segments (middle, EURm), Revenues (right, EURm)
W
Europe
33%
New
Mkts
41%
NorthA
m
26%
Hair colourants
100%
490
90%
2,488
80%
70%
60%
3,190
50%
40%
30%
2,651
20%
10%
1,895
0%
2012
Haircare & styling
Make-up
515
530
Skincare
524
Others
2,535
2,489
2,657
14,000
12,000
10,000
3,216
3,205
3,840
8,000
6,000
2,713
2,723
2,885
1,895
1,821
1,939
2013
2014
2015
4,000
2,000
0
2012 2013 2014 2015 2016E2017E2018E 2019E2020E
9
GARP
L'Oréal
Professional Products – 14% of revenue and EBIT  Find new sources of growth
● Activity: The Professional Products division is L’Oréal’s original activity. It dates back to 1909, when Eugène Schueller created his
first range of hair dyes, which he went on to sell to Parisian hairdressers. It houses four global brands, each generating more than
EUR400m in revenue, plus a number of growing hair care brands, and three recently acquired in make-up and body care brands
targeting beauty institutes.
L'Oréal - Estimated Sales by Brand - Professionnal Products - 2015
Est. Sales
(EURm)
L'Oréal Professionnel
% of
Division Sales
% of
Group Sales
Comments
1,200
35
5
Premium generalist brand, inspired by Paris and its fashion industry
Kérastase
800
24
3
Luxury haircare products created within the group in the 60s
Redken
500
15
2
Leading US brand, inspired by NYC style
Mizani
150
4
1
Professional products for all curly hair textures
Essie
48
1
0
US nail polish brand, available both in Consumer and Professional circuits
Decléor
70
2
0
Specialist in aromatherapy for beauty institutes and spas
467
14
2
#1 US professional brand in the world. Innovation at affordable price
Pureology
61
2
0
US brand for colour-treated hair
Shu Uemura
73
2
0
Brings Japanese luxury brand to a selective number of Salons
Carita
30
1
0
Luxury beauty brand providing cosmetics and treatments as alternatives to surgery
3,400
100
13
Matrix
Total
In geographical terms:

The group’s main markets, Western Europe and North America, are mature and have seen a fall in clientele among women since
2009. The sector is hurt by its fragmented nature. There are no fewer than 60,000 hair salons in France, a market representing
revenue of EUR6bn, or an annual average of EUR100k per salon. In the US, hair salons are the gathering points of independent
hairdressers. This organisation, which is more akin to that of a craft market, tends to slow the development of professional products.

The plight of salons could promote a phase of consolidation, which would be good news for producers. By modernising, salons
would be able to offer more technical services and expand their services (massages, make-up, beauty treatments). A tighter
organisation of the offer would also lower transaction costs with suppliers.

Emerging markets vary in nature. Beauty culture varies widely from one country to another. In Eastern Europe, Brazil and India, hair
is a key part of beauty, and needs are similar to those seen in Europe and North America. Brazil is a major market, and a structure
is gradually emerging. This process is proving slower in India. In Asia, and particularly China, the nature of hair, which tends to be
thick and straight, does not really lend itself to treatment in a professional setting.
● Competitive environment: L’Oréal is the world’s leading supplier of professional products for hairdressing salons, with a 27% share
of a EUR11bn market in 2015, after moderate growth since 2009 (roughly 1.5% annually). The division has gradually strengthened its
positions, benefiting from the lethargy of players such as P&G, more focused on conquering the most dynamic markets. The merger
between Coty and the selective distribution assets of P&G Beauty, not to mention recent initiatives by Henkel, will increase competition.
New entrants have tended to focus on either the upper level or the entry level, without representing major threats. The fragmented
beauty salon market is dominated by Guinot-Mary Cohr and Sothys, although L’Oréal’s expertise in beauty treatments – not forgetting
its recent acquisitions of Decleor and Carita – make it a natural predator. However, we should distinguish the rise of make-up bars from
traditional beauty salons, which have suffered more since 2009. L’Oréal took advantage of its 2010 acquisition of Essie to increase its
salon offer by offering nail care and varnishing products. In this market, Essie competes against OPI, the global leader in salon sales,
owned by Coty. Other players such as French company Peggy Sage and its Americans rivals China Glaze and Revlon (Pure Ice
Cosmetics) also operate in this market.
● Entry barriers & franchise sustainability: Barriers to entry appear to be stronger than for the Consumer Products division. The cost
and complexity of addressing 500,000 salons has one key advantage: it limits competition. The prospect of consolidation of salons
would initially have a positive impact for professional products. But it would increase salons’ bargaining power, making competition a bit
more effective. Training is a second strong barrier. The sale of professional products is a long-cycle business that requires appropriate
structures and involves training sector professionals and bringing them to understand the sector’s rituals. L’Oréal is accelerating this
process and encouraging market development through the establishment of specialised centres to train and retain a new generation of
hairdressers who then open their own salon. In Brazil, 1,500 hairdressers are trained every year in the country’s seven institutes.
● Risk profile: The division boasts substantial market share with a large number of customers, which provides protection. The two main
risks are the market’s sluggish nature and limited development in emerging countries, which account for only 25% of revenue. A
profound restructuring of the hairdressing business in mature countries in the coming 10 years could further open up the market and
result in the emergence of new world-class players. Reputation risk is also high (witness the 2013 Inoa Ultra Blond dye scandal). As
such, L’Oréal is challenged by the success of speciality brands playing on the dermatological aspect (Rodan + Fields, StriVectin-SD) or
emphasising naturalness (John Masters Organics, Rahua, EOS dyes by Wella). Thanks to the strength of its R&D, L’Oréal is able to
identify solutions in response to criticisms of the use of chemicals.
L'Oréal - Professional Products Sales - Geomix (left, 2015, %), Segments (middle, EURm), Revenues (right, EURm)
Hair colourants
New Mkts
27%
W Europe
32%
NorthAm
41%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Styling & textures
Shampoos & haircare
4 000
3 500
3 000
1 637
1 634
1 665
1 893
317
304
329
354
1 048
1 036
1 039
1 153
2012
2013
2014
2015
2 500
2 000
1 500
1 000
500
0
2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
10
GARP
L'Oréal
L’Oréal Luxe – 29% of revenue and 30% of EBIT  Space is the ultimate luxury
● Activity: L’Oréal Luxe offers relatively affordable luxury products through selective circuits in a blend of directly owned brands and
others operated under licence. The division’s performance is consistent with that of the luxury goods market: mature in Europe and
North America, buoyant in emerging markets through the rise of the middle class, with its growth more sensitive to economic conditions
and global tourism flows. Travel retail is L’Oréal’s “sixth continent”.
L'Oréal - Estimated Sales by Brand - L'Oréal Luxe - 2015
Est. Sales
(EURm)
Lancôme
Giorgio Armani - License
% of
Division Sales
% of
Group Sales
2,500
35
10
Comments
High-end feminine luxury brands offering a wide range category of Cosmetics
850
12
3
One of the most famous Italian fashion brands, both for women and men
1,000
14
4
One of the most famous (and recently rejuvenated) French fashion houses
Biotherm
550
8
2
Specialist in aquatic skincare solutions
Kiehl's
441
6
2
NY-based specialist for skincare using natural ingredients
Ralph Lauren - License
600
8
2
One of the most famous affordable US fashion and lifestyle brands
73
1
0
Japanese high-end brand
Cacharel - License
150
2
1
French fashion branded for young women
Helena Rubinstein
250
3
1
Strong heritage of a 100+ year-old brand for premium anti-age treatments
Clarisonic
129
2
1
Pioneer in skincare devices
Diesel - License
200
3
1
Italian, modern fashion brand
Viktor & Rolf - License
150
2
1
Fashion brand famous for its provocative and glamourous collections
Yue Sai
65
1
0
Pioneer in the cosmetics market in China
Maison Margiela - License
30
0
0
Modern, irreverent fashion house
193
3
1
Avant-garde US make-up brand
Guy Laroche - License
30
0
0
French fashion house, mostly known today for its fragrances
Paloma Picasso - License
20
0
0
Daughter of Pablo and creator of jewellery and fashion accessories
Proenza Schouler - License
0
0
0
Relatively new US fashion brand
7,230
100
29
Yves Saint Laurent - License
Shu Uemura
Urban Decay
Total
● Competitive environment: L’Oréal Luxe boasts a strong portfolio of complementary brands, recognised worldwide, allowing it to
address a broad customer base: Lancôme in status products, Saint Laurent in a sphere adjacent to the world of fashion, Urban Decay in
high-end make-up, Armani and Ralph Lauren for male customers looking for either sophisticated or more casual products. The group is
a key partner for distribution. L’Oréal Luxe ranks second in beauty products in the selective circuit behind Estee Lauder, the leader in
perfumes, and ahead of the merged Coty-P&G. Competition comes in various forms: 1) pure players like Estee Lauder, Shiseido,
Beiersdorf and Puig; and 2) luxury groups such as LVMH, Chanel and Hermes. The group enjoys strong market share in perfumes in
North America, particularly for men, thanks to Ralph Lauren and Armani. In China, Lancôme is the leader in skincare.
● Entry barriers & franchise sustainability: Despite fierce competition, barriers to entry are sound, but perfumes, make-up and
skincare segments cover different realities. Make-up and perfumes are more porous. The rise of increasingly powerful networks, driven
by Sephora, leaving traditional perfumeries looking like something out of the past, has simplified the marketing approach. At the same
time, we are witnessing the rise of niche players. In perfumes: 1) the R&D effort is close to zero, innovation stems from the composition
of olfactory components provided by perfumers (also known as noses), often independent from the perfume maker; and 2) industrial
intensity is also low. The group’s manufacturing facilities provide quality control and prepare the product from fragrances obtained from
Givaudan, IFF or other suppliers, in packaging supplied from glass, plastic and cardboard manufacturers. But while it may enjoy shortcycle production, requiring no R&D and low industrial capacity, the perfume business requires marketing and communication effort to
survive in a market that sees 500 launches each year. The business requires a substantial base of intangible assets, first of which a
strong brand. L’Oréal, like its major competitors, generates a portion of its revenue under licence. Its asset base, which has a low level
of capital intensity, does not have the same duration as fully owned assets. In skincare, the brand engages its reputation and R&D to
deliver safe and effective products, which very significantly increases barriers to entry.
● Risk profile: The decline in the luxury goods market in 2009 resulted in a drop in the profitability of all players, and particularly L’Oréal
at a time coinciding with its consolidation of YSL Beauté, whose margins were close to zero. Moreover, the model is based on a blend of
directly owned brands and others operated under licence, with a low level of capital intensity but duration limited by the nature of the
asset, which has to be taken into account in the valuation. Our understanding is that licences signed with YSL, Armani and Ralph
Lauren (EUR2.5bn in revenue) are particularly long. Our valuation assumes an 85% likelihood of renewal at maturity, with a standard
15-year contract. L’Oréal Luxe is also exposed to perfume sales, which provide 32% of its revenue. Perfumes are faced with two
problems: 1) the segment is the most competitive in the market, because of its low barriers to entry; and 2) it is among the most mature
segments of the luxury goods and beauty universe. Very active in Europe over the last 30 years, but with a small market in Asia given its
lack of appeal for local customers, it has found a source of new growth over the last 10 years in Latin America, the Middle East and
Eastern Europe, three areas that have been plagued by serious economic difficulties since the end of 2014. The short-term growth
profile is limited. Lastly, the division was fined EUR4.1m in 2006 for vertical price fixing with 13 other perfumers (BPI, LVMH, Dior,
Guerlain, Chanel, YSL Beauté, Hermes Parfums, etc.) and three distributors (Marionnaud, Nocibé, Sephora). The case dates back to
1997-2000, and the process was allegedly maintained by means of a price policing mechanism.
L'Oréal Luxe Sales - Geomix (left, 2015, %), Segments (middle, EURm), Revenues (right, EURm)
Skincare
New Mkts
43%
W Europe
29%
NorthAm
28%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Perfumes
Make-up
10,000
9,000
1,159
1,272
1,404
1,808
1,928
1,946
2,040
2,299
8,000
7,000
6,000
5,000
4,000
3,000
2,481
2,648
2,754
3,122
2,000
1,000
0
2012
2013
2014
2015
2012 2013 2014 2015 2016E2017E2018E 2019E2020E
11
GARP
L'Oréal
Active Cosmetics – 7% of revenue and 8% of EBIT  The source remains abundant
● Activity: The Active Cosmetics division designs, manufactures and markets skincare products for healthcare professionals
(pharmacies and drugstores, etc.), often on the recommendation or prescription of pharmacists, dermatologists, paediatricians and
aesthetic physicians. The division comprises five complementary brands (Vichy, La Roche-Posay, SkinCeuticals, Sanoflore and Roger
& Gallet) and a total catalogue of 700 references. To claim the title of active cosmetic, a product must contain active ingredients backed
up by scientific evidence. Skincare accounts for 80% of sales, with hair care and make-up weighing in at 10%. Asian consumers have
given demand a big boost over the last 10 years. The division is the most primed to support the ageing population. It is not a big force in
certain types of products such as essential oils or a number of niche markets (ayurvedic products, aromatherapy, etc.), especially since
the sale of Inneov (food supplements) to Nestlé in 2014.
L'Oréal - Estimated sales by brand - Active Cosmetics - 2015
Est. Sales
(EURm)
% of
Division Sales
% of
Group Sales
Comments
Vichy
948
51
4
World leader in dermo-cosmetics. Founded in 1931 to exploit thermal spa water
La Roche Posay
758
41
3
Among the Top 3 brands in dermo-cosmetics. Specialist in sensitive skins
Sanoflore
23
1
0
Combining a 'natural' approach with scientific rigor to offer an alternative to conventional cosmetics
Skinceuticals
75
4
0
High-end, relatively new US brand specialised in anti-ageing
Autres
60
3
0
Mainly Roger & Gallet
1,863
100
7
Total
The division enjoys traction from a dynamic market, with growth of over 5% in 2014 and 2015, driven by the growing appetite of
consumers for skincare addressing health, beauty and safety needs. This factor is gaining importance in the purchasing decision; it is
decisive for 65% of women (and 74% of Chinese women) according to the 2013 ACD sensisurvey.
● Competitive environment: L’Oréal is the global leader in a consumer market valued at EUR12bn in 2015 (source: Euromonitor), with
roughly 30% market share thanks chiefly to its two major brands, Vichy (leading global brand, 2015 revenue estimated at roughly
EUR950m) and La Roche-Posay (number two global brand, 2015 revenue estimated at roughly EUR750m). The group competes
against global cosmetics corporations, namely Beiersdorf (Eucerin) and Nobacter (Puig) since the 2011 acquisition of Laboratoires
d’Uriage. The other main challenger is Avène (Pierre Fabre), the number three global brand, with estimated 2015 revenue of EUR750m,
a leading brand in Europe, Japan (through a partnership with Shiseido) and China. Its other brands (Galenic, Elancyl, etc.), allowed
Fabre to achieve estimated revenue of almost EUR1.3bn in 2015.
● Entry barriers & franchise sustainability: Distribution networks vary from one country to another:
 In Western Europe (50% of divisional revenue), pharmacies and drugstores are the mainstay of the distribution network, generating
roughly 25% of skincare sales. Benefiting from the recommendation of a medical professional, they have deep roots dating back many
years throughout the country, with more than 50,000 outlets. The market is consolidated, with high barriers to entry.
 In North America (10% of divisional revenue) and the new markets (40% of divisional revenue, with a particular focus on China),
where pharmacies do not have the same status, Active Cosmetics products are sold in corners located in drugstores, shopping
centres and department stores, with a healthcare professional in attendance. Strong demand from Asian customers has generated
growing sales in the travel retail segment. Activity is more competitive in countries with a poorly organised distribution network and the
absence of pharmaceutical advice.
 The group is also expanding its own network, DermaCenter, online and in a single bricks and mortar outlet in Paris at this stage. This
allows it to combine the division’s five major brands and provide specific advice.
Medical support is an important source of credibility in the eyes of consumers, hence the presence of a healthcare professional at all
outlets. La Roche-Posay, for instance, is recommended by 25,000 dermatologists worldwide.
● Risk profile: The division is exposed to three risks: 1) potential conflicts of interest with healthcare professionals; 2) the dual demands
of consumers as regards the quality and safety of active ingredients and the product’s effectiveness; and 3) the questioning of the
distribution model in Europe, and France in particular. To date, all three represent significant barriers to entry.
L'Oréal - Active Cosmetics' Sales - Geomix (left, 2015, %), Segments (middle, EURm), Revenues (right, EURm)
Skincare
New
Mkts
40%
W
Europe
48%
NorthAm
12%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Haircare
Make-up
157
160
93
97
109
93
109
105
145
Others
2,500
169
104
99
2,000
1,500
1,168
1,214
1,286
1,445
1,000
500
0
2012
2013
2014
2015
2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
12
GARP
L'Oréal
The Body Shop – 4% of revenue and 1% of EBIT  Formulate a new anti-ageing treatment
● Activity: The Body Shop has built a reputation since its establishment in 1976 by creating and distributing cosmetics and make-up using
natural ingredients from fair trade, allowing it to lay claim to a strong ethical commitment. The company has gradually expanded in Englishspeaking countries. At the time of its acquisition in 2006, the goal was to provide TBS with support from the group’s R&D resources and
marketing expertise to accelerate growth, expand product lines and rejuvenate the brand image. Ten years down the track, the results are
mixed. Expansion into new geographic regions has tended to dilute to margins, and the brand is struggling to reinvent itself.
Organic growth by Division - basis 100 in 2006
EBIT margin as function of Sales - TBS vs Cosmetics
170
20,0%
2015
Active Cosmetics
160
2007
L'Oréal Luxe
16,0%
150
Cosmetics divisions
Mass Market
140
12,0%
Professional products
130
The Body Shop
The Body Shop
8,0%
120
2007
110
2015
4,0%
100
90
2006
2008
2010
2012
0,0%
2014
70
Sources: CM-CIC Marker Solutions, L'Oréal
80
90
100
110
120
130
140
150
160
Sources: CM-CIC Marker Solutions, L'Oréal
● Competitive environment: The Body Shop faces competition in numerous forms, between: 1) rivals applying the same business
model, such as Yves Rocher (estimated revenue of EUR700m) and L’Occitane (revenue of EUR1.4bn); 2) brands operating in the
natural cosmetics segment seeking to develop their own distribution network, such as Natura and o boticário in Europe, out of an
original door-to-door model in Brazil; 3) an array of brands positioned in the natural beauty market with no directly owned stores,
available in supermarkets (SO’BiO étic) or in specialised circuits (Sanoflore, also owned by L’Oréal, in pharmacies, Weleda in beauty
salons, etc.).
● Entry barriers & franchise sustainability: Barriers to entry are twofold: establishment of the network, and resonance of the brand.
The Body Shop has an international network of 1,134 directly operated stores and 1,968 franchised outlets, i.e. a total of 3,100 points of
sale located in city centres, generating retail sales of EUR1.4bn in 2015, i.e. an average of EUR500k per store, and EUR50 per square
metre of total area, two figures consistent with the market for the sale of personal goods in mature countries. The Body Shop receives
about 300m visitors each year. Its reputation, built on ethical values and its commitment to fair trade, has allowed it win over a loyal
customer base. In addition to an attractive pricing policy, its position today dovetails with growing demand for natural products,
resonating with the increasingly widespread accent placed on individual and collective responsibility. L’Oréal has strengthened this
position by refocusing on personal care products, partnerships with militant figures such as Lily Cole and an improved shopping
experience with “Pulsensation” store concepts centred on service.
Long segregated from the rest of the group to allow it to retain its freedom of action, TBS is increasingly working in synergy with the
group’s cosmetics divisions. The brand is set to place increasing reliance on the group’s power, including its R&D and marketing – and
even its manufacturing facilities – to intensify its innovations and increase the effectiveness of its market launches.
● Risk profile: TBS has long been a separate part of the group, which goes to explain the difficulties involved in its integration and the
lack of motivation for many of L’Oréal’s most talented employees to join the brand and contribute to its growth. Moreover, geographic
expansion is incomplete, and its presence in Mainland China limited. Lastly, the brand is struggling to reinvent itself in the face of
younger emerging brands.
The Body Shop - Total Retail Sales Geomix (left, 2015, %) and change (middle, EURm), Revenues (right, EURm)
W Europe
New Mkts
50%
W Europe
38%
NorthAm
12%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
NorthAm
New Mkts
1,200
1,000
738
686
734
786
185
169
179
179
548
545
562
595
2012
2013
2014
2015
800
600
400
200
0
2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
13
L'Oreal SA: Barriers to entry analysis
Low
Average
High
● Advertising
x
● Capital
● Control of resources
Comments
Advertising and promotion expenses are equivalent to ~30% of sales
Capex intensity ~4.5% of Sales
x
Dependent on fragrances for primary ressources (Givaudan, etc.)
x
● Cost advantage (independent of scale)
x
L'Oreal has a segmented offer and a strong brand image
● Customer loyalty
x
Relatively high due to strong brands
● Distributor agreements
x
In particular in the selective channels
● Economy of scale
x
Centralized R&D, insourcing of production and supply chain
● Government regulations
x
● Inelastic demand
x
Safety issues
Segmentation of the offer means that demand is more elastic when service quality increases
● Intellectual property
x
The group registered 501 patents in 2014; 130 molecules since its foundation in 1909
● Network effect
x
The group has a segmented offer and a strong and diversified client base
x
R&D budget of EUR794m (~3% of L'Oreal's turnover). 3 global centers (France), 5 regional hubs & 18 research centres
● Predatory pricing
x
● Restrictive practices
x
● Research & Development
● Supplier agreements
x
● Sunk costs
x
● Switching barriers
x
Relatively slow development
● Tariffs
x
● Vertical integration
● Zoning
Strong segmentation
Upstream L'Oreal produces most cosmetics units sold; only 13% are outsourced
x
Products are sold by retailers among other brands
x
L'Oreal SA: Risk analysis
Implicit Market risk rating:
Average
Strategic
Risks
Operational
Risks
● Management
Low
Average
High
● Costs
COGS represent 30% of sales
x
● Currency
x
● Commodity
x
Comments
Very experienced and dedicated management team
x
Geographical revenues are well diversified and the group hedges a significant portion of annual requirements
● I.T.
x
IT is a new way of competition as it enables the brand to be connected with consummers
● Competitors
x
L'Oréal is the world's largest cosmetics company but due to its positioning the group is subject to constant pressure
● Customers
x
Customers are faithful to L'Oreal and its brands
● Suppliers
x
L'Oreal produces 87% of sold cosmetics units and it has prepared business continuity plans for production
● Technology
x
The development of innovative products is an ongoing priority for the Group (Consumer & Market Insights Department)
● Product
Financial
Risks
x
● Credit
Compliance
Risks
GARP
L'Oréal
● Regulatory
x
● Legal
x
x
● Liquidity
x
Net cash position (EUR618m) before restatement. After restatement, Net debt of EUR2320m
L'Oréal has unused confirmed credit lines from first-rate banks for EUR3813m and a Treasury of EUR1400m
● Interest rates
x
● Political
x
● Governance
x
Company’s reputation and its brand image may be compromised at any time in a globalised world
99% floating rate debt
French antitrust regulator recently imposed two heavy fines on L'Oreal (EUR189.5m in 2014)
Jean-Paul Agon has spent his entire career with L'Oréal, like many members of the executive committee
Sources: CM-CIC Market Solutions, Market risk rating: High = Volatility > 30% ; Average = Volatility 20-30% ; Low = Volatility < 20%
14
GARP
L'Oréal
GROWTH DRIVERS
Demand for beauty products is driven by macroeconomic and social factors (purchasing power gains among the population,
urbanisation, pollution) and microeconomic factors (innovation, changes in individual behaviour). The ageing of the
population is a negative factor for make-up but a positive factor for skincare. With the recovery in Europe, preservation of
existing momentum in North America and the steady growth in the middle and upper classes in emerging countries, the sector
still has the capacity to grow by roughly 4% per annum. The strong weighting of selective circuits in its model and the
revitalisation of its Consumer Products division in our opinion put L’Oréal in a position to outperform slightly in the medium
term.
Macroeconomic and social sensitivity
Our first observation (see appendix 1) is that the overall market for personal care and beauty products has proved relatively insensitive
to economic conditions over the last century. Its overall elasticity is low. In tough economic environments, consumers have traded down
to more affordable beauty products in the professional and luxury segments, but penetration rates have never fallen.
Our second observation is that while the desire for beauty is universal, it is expressed differently in different cultures. Cosmetic
products are popular in a large majority of cultures. The North American market is the most firmly entrenched, with annual expenditure
of EUR200 per person, representing 0.5% of overall consumption. It is followed by Western Europe and Latin America. Spending on
beauty products is an increasing function of income, but its share in consumption is tending to decline in favour of services, and even
surgery. Penetration rates are at near saturation levels in North America and Europe, excluding make-up, but there is still scope for mix
improvement in line with economic growth. Emerging markets offer significant long-term growth potential.
Beauty Products - Spendings / capita / year (red col, left scale), as a % of household cons. (blue line, right scale) - Consumer prices 2014 - EUR
250
1.6%
1.3%
1.4%
1.2%
EUR 192
200
1.2%
0.9%
150
1.0%
EUR 132
0.8%
0.6%
0.5%
100
0.6%
0.7%
EUR 67
50
0.4%
EUR 40
EUR 29
EUR 20
0.2%
0
0.0%
North America
Western Europe
Latin America
Eastern Europe
Asia pacific
World
Sources: Euromonitor, World Bank
Microeconomic sensitivity
Our third observation is that while demand for beauty products is growing – albeit in concave proportions to economic growth – the
nature of demand varies widely from one continent to the next: 1) perfume is the leading product in Western Europe, as well as Latin
America, the Middle East and Eastern Europe, three economic zones where purchasing power is under pressure and where the
economic outlook is challenging, at least in 2016; 2) better economic conditions in mature markets and the growth of social networks
have helped accelerate global demand for make-up; 3) hair care is a constant worldwide, even if it is of somewhat greater importance in
the household budget in Latin America and MEA; and 4) skincare is by far the dominant segment in Asia.
Beauty Market - Share of different segments - 2015
North America
Sun Care
3%
Skin Care
28%
World
Sun Care
4%
Colour
Cosm etics
18%
Skin Care
Deodorants
30%
7%
Deodorants
8%
Sun Care
3%
Colour
Cosm etics
18%
Skin Care
34%
Colour
Cosm etics
25%
Western Europe
Deodorants
7%
Fragrances
14%
Hair Care
24%
Fragrances
12%
Latin America
Sun Care
4% Colour
Cosm etics
13%
Skin Care
18%
Hair Care
24%
Fragrances
19%
Middle East, Africa
Sun Care
2% Colour
Cosm etics
18%
Skin Care
19%
Deodorants
10%
Hair Care
24%
Fragrances
27%
Hair Care
22%
Eastern Europe
Asia Pacific
Sun Care
2% Colour
Cosm etics
Skin Care
18%
26%
Deodorants
16%
Sun Care
2% Colour
Cosm etics
15%
Deodorants
2%
Fragrances
4%
Deodorants
8%
Skin Care
54%
Hair Care
27%
significantly high vs w orld avg
significantly low vs world avg
Fragrances
22%
Hair Care
25%
Hair Care
23%
Fragrances
21%
Sources: CM-CIC Market Solutions, Euromonitor
15
GARP
L'Oréal
While not as resilient as food, the consumption of beauty products remains strong in volume in difficult times. Demand grew by 1% in
2009, although the mix deteriorated. Consumer demand is embracing greater naturalness, and this has encouraged the emergence of
new brands. The downside is the sharp decline in consumption of beauty products after people enter their 60s, especially in make-up.
The components of L’Oréal’s growth
Over the last 10 years, the group has recorded average annual growth of 5.7%, fuelled by organic growth of 4.4%. The geographical
mix has shifted significantly in favour of emerging countries, which represented 40% of revenue in 2015, up from 25% 10 years ago. The
consolidation of YSL Beauté has caused the weight of L’Oréal Luxe to rise sharply.
L'Oréal: 2005/15 Sales by segment
2005
Active
7%
L'Oréal: 2005/15 Sales Geomix excl. TBS
2015
BS
Active
Pro
4%
7%
13%
Pro
15%
2005
E Europe
5% AME
5%
LatAm
6%
APAC
10%
Luxury
25%
Luxury
29%
Sources : L'Oréal, CM-CIC Market Solutions
W Europe
47%
W Europe
33%
APAC
23%
NorthAm
27%
Mass
47%
Mass
53%
E Europe 2015
6% AME
3%
LatAm
8%
NorthAm
27%
Looking more closely at the components of the organic growth of 4.4%, we note the following points:
 Strong momentum in Active Cosmetics, whereas it took L’Oréal Luxe six years to catch up with Consumer Products, and while
Professional Products long weighed on the group’s overall growth profile.
 By geographic region, there is a growth gap between the relatively saturated mature markets and emerging markets, which together
generate growth of roughly 10% per annum.
L'Oréal: Organic development by segment - Basis 100 in 2005
200
180
Active (6.2% CAGR)
Mass (4.5% CAGR)
The Body Shop (2.6% CAGR)
Luxury (4.7% CAGR)
Pro (2.5% CAGR)
L'Oréal: Organic development by geography - Basis 100 in 2005
350
300
160
250
140
200
120
150
100
LatAm (11.8% CAGR)
E Europe (10.3% CAGR)
NorthAm (2.3% CAGR)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
100
2005
2006
2007
2008
2009
AME (10.4% CAGR)
APAC (9.8% CAGR)
W Europe (1.0% CAGR)
2010
2011
2012
2013
2014
2015
The contribution to organic growth in value is balanced between geographies, but stands at 78% in emerging markets. The mass market
is clearly the mainstay of the group’s organic growth in value.
L'Oréal: Contribution to org. growth '05/'15, by segment
BS
Pro
Active 2% 8%
10%
L'Oréal: Contribution to org. growth '05/'15, by geography excl. TBS
AME
15%
W Europe
9%
NorthAm
13%
E Europe
15%
Luxury
27%
Mass
53%
LatAm
21%
APAC
27%
16
NORMALISED PROFITABILITY
The group stands out by virtue of the steady improvement in its economic performance. It ranks today as the most profitable
group in the perfumes and cosmetics segment of the HPC sector. Its position as world leader allows it to cover its fixed
expenses, especially R&D, manufacturing facilities and the sales force, better than its rivals. We have not identified significant
restructuring potential at this stage. The only challenge at the moment – and a relatively small one at group level – is to
achieve a recovery at The Body Shop.
Record profitability through reliable operating leverage
L’Oréal is generally seen as a school of marketing. It is also a highly effective industrial company, firmly focused on profitable growth.
The difficulties it experiences in maintaining its market share in some emerging markets also reflects its demanding profitability
requirements, witness its cautious expansion in the body and hair care markets outside Europe, where it competes against P&G or
Unilever.
The group is the most profitable group in the perfumes and cosmetics segment of the HPC sector, with an EBIT margin now well above
16%, its size allowing it to cover fixed expenses in the fields of R&D, manufacturing facilities and sales force.
Gross margin: over 71% of revenue in 2015. Scope to move closer to 72% in 2016
Since 2005, the gross margin has firmed slightly to more than 71%, driven by industrial productivity gains, an improvement in the
product mix and lower prices for many oil-based raw materials. L’Oréal has opted for significant upstream integration. Its 43 industrial
plants produce 87% of production sold by the cosmetics divisions, i.e. 7bn of the 8bn units sold every year, with the exception of The
Body Shop. External supplies of finished products are confined to tests before insourcing, products based on paper or fibres such as
wipes, make-up in small production runs such as pencils (from suppliers including Schwan Stabilo), and sampling.
To gain agility, adjust to local conditions and address currency risk, the Consumer Products division’s manufacturing facilities are spread
across the five major geographical areas. Over the last 25 years, the group has increased the productivity of its plants by making them
specialise more radically (2009), adopting Japanese lean manufacturing processes, adopting wall-to-wall supplier integration and using
robotics to automate logistics. The group’s manufacturing is based on a very strict reading of the just-in-time model, on order, with a
reduced number of suppliers and a constant focus on streamlining. The number of bottle sizes has been cut from 28 in 2009 to 10 in
2014, and the number of packaging suppliers (capsules, labels, cardboard) from 35 to 11 over the same period. Our feeling is that it has
made most of the possible industrial productivity gains. Further improvement in gross margin in the coming few years will be hinged on
prices: improvement in product mix, especially in emerging markets, and pricing power.
L'Oréal - Cosmetics division: change in GM and Operating Costs, CM-CIC Market Solutions estimates starting 2015
73%
35%
30%
2020E
72%
Advertising
72%
2015
71%
Op costs (%)
25%
Gross margin (%)
GARP
L'Oréal
20%
SG&A
15%
10%
71%
R&D
5%
2005
2020E
0%
70%
2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E
2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E
The dilutive effect of currency hedging instruments and acquisitions (Niely in the Consumer Products division, Decleor and Carita in
Professional Products) shaved 90bp off the gross margin in 2015. But a gain of 70bp is anticipated in 2016, bringing gross margin just
shy of 72%, in the absence of the dilutive impact of hedging instruments, major acquisitions and a substantial increase in raw material
prices denominated in euros.
Advertising (roughly 29% of revenue) and SG&A (roughly 22% of revenue) expenditure
Advertising and SG&A expenditure should be taken together. The last 10 years have seen a proliferation of mass media (TV), which has
given advertisers more pricing power, combined with the emergence of social networks, a disruptive and doubtless more efficient –
read: cheaper – means of targeting prospects. In the wake of these trends, advertising expenditure has fallen below 30% of revenue. At
the same time, the group has placed emphasis on hiring to expand the in-house digital team led by Lubomira Rochet.
Digital media are now a key part of the overall strategy of beauty industry players. Consumers increasingly manifest their needs on
social networks. A total of 5bn beauty-related searches are conducted yearly on search engines, and 80% of consumers do internet
searches before buying, regardless of the distribution channel they ultimately choose. In recent years, vloggers have seen their
audience grow exponentially, especially among younger customers in search of advice, and as such more open to influence. The five
most popular vloggers in the field of beauty have together notched up nearly 4 billion views on YouTube. Their influence is compounded
by the fact that advertising signals have been multiplied with the emergence of the mobile internet. This advertising saturation can be
measured. On average, 44 points of contact (off and online advertising, social networks, videos, search engines, etc.) are necessary for
the purchase of a beauty product, across all channels. And younger generations are less sensitive to purely commercial, one-way
advertising messages.
The group has been somewhat slow to keep up with this new environment. But it has addressed this issue with sharp focus since 2013,
resulting in a trade-off between advertising budgets and SG&A. The group’s digital transformation has involved work in three main
areas:
17
GARP
L'Oréal
 Brand positioning: The organisation is aimed at being more attentive and responsive. The product life cycle is shorter, and a wide
variety of trends coexist. Marketing is adapting by becoming more responsive to emerging trends, detecting popular trends in real time
on social networks, identifying the best ambassadors and influencers to support the product, producing appropriate content (video
tutorials, viral campaigns, etc.) – and by measuring the ROI continuously.
 E-commerce: The organisation is geared towards facilitating and enhancing the consumer experience. The group has caught up to
an extent, and now derives 4% of its revenue from e-commerce, compared with 5% for the broader market, its shortfall being
attributable the lead enjoyed by niche players rather than lost ground in relation to major competitors. Lastly, the group is not seeking
to “disintermediate” the market. In the same way as it “trained” food retailers to showcase their beauty departments in the 1960s, the
group is now helping e-merchants to enhance their offer, especially in emerging markets.
 Targeted advertising: This phenomenon, which is positive for advertisers, has reduced barriers to entry. Some L’Oréal brands (La
Roche Posay, Redken, etc.) have found a suitable media presence. In return, the market has become more porous, and new niche
players have emerged. 25% of advertising spend was devoted to digital media in 2015, vs 16% in 2014. This figure is set to go up in
the coming years and will help to optimise spending.
To entrench its transformation, the group has adapted its organisation. A deliberately lean corporate department has been established
under Lubomira Rochet; it reports directly to Jean-Paul Agon. The structure is in charge of spreading methods within the group and
identifying best practices. The group has completed a hefty hiring programme over the last five years, and now has 1,000 digital
specialists working throughout the company. The strategy is resolutely decentralised and encourages marketing teams to take initiatives
and share expertise.
We reckon that the 1,000 digital specialists represent a full-year expense of roughly EUR200m (salaries and technologies), or 1% of
consolidated revenue, a figure consistent with the rise of SG&A as a percentage of revenue between 2011 and 2015. But the increase
was funded by advertising supports rather than by consumers! Between 2010 and 2015, advertising and promotional expenses declined
by 190bp of revenue, an annual saving of EUR450m over the last year alone. However, the relative saving (EUR250m) is not replicable
indefinitely. The group benefited from its status as third-ranking global advertiser to optimise its expenditure against the weakness of
traditional media and a competitive technological environment. A recovery of the pricing power of these two categories of suppliers in
the medium to long term would reduce the leverage provided by L’Oréal’s digital transformation. One must also bear in mind that the
fixed cost base has swelled.
R&D (roughly 3.5% of revenue)
The group was born from an innovation in the field of hair colouring in 1909. Since then, it has continued to invest in research and
innovation, in the belief that robust research is the only way of creating cosmetic products that can deliver real performance. Its model is
built on three entities: 1) advanced research, tasked with constantly enhancing scientific knowledge of skin and hair worldwide, and
discovering new ingredients; 2) applied research, which develops formulation systems, subsequently broken down into different product
families; and, last but not least, 3) development, which provides brands with innovative formulas tailored to their purpose and to the
expectations of consumers worldwide.
Research and development is accordingly built on a global platform in Europe and five regional centres (US, Japan, China, India, Brazil)
covering 18 research centres and 16 evaluation centres. A team of 3,800 researchers spans 30 disciplines (biology, chemistry, physics,
optics, microbiology, statistical analysis, bioinformatics, ethnology, sociology, dermatology, etc.).
The beauty universalisation strategy has led the group, under the leadership of Jean-Paul Agon, to shift from a top-down to a more
decentralised bottom-up approach so as to better identify the characteristics and needs of local customers and to increase efficiency. It
is expected that the group will open a sixth pole in Africa to round out its structure in 2016.
These significant investments have resulted in the filing of 30,000 patents since the company’s foundation, with the development of 130
molecules over the past 40 years and between 15% and 18% of full-year revenue derived from innovations.
L'Oréal: Summarized cost base as a % of Sales
100%
30%
30%
29%
29%
30%
29%
29%
29%
28%
28%
28%
28%
28%
3%
3%
3%
4%
3%
3%
3%
3%
3%
3%
3%
3%
3%
30%
31%
31%
31%
30%
30%
29%
29%
29%
29%
29%
29%
29%
COGS
80%
60%
R&D
Advertising
SG&A
40%
22%
21%
21%
21%
21%
21%
21%
21%
22%
22%
22%
22%
22%
15%
13%
15%
16%
16%
16%
16%
17%
17%
18%
18%
18%
18%
2008A
2009A
2010A
2011A
2012A
2013A
2014A
2015A
2016E
2017E
2018E
2019E
2020E
Others
20%
EBIT
0%
Operating margin by division and geographic region
The portfolio of cosmetics brands is structured around a multitude of commercial SMEs. The high level of resource pooling (R&D,
marketing, sales, manufacturing facilities) is reflected in the very similar level of EBIT from ordinary activities (EBIT margin less
unallocated costs) between distribution circuits and geographic regions. By circuit, cosmetics divisions’ EBIT from ordinary activities
weighed in at between 20% and 23% in 2015:
 Consumer Products have enjoyed significant leverage over the last 10 years (gain of 290bp to 20.1%), despite a slight drop in 2015
attributable chiefly to currency hedging instruments and the consolidation of Niely;
18
 The EBIT from ordinary activities for Professional Products has remained within a range of 20-21%, even in 2009, due to limited
leverage;
 L’Oréal Luxe quickly integrated YSL Beauté, returning its margins from close to 0 at the time of the acquisition to their normalised level
after 2009. The margin has increased by 50bp in the space of 10 years;
 Active Cosmetics benefited from strong growth to record the biggest increase among the cosmetics divisions (+390bp); it now
generates a margin of nearly 23%, well above those of the three other divisions.
L'Oréal - Cosmetics division: Recc. EBIT margin as a function of sales by year, CM-CIC Market Solutions estimates starting 2015
25,0%
2020E
24,0%
Pro
Active
23,0%
Luxury
Mass
2020E
EBIT margin
22,0%
2020E
2020E
21,0%
20,0%
2005
2005
19,0%
2005
18,0%
17,0%
2005
16,0%
15,0%
0
2 000
4 000
6 000
8 000
Sales (EUR m)
10 000
12 000
14 000
 While the cosmetics divisions have enjoyed significant operating leverage, gaining 200bp of margin in ten years, The Body Shop
shaved 20bp off the group’s overall profitability.
L'Oréal - EBIT margin - Cosmetics division vs The Body Shop, CM-CIC Market Solutions estimates starting 2015
20.0%
Cosmetics
18.0%
Group
EBIT margin
16.0%
14.0%
12.0%
10.0%
The Body Shop
8.0%
6.0%
4.0%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
Versus listed peers
The group is among the best HPC players in terms of profitability and the best in Perfumes & Cosmetics at just a few margin points
behind P&G and Colgate. The group is getting ahead in its Estée Lauder sub-sector (15% of EBIT margin), which is only present on
selective circuits, thanks to weaker communication intensity.
L'Oréal vs peers - GM vs SG&A - 2015
L'Oréal vs peers - Operating leverage - 2008/15
25%
Colgate
90%
EBIT margin > 15%
L'Oréal
75%
Colgate
60%
P&G
Coty
Beiersdorf
EBIT margin < 15%
Henkel
45%
Unilever
L'Oréal
15%
Beiersdorf
Henkel
Unilever
Estée Lauder
10%
5%
30%
P&G
20%
Estée Lauder
EBIT, as a % of Sales
Gross Margin, % of sales
GARP
L'Oréal
Coty
0%
15%
0%
20%
Sources: CM-CIC Market Solutions, Factset
40%
60%
SG&A, % of Sales
80%
0
10 000
20 000
30 000
40 000
50 000
Sales, EUR m, current FX
60 000
70 000
Sources: CM-CIC Market Solutions, Factset
19
GARP
L'Oréal
Consumer Products – Summary forecasts
● Growth outlook: After two difficult years, during which it underperformed the broader market, the division’s first quarter revenue
showed a rebound in growth (+3.9% organic), ahead of phase, with product initiatives set to provide a slightly firmer impact from the
second quarter. We are therefore forecasting a significant acceleration of growth to 4.2% in 2016, vs 2.5% in 2015. Garnier will
contribute to the revival in 2016. Its positioning in naturalness will be emphasised more fully, with the release of the Ultra Doux shampoo
internationally, where the group is facing fierce competition from P&G and Unilever on affordable ranges. A series of innovations in
skincare and hair colourings should also give the division a breath of fresh air, bearing in mind that it derives its resilience from make-up.
Ultimately, with well-repositioned brands, the division should be able to deliver organic growth of 4%, slightly outperforming its reference
market.
● CM-CIC Market Solutions estimates: In the short term, in 2016, the gross margin is expected to grow in the absence of dilutive
hedging instruments, after the consolidation of Niely, assuming a resumption of growth and a neutral impact from raw material prices.
The ramp-up of Garnier’s Ultra Doux shampoo internationally will probably generate gross margin within the average. In the long term,
increases in raw material prices should be passed on to consumers, and growth in emerging countries suggests an underlying
improvement in the mix. The advertising budget, notably that devoted to Garnier, is set to rise significantly.
Segment information - Consumer Products
Sales
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
7,499
7,903
8,280
8,355
8,555
9,530
9,835
10,713
10,873
10,767
11,844
11,991
12,469
12,967
13,486
14,026
Change (%)
-
5.4
4.8
0.9
2.4
11.4
3.2
8.9
1.5
-1.0
10.0
1.2
4.0
4.0
4.0
4.0
1,613
1,763
1,951
1,921
1,957
2,174
2,204
2,453
2,661
2,637
2,898
3,056
3,202
3,343
3,491
3,644
Margin (%)
21.5
22.3
23.6
23.0
22.9
22.8
22.4
22.9
24.5
24.5
24.5
25.5
25.7
25.8
25.9
26.0
Change (%)
-
9.3
10.7
-1.5
1.9
11.1
1.4
11.3
8.5
-0.9
9.9
5.5
4.8
4.4
4.4
322
342
369
355
380
409
345
402
494
450
512
EBITDA - Recurring
Depreciation
Depreciation/Sales (%)
532
553
576
599
4.4
623
4.3
4.3
4.5
4.2
4.4
4.3
3.5
3.8
4.5
4.2
4.3
4.4
4.4
4.4
4.4
4.4
1,291
1,421
1,582
1,566
1,577
1,765
1,859
2,051
2,167
2,186
2,386
2,523
2,649
2,768
2,892
3,022
Margin (%)
17.2
18.0
19.1
18.7
18.4
18.5
18.9
19.1
19.9
20.3
20.1
21.0
21.2
21.3
21.4
21.5
Change (%)
-
10.1
11.3
-1.0
0.7
11.9
5.3
10.3
5.7
0.9
9.1
5.8
5.0
4.5
4.5
370
380
375
369
317
359
428
483
532
460
540
4.9
4.8
4.5
4.4
3.7
3.8
4.3
4.5
4.9
4.3
4.6
EBIT - Recurring
Capex
Capex/Sales (%)
561
4.7
584
4.7
607
4.7
631
4.7
4.5
657
4.7
Professional Products – Summary forecasts
● Growth outlook: After a first quarter 2016 dampened by a demanding comparison base and overexposure to the Brazilian market,
the trend is poised to improve slightly during the subsequent nine months. However, 2016 comes in the wake of a relatively strong year,
meaning that organic growth could come in shy of the 3% medium-term target that we see as normalised.
● CM-CIC Market Solutions estimates: The gross margin was affected by forex – an impact that is set to disappear in 2016 – and the
consolidation of Decleor and Carita (-20bp). We expect the downward trend in margins since 2011 to be reversed in 2016. Leverage is
relatively limited at this stage in a mature hairdressing activity, pending potential developments in the professional beauty and make-up
markets.
Segment information - Professional Products
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2,061
2,126
2,392
2,472
2,389
2,717
2,814
3,003
2,974
3,033
3,400
3,409
3,511
3,617
3,725
3,837
-
3.2
12.5
3.3
-3.4
13.7
3.6
6.7
-1.0
2.0
12.1
0.3
3.0
3.0
3.0
469
505
583
614
589
653
676
719
736
729
833
867
898
929
959
989
Margin (%)
22.8
23.8
24.4
24.8
24.7
24.0
24.0
23.9
24.8
24.0
24.5
25.4
25.6
25.7
25.7
25.8
Change (%)
-
7.7
15.3
5.3
-4.0
10.9
3.5
6.3
2.4
-1.0
14.3
4.1
3.6
3.4
3.2
62
81
95
112
101
98
104
127
120
155
Sales
Change (%)
EBITDA - Recurring
Depreciation
63
160
164
169
174
3.0
3.2
180
3.1
2.9
3.4
3.8
4.7
3.7
3.5
3.5
4.3
4.0
4.6
4.7
4.7
4.7
4.7
4.7
406
443
502
519
477
552
579
615
610
609
679
708
734
760
784
810
Margin (%)
19.7
20.8
21.0
21.0
20.0
20.3
20.6
20.5
20.5
20.1
20.0
20.8
20.9
21.0
21.1
21.1
Change (%)
-
9.1
13.3
3.3
-8.1
15.7
4.8
6.3
-0.9
-0.1
11.4
4.3
3.7
3.5
3.2
64
68
64
65
60
53
83
67
74
75
128
3.1
3.2
2.7
2.6
2.5
2.0
2.9
2.2
2.5
2.5
3.8
EBIT - Recurring
Capex
Capex/Sales (%)
131
3.9
135
3.9
139
3.9
144
3.9
3.2
148
3.9
L’Oréal Luxe – Summary forecasts
● Growth outlook: The group benefits from global demand for make-up, recent launches of hit perfumes (La Vie Est Belle by Lancôme,
Black Opium by Saint Laurent, Sì and Aqua di Gio by Armani Profumo) and its domination of the US market, allowing it to outperform
the global perfume and cosmetics market. The increasingly stretched situation in the perfume market – in a less abundant year in terms
of launches – and a slowdown in tourist flows in Europe are likely to contain the division’s growth in 2016, as seen in the first quarter on
demanding comparables. Getting the balance right between perfumes, skincare and make-up is a factor of sustainable growth. The
division could be tempted to acquire the Dolce & Gabbana licence in 2016.
● CM-CIC Market Solutions estimates: The consolidation of YSL Beauté caused the division’s margin to take a dive, before a quick
turnaround. The division is the most profitable among players working in selective distribution, despite the weight of royalties payable to
licensors (roughly 10% of revenue), thanks to synergies with other divisions. Reduced momentum in travel retail in the very short term is
liable to weigh on profitability.
20
GARP
L'Oréal
Segment information - L'Oréal Luxe
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
3,582
3,773
3,928
4,170
4,080
4,507
4,801
5,568
5,865
6,198
7,230
7,486
7,931
8,407
8,911
9,446
-
5.3
4.1
6.2
-2.2
10.5
6.5
16.0
5.3
5.7
16.6
3.5
5.9
6.0
6.0
6.0
855
902
990
956
819
963
1,111
1,274
1,413
1,493
1,798
1,930
2,055
2,180
2,313
2,454
Margin (%)
23.9
23.9
25.2
22.9
20.1
21.4
23.1
22.9
24.1
24.1
24.9
25.8
25.9
25.9
26.0
26.0
Change (%)
-
5.5
9.7
-3.4
-14.3
17.6
15.4
14.7
10.9
5.6
20.4
7.4
6.5
6.1
6.1
132
126
146
189
202
172
185
197
239
224
300
Sales
Change (%)
EBITDA - Recurring
Depreciation
312
325
338
351
6.1
365
3.7
3.3
3.7
4.5
5.0
3.8
3.9
3.5
4.1
3.6
4.2
4.2
4.1
4.0
3.9
3.9
723
776
844
767
617
791
926
1,077
1,174
1,269
1,498
1,618
1,730
1,842
1,962
2,089
Margin (%)
20.2
20.6
21.5
18.4
15.1
17.6
19.3
19.3
20.0
20.5
20.7
21.6
21.8
21.9
22.0
22.1
Change (%)
-
7.3
8.8
-9.2
-19.5
28.2
17.1
16.3
9.0
8.1
18.0
8.0
6.9
6.5
6.5
144
151
176
154
103
113
161
200
223
247
305
4.0
4.0
4.5
3.7
2.5
2.5
3.3
3.6
3.8
4.0
4.2
EBIT - Recurring
Capex
Capex/Sales (%)
318
4.2
330
4.2
344
4.1
357
4.0
6.5
372
3.9
Active Cosmetics – Summary forecasts
● Growth outlook: The most powerful division in terms of growth and profitability, Active Cosmetics saw organic growth wane in the
first quarter, for the same reasons as L’Oréal Luxe, namely demanding comparables at a time when tourist flows of Asian customers
were down in Europe in the wake of the Paris terrorist attacks. 2016 is set for somewhat more muted growth than 2015. However, we
continue to see the division enjoying organic growth of 6% in the medium term.
● CM-CIC Market Solutions estimates: The group’s most profitable division will have to make do with less leverage in 2016. But the
neutral forex environment should enable it to set an all-time high margin, probably above 23%.
Segment information - Active Cosmetics
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
986
1,128
1,248
1,289
1,235
1,386
1,422
1,528
1,593
1,660
1,816
1,863
1,975
2,094
2,219
2,353
-
14.4
10.6
3.3
-4.2
12.2
2.6
7.5
4.2
4.2
9.4
2.6
6.0
6.0
6.0
219
254
297
307
296
318
330
353
386
418
469
498
530
562
596
632
Margin (%)
22.2
22.6
23.8
23.8
24.0
23.0
23.2
23.1
24.2
25.2
25.8
26.7
26.8
26.9
26.8
26.8
Change (%)
-
16.4
16.7
3.4
-3.6
7.5
3.7
6.9
9.4
8.3
12.2
6.1
6.4
6.2
6.0
33
41
48
46
40
43
42
46
42
55
Sales
Change (%)
EBITDA - Recurring
Depreciation
32
56
57
58
59
6.0
6.0
60
3.2
3.0
3.3
3.7
3.7
2.9
3.0
2.7
2.9
2.5
3.0
3.0
2.9
2.8
2.7
2.6
187
221
256
259
250
278
287
311
340
376
415
442
473
504
537
571
Margin (%)
19.0
19.6
20.5
20.1
20.2
20.1
20.2
20.4
21.4
22.7
22.8
23.7
23.9
24.1
24.2
24.3
Change (%)
-
18.2
15.8
1.2
-3.5
11.2
3.1
8.5
9.3
10.6
10.2
6.6
6.9
6.7
6.4
22
30
32
33
22
23
28
30
34
39
50
2.3
2.7
2.6
2.5
1.8
1.7
2.0
2.0
2.1
2.4
2.7
EBIT - Recurring
Capex
Capex/Sales (%)
51
2.7
53
2.7
54
2.6
56
2.5
6.4
58
2.4
The Body Shop – Summary forecasts
● Growth outlook: Q1-2016 came as a pleasant surprise, with organic growth of 2% despite a particularly challenging comparison
base. The brand’s repositioning in skincare and investment in the network were completed in 2015. The brand celebrates its 40th
anniversary in 2016, offering it media leverage to refocus its image on its pioneering role in naturalness and fair trade, resonating with
mounting demand. And while it is too early to speak of a renewal, the comparables for the final nine months of 2016 will be easy. The
Body Shop is in a position to deliver growth of more than 3% in 2016, and to recreate a special connection with customers to drive longterm growth.
● CM-CIC Market Solutions estimates: The celebration of the brand’s 40th anniversary and the desire to renew the brand image will
probably be costly in 2016. We are anticipating relatively little leverage from the return to growth in the short term.
Segment information - The Body Shop
2005
Sales
Change (%)
EBITDA - Recurring
2006
-
435
-
-
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
1,090
787
756
726
755
768
855
836
874
967
956
986
1,018
1,053
80.9
-3.9
-4.0
4.0
1.7
11.4
-2.3
4.6
10.7
-1.1
3.1
3.3
3.4
78
95
100
99
118
112
112
94
102
114
121
128
137
12.5
-
87
117
Margin (%)
-
19.9
14.9
10.4
13.1
13.2
12.9
13.8
13.4
12.8
9.7
10.6
11.5
11.9
12.2
Change (%)
-
-
35.1
-33.0
21.2
5.3
-0.9
18.9
-5.0
0.2
-16.5
8.9
11.6
6.6
5.7
Depreciation
29
53
42
41
35
31
40
40
47
39
-
6.6
6.7
5.6
5.6
4.6
4.0
4.7
4.8
5.3
4.0
4.2
4.3
4.4
4.5
-
58
64
36
54
65
68
78
72
65
55
61
71
76
81
87
Margin (%)
-
13.3
8.1
4.8
7.4
8.6
8.9
9.1
8.6
7.5
5.7
6.4
7.2
7.5
7.7
8.0
Change (%)
-
-
11.7
16.0
42
44
Capex
Capex/Sales (%)
10.3
-43.4
49.2
20.4
4.8
13.8
-7.2
-9.2
-16.1
-
47
58
41
14
12
24
35
40
34
40
-
10.9
7.4
5.4
1.9
1.6
3.1
4.1
4.8
3.8
4.1
4.4
43
4.5
45
7.6
46
4.5
47
6.6
-
EBIT - Recurring
41
3.5
6.2
49
4.6
49
4.5
7.5
51
4.7
Breakdown by geographic region – Cosmetics divisions
L’Oréal has particularly strong market share in Europe, which gives it its highest margins. The consolidation of YSL Beauté in 2008, at
the same time as the economic crisis, slightly lowered the margin in 2008-09. But the Cosmetics divisions returned to record levels in
Europe in 2011, despite difficulties with large retailers in France. Short-term leverage is in our opinion limited, with less momentum on
the product mix and in travel retail.
The mainstay of growth in the last 15 years has been the emergence of the middle class in the so-called new markets, mainly in Asia
and Latin America. This area has seen its profitability grow steadily, despite the difficulty in stabilising market share, in our opinion
demonstrating the group’s demanding profitability requirements. Forex will help drive profitability in 2016, after putting it under pressure
21
in 2015. We are thus expecting the region’s margin to post a further rise of 100bp over the FY before increasing at the pace of the
product mix and market share gains.
The group saw its profitability fall in North America in 2008, ahead of a recovery, bringing it back within reach of its 2007 record. The
area appears to be the least profitable of the three today, with a fairly high level of competition. 2016 will most likely allow the group to
set a new record, also by a rise of around 100bp, here and in the new markets alike thanks simply to the effect of currency hedges.
L'Oréal - Cosmetics division: Recurring EBIT margin vs. sales, by year, CM-CIC Market Solutions estimates starting 2015
24,0%
2016E
W Europe
20,0%
2020E
2016E
NorthAm
2015
2015
2005
18,0%
2020E
2016E
2005
EBIT margin
2020E
2015
22,0%
RoW
16,0%
14,0%
2005
12,0%
0
2 000
4 000
6 000
8 000
10 000
12 000
14 000
Sales (EUR m)
Management guidance
The group has confined its 2016 guidance to the prospect of revenue growth above market growth of 3.5% (at constant exchange
rates), as well as higher operating margin and net profit, but with no guidance by division or by geographic region.
CM-CIC Market Solutions versus the consensus
By 2020, we expect organic growth of higher than 4%, a level very close to the Factset consensus on 25 April 2016. However, we think
that the EBIT margin for the consensus is slightly too optimistic by 2020, targeting 19% while we were expecting 18%.
L'Oréal - CM-CIC Estimates vs Consensus : Sales (left), reported EBIT margin as a function of Sales (right)
32,000
19.0%
31,000
29,000
28,000
27,000
Sales - Consensus Factset
26,000
Sales - CM-CIC
25,000
24,000
Reported-EBIT margin (% of Sales)
18.5%
30,000
Annual Sales (EUR m)
GARP
L'Oréal
18.0%
17.5%
reported-EBIT margin, Cons. Factset
17.0%
reported-EBIT margin, CM-CIC
16.5%
16.0%
23,000
22,000
15.5%
2015A
2016E
2017E
2018E
2019E
2020E
2015A
2016E
2017E
2018E
2019E
2020E
Sources: L'Oréal, CM-CIC Market Solutions, Factset
22
GARP
L'Oréal
L'Oréal: Profit & Loss account
(EURm)
Revenues
Change (%)
EBITDA - Adjusted
Change (%)
Margin (%)
Exceptional items
EBITDA - Reported
Change (%)
Margin (%)
Depreciation & amortisation
EBITA - Reported
Change (%)
Margin (%)
EBITA - Adjusted
Change (%)
Margin (%)
Depre. & amort. of intangible Assets
EBIT - Reported
Change (%)
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
15 790
17 063
17 542
17 473
19 496
20 343
21 638
22 124
22 532
25 257
25 705
26 872
28 103
29 395
30 751
-
8,1
2,8
-0,4
11,6
4,3
6,4
2,2
1,8
12,1
1,8
4,5
4,6
4,6
4,6
3 130
3 426
3 274
3 081
3 671
3 938
4 278
4 532
4 455
5 157
5 654
5 965
6 291
6 604
6 930
-
9,4
-4,4
-5,9
19,2
7,3
8,6
5,9
-1,7
15,8
9,7
5,5
5,5
5,0
4,9
19,8
20,1
18,7
17,6
18,8
19,4
19,8
20,5
19,8
20,4
22,0
22,2
22,4
22,5
22,5
-61
622
0
0
0
0
0
0
0
0
0
0
0
0
0
3 070
4 047
3 274
3 081
3 671
3 938
4 278
4 532
4 455
5 157
5 654
5 965
6 291
6 604
6 930
-
31,9
-19,1
-5,9
19,2
7,3
8,6
5,9
-1,7
15,8
9,7
5,5
5,5
5,0
4,9
19,4
23,7
18,7
17,6
18,8
19,4
19,8
20,5
19,8
20,4
22,0
22,2
22,4
22,5
22,5
-590
-599
-706
-781
-768
-742
-841
-900
-871
-963
-1 157
-1 209
-1 265
-1 323
-1 384
2 480
3 449
2 568
2 300
2 904
3 196
3 437
3 632
3 584
4 194
4 498
4 755
5 027
5 281
5 546
-
39,1
-25,5
-10,4
26,2
10,1
7,5
5,7
-1,3
17,0
7,2
5,7
5,7
5,1
5,0
15,7
20,2
14,6
13,2
14,9
15,7
15,9
16,4
15,9
16,6
17,5
17,7
17,9
18,0
18,0
2 541
2 827
2 568
2 300
2 904
3 196
3 437
3 632
3 584
4 194
4 498
4 755
5 027
5 281
5 546
-
11,3
-9,2
-10,4
26,2
10,1
7,5
5,7
-1,3
17,0
7,2
5,7
5,7
5,1
5,0
16,1
16,6
14,6
13,2
14,9
15,7
15,9
16,4
15,9
16,6
17,5
17,7
17,9
18,0
18,0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
2 480
3 449
2 568
2 300
2 904
3 196
3 437
3 632
3 584
4 194
4 498
4 755
5 027
5 281
5 546
-
39,1
-25,5
-10,4
26,2
10,1
7,5
5,7
-1,3
17,0
7,2
5,7
5,7
5,1
5,0
Margin (%)
15,7
20,2
14,6
13,2
14,9
15,7
15,9
16,4
15,9
16,6
17,5
17,7
17,9
18,0
18,0
EBIT - Adjusted
2 541
2 827
2 568
2 300
2 904
3 196
3 437
3 632
3 584
4 194
4 498
4 755
5 027
5 281
5 546
-
11,3
-9,2
-10,4
26,2
10,1
7,5
5,7
-1,3
17,0
7,2
5,7
5,7
5,1
5,0
16,1
16,6
14,6
13,2
14,9
15,7
15,9
16,4
15,9
16,6
17,5
17,7
17,9
18,0
18,0
Change (%)
Margin (%)
Net financial interest
PBT
Change (%)
Margin (%)
Associates
Other non-recurring items
Corporate taxes
Corporate tax rate (%)
Discontinued operations
Net Proft - Consolidated - Reported
Change (%)
Margin (%)
Minority interests
Net Proft - Group share - Reported
Change (%)
Margin (%)
Net Profit - Group share - Adjusted
Change (%)
Margin (%)
EPS - Reported
Change (%)
EPS - Adjusted
Change (%)
Book Value per share
Change (%)
Dividend per share
Dividend pay-out ratio (%)
97
68
71
184
257
276
321
341
342
369
352
388
422
461
528
2 577
3 517
2 632
2 471
3 152
3 467
3 752
3 928
3 890
4 517
4 801
5 094
5 396
5 687
6 016
-
36,5
-25,2
-6,1
27,6
10,0
8,2
4,7
-1,0
16,1
6,3
6,1
5,9
5,4
5,8
16,3
20,6
15,0
14,1
16,2
17,0
17,3
17,8
17,3
17,9
18,7
19,0
19,2
19,3
19,6
-1
0
0
0
0
0
-5
-3
-14
4
4
4
4
4
4
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
-515
-860
-681
-676
-910
-1 026
-985
-1 044
-1 111
-1 223
-1 441
-1 528
-1 619
-1 706
-1 805
20,0
24,4
25,9
27,4
28,9
29,6
26,3
26,6
28,6
27,1
30,0
30,0
30,0
30,0
30,0
0
0
0
0
0
0
108
80
2 143
0
0
0
0
0
0
2 061
2 658
1 951
1 795
2 242
2 441
2 871
2 961
4 909
3 298
3 365
3 569
3 781
3 985
4 215
-
29,0
-26,6
-8,0
24,9
8,9
17,6
3,2
N/M
-32,8
2,0
6,1
5,9
5,4
5,8
13,1
15,6
11,1
10,3
11,5
12,0
13,3
13,4
21,8
13,1
13,1
13,3
13,5
13,6
13,7
-1
-2
-3
-3
-2
-3
-3
-3
2
0
0
0
0
0
0
2 060
2 656
1 948
1 792
2 240
2 438
2 868
2 958
4 910
3 298
3 365
3 569
3 781
3 985
4 215
-
28,9
-26,6
-8,0
25,0
8,9
17,6
3,1
N/M
-32,8
2,0
6,1
5,9
5,4
5,8
13,0
15,6
11,1
10,3
11,5
12,0
13,3
13,4
21,8
13,1
13,1
13,3
13,5
13,6
13,7
1 832
2 039
1 948
1 792
2 240
2 438
2 868
2 958
4 910
3 298
3 365
3 569
3 781
3 985
4 215
-
11,3
-4,5
-8,0
25,0
8,9
17,6
3,1
N/M
-32,8
2,0
6,1
5,9
5,4
5,8
11,6
12,0
11,1
10,3
11,5
12,0
13,3
13,4
21,8
13,1
13,1
13,3
13,5
13,6
13,7
2,98
3,36
3,23
2,99
3,73
4,04
4,71
4,88
8,75
5,88
6,00
6,36
6,74
7,10
7,51
-
13,1
-3,9
-7,5
24,5
8,5
16,5
3,6
N/M
-32,8
2,0
6,1
5,9
5,4
5,8
2,98
3,36
3,23
2,99
3,73
4,04
4,71
4,88
8,75
5,88
6,00
6,36
6,74
7,10
7,51
-
13,1
-3,9
-7,5
24,5
8,5
16,5
3,6
N/M
-32,8
2,0
6,1
5,9
5,4
5,8
23,8
22,7
19,2
22,7
24,7
29,2
34,4
37,4
36,0
42,1
45,2
48,7
52,3
56,2
60,2
-
-4,9
-15,4
18,3
9,0
18,2
17,6
8,7
-3,7
17,0
7,5
7,6
7,5
7,3
7,1
1,18
1,38
1,44
1,50
1,80
2,00
2,30
2,50
2,70
3,10
3,20
3,40
3,60
3,85
4,10
39,7
41,0
44,5
50,1
48,3
49,5
48,8
51,2
30,9
52,8
53,4
53,5
53,4
54,2
54,6
Number of shares - Basic
613,3
600,5
602,4
599,0
601,0
603,0
608,8
605,9
561,2
554,2
554,2
554,2
554,2
554,2
554,2
Number of shares - Diluted
615,7
606,0
602,4
599,0
601,0
603,0
608,8
605,9
561,2
561,2
561,2
561,2
561,2
561,2
561,2
L'Oréal: Cash flow statement
(EURm)
EBITDA
Net financial interest expenses
Corporate taxes
Other
Cash flow from operations
Change in Working Capital
Operating cash flow
CAPEX - Net
Financial investments
Investing cash flow
Free cash flow
Dividends
Other
Change in net debt (cash)
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
3 070
4 047
3 274
3 081
3 671
3 938
4 278
4 532
4 455
5 157
5 654
5 965
6 291
6 604
6 930
97
68
71
184
257
276
321
341
342
369
352
388
422
461
528
-515
-860
-681
-676
-910
-1 026
-985
-1 044
-1 111
-1 223
-1 441
-1 528
-1 619
-1 706
-1 805
-241
-536
82
169
153
38
-106
-71
123
97
-108
-118
-129
-141
-154
2 410
2 720
2 746
2 758
3 171
3 226
3 507
3 758
3 808
4 400
4 457
4 707
4 965
5 218
5 500
66
-76
-149
466
133
-322
-109
-68
56
-196
83
-50
-52
-55
-58
2 476
2 644
2 597
3 225
3 304
2 904
3 399
3 690
3 864
4 203
4 540
4 657
4 913
5 163
5 442
-1 426
-716
-746
-746
-628
-678
-866
-923
-1 019
-1 008
-1 172
-1 219
-1 268
-1 318
-1 371
-1 070
851
-1 299
-96
-140
-703
34
-538
1 658
-464
0
0
0
0
0
-1 786
105
-2 045
-724
-818
-1 569
-889
-1 557
650
-1 636
-1 219
-1 268
-1 318
-1 371
-1 426
690
2 749
552
2 501
2 486
1 335
2 509
2 133
4 514
2 567
3 321
3 390
3 595
3 792
4 016
-634
-726
-849
-852
-922
-1 108
-1 268
-1 425
-1 589
-1 535
-1 740
-1 796
-1 908
-2 020
-2 161
-1 168
-1 067
-913
93
353
317
203
-336
-5 916
257
0
0
0
0
0
1 112
-956
1 210
-1 742
-1 917
-545
-1 444
-372
2 991
-1 289
-1 581
-1 594
-1 686
-1 772
-1 855
23
GARP
L'Oréal
Revenues (EURm)
Adjusted EBITDA (EURm, lhs) & margin (%, rhs)
35,000
8,000
25.0
1999-2015 CAGR: 5.5%
30,000
1999-2015 CAGR: 7.8%
7,000
2015-2020 CAGR: 4.0%
2015-2020 CAGR: 6.1%
20.0
6,000
25,000
5,000
15.0
20,000
4,000
15,000
10.0
3,000
10,000
2,000
5.0
5,000
1,000
0
0
1999
2001
2003
2005
2007
2009
2011
2013
2015 2017E 2019E
1999-2015 CAGR: 8.0%
2015-2020 CAGR: 5.8%
4,000
3,000
2,000
1,000
0
2001
2003
2005
2007
2009
2011
2013
20.0
10.0
18.0
9.0
16.0
8.0
14.0
7.0
12.0
6.0
10.0
5.0
8.0
4.0
6.0
3.0
4.0
2.0
2.0
1.0
0.0
2005
2007
2009
2011
2013
2015 2017E 2019E
0.0
1999-2015 CAGR: 10.4%
2015-2020 CAGR: 5.0%
2015 2017E 2019E
1999
2001
2003
2005
2007
2009
2011
2013
2015 2017E 2019E
2009
2011
2013
2015 2017E 2019E
Dividend per share (EUR, lhs) & Pay-out ratio (%, rhs)
4.50
Book value per share (EUR)
60.0
70.0
50.0
60.0
1999-2015 CAGR: 14.8%
4.00
2003
Adjusted Earning per share (EUR)
6,000
1999
2001
Adjusted EBIT (EURm, lhs) & Margin (%, rhs)
5,000
0.0
1999
1999-2015 CAGR: 10.5%
2015-2020 CAGR: 5.8%
2015-2020 CAGR: 7.4%
3.50
3.00
40.0
50.0
40.0
2.50
30.0
2.00
30.0
1.50
20.0
20.0
1.00
10.0
10.0
0.0
0.0
0.50
0.00
1999
2001
2003
2005
2007
2009
2011
2013
2015 2017E 2019E
1999
2001
2003
2005
2007
Net financial debt (EURm, lhs) & Leverage ratio (x, rhs)
6,000
Working capital (EURm, lhs) & Working Cap/Revenues (%, rhs)
1.5
1,800
14.0
1,600
4,000
12.0
1.0
1,400
2,000
0.5
0
-2,000
10.0
1,200
1,000
8.0
800
6.0
0.0
-4,000
-0.5
-6,000
600
4.0
400
-1.0
-8,000
2.0
200
-10,000
-1.5
0
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017E 2019E
0.0
1999
2001
2003
2005
2007
2009
2011
2013
2015 2017E 2019E
CAPEX (EURm, lhs) & CAPEX/Revenues (%, rhs)
Basic number of shares (m)
1,600
6.0
1,400
5.0
1,200
800.0
700.0
600.0
4.0
1,000
800
3.0
600
2.0
400
500.0
400.0
300.0
200.0
1.0
200
0
0.0
1999
2001
2003
2005
2007
2009
2011
2013
2015 2017E 2019E
100.0
0.0
1999
2001
2003
2005
2007
2009
2011
2013
2015 2017E 2019E
24
GARP
L'Oréal
SOURCES & USES OF FREE CASH FLOW
The HPC sector is characterised by robust cash-flow generation stemming from good margins coupled with industrial cycles
that are both short and relatively capital light. L’Oréal offers the best ratio of FCF to revenue in the beauty sector (13%, 12%
excluding the Sanofi dividend) thanks to the slight operating margin advantage derived from its size and operating discipline.
The sector saw few major deals in the 10 years preceding the Coty-P&G merger. The relative prosperity enjoyed by sector
players combined with digitisation – which affects distributors more than industry – does not necessarily argue in favour of
consolidation. After a phase of acquisitions and globalisation of its brands in the 1980s and 90s, L’Oréal has sought to acquire
smaller brands enabling it to strengthen its operations in emerging markets and among digital natives.
Operating cash flow
L’Oréal’s business model is capital efficient (annual capex representing 4.5% of revenue), while being aligned with geographic markets,
and its operating cycle is undemanding in terms of working capital (4% of revenue). Cash generation, adjusted for the Sanofi dividend,
in proportion to revenue (FCF/revenue) is therefore the best in the world of beauty, at 12%, ahead of Estee Lauder (11%), but behind
the overall level in the HPC sector (17% for P&G, 15% for Colgate-Palmolive).
The group is characterised by an operating margin above its direct peers in the beauty segment. Its operating cash flow exceeded
EUR4bn for the first time in 2015, coming in at EUR4.2bn, or EUR3.9bn after stripping out the Sanofi dividend. Cash flow from
operations grew very steadily by 7% per annum between 2008 and 2015, on revenue growth a shade above 5%. Change in working
capital was a bit more volatile, contributing significantly in 2009 (EUR466m, 3% of revenue) with the slowdown in growth and the
urgency of generating cash in the financial crisis, then weighing on cash flow to the tune of EUR322m in 2011 at a time of accelerated
growth in emerging countries.
Consumption of working capital has declined over the last 10 years, without significant change in the business model, for the following
reasons: 1) industrial operations have assembly plants with short production cycles located close to end markets, since the ecosystem
of suppliers of raw materials is sufficiently qualitative; 2) the group works wall-to-wall with its suppliers and on a strict just-in-time basis,
limiting inventories of raw materials and finished products; and lastly, 3) L’Oréal benefits, as we understand it, from its status as the
world’s third-largest advertiser to put pressure on settlement terms with media agencies. Working capital consumption of EUR196m in
2016 includes the payment of a EUR189m fine paid to the French consumer protection body, and is not seen as normalised.
Capital intensity
While the group has 44 manufacturing facilities, the Consumer Products division is the only one to have a global industrial base.
Products sold in selective circuits largely benefit from the Made in France seal. And its industrial is capital efficient: capital expenditure
represents 4.5% of revenue over a long period, i.e. an annual spend of EUR1.2bn in today’s terms. This low level of capital intensity is
shared by all integrated HPC players (between 3.5% for Henkel and 5% for P&G), whose production cycles are short and require little
high technology.
Shareholder remuneration
The dividend has increased by roughly 9% per annum, and the group pays out close to 50% of FCF and net income. The prospect of a
new round of acquisitions is unlikely to prevent the group from maintaining a payout ratio above 50% in the coming years. L’Oréal
purchased 48.5m of its shares from Nestlé in 2014, but does not have an ongoing share buyback programme, except to cover its sharebased payments.
L'Oreal SA: Cash-flow projections
(EURm)
2015
EBITDA
5 646
Fin. interest expenses
Corporate taxes
Cash flow from operations
Changes in working capital
2016E
5 914
2017E
6 251
2018E
6 600
-24
-16
-16
-16
-1 223
-1 441
-1 528
-1 619
4 400
4 457
4 707
4 965
-196
83
-50
-52
4 203
4 540
4 657
4 913
-1 166
-1 219
-1 268
-1 318
-471
0
0
0
-1 636
-1 219
-1 268
-1 318
-1 535
-1 740
-1 796
-1 908
339
0
0
0
Financing Cash flow (C)
-1 196
-1 740
-1 796
-1 908
Free cash flow (A) + (B)
2 567
3 321
3 390
3 595
-1 371
-1 581
-1 594
-1 686
Net debt - end of period
-618
-2 199
-3 793
-5 479
Leverage (NFD/EBITDA)
-3,0
-0,5
-0,8
-1,2
Operating cash flow (A)
CAPEX
Acquisitions
Investing cash flow (B)
Dividends
Capital increase
Changes in net debt (A) + (B) + (C )
Comments
See segment information tables
Average cost of debt of 1.0%
Average corporate tax rate of 30.0%
Working Capital of 4% of Revenues
CAPEX intensity of 4.5% of Revenues
Pay-out up from 50% in 2015 to 54% in 2018E
External growth
In this industry generating hefty amounts of free cash flow, transaction prices are high and generate intangible assets. The group has
spent EUR8bn in the M&A market since 2001. The licensing model developed in perfumes (estimated revenue of EUR3bn) enables the
group to reduce this item partially.
We also believe that the group will steadily continue its external growth policy, not necessarily through major deals, but rather by: 1)
accelerating its investments in small emerging brands to round out its asset base in line with the underlying trends in beauty products
(digital natives, naturalness, urban); and 2) strengthening its positions in Asia, America and Africa through bigger deals:
 For the industry as a whole, a return to normal after the P&G-Coty merger. The group faces competition from: 1) HPC
behemoths from the personal care segment, primarily competing against the Consumer Products division after P&G opted for new
governance for its activities in selective circuits (Coty); 2) specialists in selective circuits, including Estee Lauder, Clarins and Puig; 3)
subsidiaries of luxury groups such as LVMH and Chanel; and 4) new entrants addressing niches.
25
GARP
L'Oréal
We do not expect the sector to see massive consolidation in the wake of the Coty-P&G merger, although we cannot rule out another
major deal. Digital technology requires agility rather than massive streamlining and additional pressure on suppliers or customers. We
expect sector majors to continue asset-picking to acquire more highly innovative concepts and/or “make up” for their relative
weaknesses.
The Coty-P&G merger prompted Dolce & Gabbana to request the return of its licence. A new operator will now be sought. It is highly
likely that L’Oréal will be in the running to regain this licence, if Armani and Yves Saint Laurent are not opposed, which generates
close to EUR500m in revenue. The signing of a contract would generate an up-front payment that it is hard to quantify at this stage
without knowing the term of the contract between the Italian brand and P&G, which will determine the compensation demanded by the
former licence holder. A sum in excess of EUR300m could be mobilised.
 The future for L’Oréal: continued brand-picking in the geographies where the group is weakest. In the 1980s and 90s, L’Oréal
sought to expand its bands on an international scale so as to make them majors (L’Oréal, Garnier, acquisition of Maybelline), mainly
targeting customers of European descent. Since 2006, Jean-Paul Agon has accelerated the group’s “universalisation”, a process
aimed at enabling it to address customers of African and Asian descent more broadly, and to satisfy generally more eclectic demand.
To this end, the group has acquired a number of smaller specialised brands, and decentralised its R&D.
We expect L’Oréal to continue along this path and to go further in its strategy of acquiring Asian and Latin America brands so as to
increase market share, which remains stuck below 10% in both areas. On top of the geographical aspect, after having acquired the
small French brand Nickel from Interparfums in 2013, the group could also strengthen its presence in the male care segment, today
addressed through L’Oréal Men Expert, Biotherm and Kiehl’s. To respond to the challenge of an ageing population, the group will also
look into how best to satisfy older customers, bearing in mind that people tend to rein in their spending on make-up when they enter
their 60s.
 Adapt to digitisation and emerging trends in distribution. The group’s positions alongside retailers left it out of step with two major
and seemingly opposing trends: 1) the emergence of digital technology at all levels of the beauty market (e-commerce, exchanges on
social networks, etc.); and 2) market share gains by new high street stores in mature countries, particularly in make-up at this stage.
Consumers are looking for new shopping experiences and advice, and most retailers have failed to satisfy these new aspirations. The
trend is particularly evident in make-up. The emergence of Yves Rocher, The Body Shop and L’Occitane has been followed by the
rise over the last 10 years of new digital native brands with competitive price positioning (Kiko, e.l.f., MAC, etc.) in Europe and North
America. On top of Kiehl’s, a brand built on higher prices, and after the semi-failure of The Body Shop, the group now intends to
develop NYX in this field. The first NYX outlet opened in California in late 2015. The network is set to expand in North America and
Europe over the coming months.
Divestment
Following the sale of its 50% stake in Galderma to Nestlé in 2014, the group exited dermatological activities, which are not consistent
with its model. The 9% stake in Sanofi, valued at EUR9bn before tax, may be deemed non-strategic, and could well be distributed to
shareholders. Lastly, The Body Shop’s future in the group may appear to be at issue in view of the brand’s poor performance since its
acquisition 10 years ago. Its margins and its limited integration within the group make the brand easily “disconnectable”. However, its
various focuses (naturalness, environmental approach, fair trade) are attune with the times, making it an observation post for the group,
which acquired it for an equity value of EUR940m, representing 16.5x current year EBIT, in 2006. The group could sell it for a multiple
closer to 12x estimated 2016 EBIT, i.e. EUR720m.
L'Oréal Transactions - samples
Date
Pending
2015
Target
Assets / Raylon Corp.
Niely Cosmeticos
Adidem Pty (TBS Australia)
Bidder
Deal value
Buy-out
multiple
L'Oréal
EUR380.5m
Coloright
Hair research start up
EUR515.5m
Carol's Daughter
2014
Comments
L'Oréal
NYX Cosmetics
Decléor & Carita (Shiseido)
L'Oréal
EUR230m
Magic Holdings International
EUR636m
EV/sales 3.7x
EV/EBITDA 20.1x
L'Oréal: 27.3m of its own shares from Nestlé
EUR3,400m
EV/sales 3.3x
EV/EBITDA 15.8x; L'Oréal also sold 50% ownership in Galderma to Nestlé
Interbeauty
2013
Vogue
Spirig Pharma
L'Oréal
EUR222.8
Emporio Body Store (51%)
2012
Cadum
L'Oréal
Urban Decay
EUR263.7m
EV/sales 3.4x
(est) USD300-400m
Clarisonic
2011
Arex GmbH
Q-Med
L'Oréal
EUR813.5m
L'Oréal
EUR200.5m
Professional Products distributor
Pacific Bioscienc Laboratories
Essie Cosmetics
2010
Peel's Salon Services
C.B. Sullivan
Sources: CM-CIC Market Solutions, FactSet, Bloomberg
26
GARP
L'Oréal
NET FINANCIAL DEBT AND BALANCE SHEET ADJUSTMENTS
L’Oréal returned to a net cash position in 2015 (EUR618m), reversing the net debt of EUR671m it reported after acquiring 8% of
its capital from Nestlé in 2014. The group’s gross borrowings (EUR782m as of end-2015) consist primarily of short-term debt in
the form of commercial paper. After adjustments (operating leases, pension commitments, etc.), net financial debt stands at
EUR2,320m, representing adjusted gearing of 0.4x. None of these figures take into account the contribution of Sanofi (market
value of close to EUR9bn).
Borrowing structure, maturity, cost
L’Oréal’s gross borrowings totalled EUR782m as of 31 December 2015. They break down basically into EUR505m in commercial paper
(65% of total gross borrowings), plus EUR57m in bank loans (7%), EUR30m in finance lease liabilities (4%) and EUR187m in other
borrowings (24%). Nearly 95% of the total mature within one year; medium-term bank loans totalled EUR2m as of 31 December 2015.
Historically, L’Oréal has generated significant surplus cash (net cash of EUR2.2bn in 2013, EUR1.6bn in 2012 and EUR504m in 2011).
However, it reported net debt of EUR671m in 2014 following its purchase of 48.5m of its own shares (8% of capital) from Nestlé, partly
through the transfer of its 50% stake in Galderma to Nestlé and partly through the purchase of 27.3m shares for EUR3.4bn. As of 31
December 2015, the group again reported net cash of EUR618m. Cash and cash equivalents break down into marketable securities in
the amount of EUR335m, and cash at bank and other available resources in the amount of EUR1,065m.
L’Oréal’s gross borrowings are denominated primarily in US dollars (53%) and euros (16%); 96% is at variable rates. Currency hedging
takes the form of forward purchases or sales, or currency options. The group did not have any interest rate hedging instruments at the
end of 2015. The effective interest rate on borrowings was 0.22% in 2015.
Balance sheet adjustments
Financial debt is adjusted for standard items, namely rent commitments, pension obligations and certain provisions.
Leverage and covenants
As of 31 December 2015, L’Oréal benefited from net cash of EUR618m. After adjustment for operating lease commitments (NPV of
EUR2,115m according to our calculations), commitments in respect of pensions and employee benefits (EUR807m – deferred tax of
EUR197m) and other provisions (EUR212.5m), adjusted net financial debt was EUR2,320m, i.e. an adjusted NFD/adjusted EBITDA
ratio of 0.4x.
Liquidity
As of 31 December 2015, L’Oréal’s liquid resources amounted to EUR5,213m, breaking down into confirmed undrawn lines of credit in
the amount of EUR3,813m and cash in the amount of EUR1,400m. The commercial paper programme totals EUR4,000m (liquidity for
which is provided by confirmed undrawn lines of credit). The group’s liquidity risk is relatively low, on the one hand by virtue of its net
available cash, and on the other hand thanks to its significant medium- to long-term resources in the form of credit facilities arranged
with a number of leading banks in the amount of EUR3,813m, with EUR350m maturing in less than one year and EUR3,463 maturing
between one and four years. It should also be noted that EUR413m of these credit facilities are denominated in US dollars and are not
subject to any financial covenants. Another issue is that L’Oréal has a 9% stake in Sanofi, valued at EUR9bn.
Credit rating
L’Oréal has never issued bonds, and does not have a long-term rating assigned by any of the three main agencies. For its short-term
debt, it is noted P1 by Moody’s, A-1+ by S&P and F1+ by Fitch. In each case, these are the highest short-term ratings possible. The
group’s ratings have not changed since they were assigned, in 1989, 2006 and 1994 respectively.
L'Oréal: Financial debt structure and redemption schedule
NFD - 2015A
(EURm)
EURm
Bonds
Private placements
Bank borrowings
Finance leases
Securitisation
Commercial paper
Bank overdrafts
Redemptions
%
2016E
2017E
2018E
2019E
2020E
Comments
>2020
0
0
2
30
0
505
57
0.0
0.0
0.3
3.9
0.0
64.6
7.3
0
0
0
6
0
505
57
0
0
0
5
0
0
0
0
0
0
5
0
0
0
0
0
0
5
0
0
0
0
0
0
5
0
0
0
0
0
2
5
0
0
0
Derivative financial liabilities
Other liabilities
Total
Gross financial debt
Derivative financial assets
Gross cash & equivalents
Net financial debt
Undrawn credit lines
0
187
782
782
0
1,400
-618
3,813
0.0
23.9
100.0
0
172
741
41
0
0
5
10
31
0
0
0
5
26
0
0
0
5
21
0
0
0
5
16
0
0
10
16
0
0
41
350
31
26
21
16
0
Net fin. debt - reported
Hybrid capital
Pension liabilities
Provisions
Buy-out commitments
Operating leases
Factoring
Net fin. debt - adjusted
-618
0
610
213
0
2,115
0
2,320
The global program amounts to EUR4000m
Short term: 95%; mid term: 3%; long term: 3%
EUR3463m with a maturity from one to four years
N/S
EUR807m net of EUR197m deferred taxes
NPV at 7%
Adjusted NFD / Adjusted EBITDA of 0.4x
27
GARP
L'Oréal
L'Oréal: Balance sheet
(EURm)
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
Tangible assets
2 628
2 651
2 753
2 599
2 678
2 881
2 832
2 891
3 141
3 404
3 361
3 318
3 276
3 236
3 197
Intangible assets
5 847
6 304
7 571
7 508
7 907
8 682
8 434
8 311
10 240
11 094
11 242
11 396
11 558
11 729
11 907
Assets
10 251
7 609
5 557
6 672
5 838
6 901
8 941
9 639
9 069
9 412
9 693
9 984
10 284
10 592
10 910
Fixed assets - Total
Financial assets & other
18 726
16 564
15 881
16 780
16 422
18 464
20 208
20 842
22 450
23 910
24 296
24 698
25 118
25 557
26 014
Inventories
1 404
1 548
1 636
1 477
1 810
2 052
1 971
2 085
2 263
2 441
2 484
2 597
2 716
2 841
2 972
Accounts receivable
2 559
2 618
2 695
2 443
2 685
2 996
3 052
3 023
3 298
3 628
3 692
3 860
4 036
4 222
4 417
Other current assets
884
969
1 618
1 419
1 577
1 699
1 769
2 270
2 135
2 333
2 319
2 427
2 540
2 660
2 785
Cash & cash equivalents
781
1 087
1 077
1 173
1 550
1 652
2 235
2 659
1 917
1 400
2 981
4 575
6 261
8 033
9 888
5 628
6 221
7 026
6 512
7 622
8 400
9 027
10 037
9 613
9 802
11 476
13 458
15 553
17 755
20 061
24 353
22 784
22 907
23 292
24 045
26 864
29 234
30 879
32 063
33 711
35 772
38 156
40 672
43 311
46 075
14 622
13 619
11 560
13 595
14 863
17 624
20 921
22 637
20 185
23 614
25 394
27 330
29 374
31 518
33 761
2
3
3
3
3
3
5
6
4
3
3
3
4
4
4
14 624
13 622
11 563
13 598
14 866
17 627
20 926
22 643
20 189
23 617
25 398
27 334
29 377
31 521
33 765
Long-term financial debt
1 892
2 583
2 507
2 742
824
58
47
84
67
41
41
41
41
41
41
Provisions
1 347
1 265
1 504
1 657
1 847
1 872
1 907
1 643
2 395
1 758
1 846
1 938
2 035
2 136
2 243
Current assets - Total
Assets - Total
Equity & liabilities
Shareholders' equity
Minorities
Equity - Total
Other
Long-term liabilities - Total
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
3 239
3 848
4 011
4 399
2 672
1 929
1 954
1 727
2 462
1 799
1 886
1 979
2 076
2 177
2 284
Short-term financial debt
2 218
877
2 271
390
767
1 091
240
255
2 521
741
741
741
741
741
741
Accounts payable
2 485
2 529
2 657
2 603
3 154
3 248
3 231
3 250
3 453
3 929
3 999
4 180
4 372
4 573
4 784
Other current liabilities
1 787
1 909
2 407
2 302
2 587
2 969
2 884
3 004
3 438
3 626
3 748
3 923
4 106
4 299
4 502
Current liabilities - Total
6 490
5 315
7 334
5 295
6 507
7 307
6 355
6 509
9 412
8 296
8 488
8 844
9 219
9 613
10 026
Equity & liabilities - Total
24 353
22 784
22 907
23 292
24 045
26 864
29 234
30 879
32 063
33 712
35 772
38 156
40 672
43 311
46 075
Capital Employed
19 300
17 260
16 767
17 214
16 754
18 995
20 884
21 966
23 255
24 756
25 044
25 479
25 933
26 407
26 902
575
696
885
434
332
531
677
1 124
805
847
748
780
814
850
888
3 329
2 373
3 700
1 958
41
-504
-1 948
-2 320
671
-618
-2 199
-3 793
-5 479
-7 251
-9 106
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
22,8
17,4
32,0
14,4
0,3
N/M
N/M
N/M
3,3
N/M
N/M
N/M
N/M
N/M
N/M
Net debt / EBITDA (x)
1,1
0,7
1,1
0,6
0,0
N/M
N/M
N/M
0,2
N/M
N/M
N/M
N/M
N/M
N/M
Net debt / (EBITDA-CAPEX) (x)
1,4
0,7
1,5
0,8
0,0
-0,2
-0,6
-0,7
0,2
-0,2
-0,5
-0,8
-1,1
-1,4
-1,7
EBITDA / Financial expense (x)
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
Long Term debt / Total debt (%)
46,0
74,7
52,5
87,6
51,8
5,0
16,4
24,7
2,6
5,2
5,2
5,2
5,2
5,2
5,2
121,5
124,6
105,7
80,4
88,3
116,7
109,8
113,2
115,7
121,7
105,4
104,8
104,3
103,7
103,1
CAPEX / Revenues (%)
4,5
4,4
4,3
3,6
3,5
4,3
4,3
4,6
4,5
4,6
4,7
4,7
4,7
4,7
4,6
Working capital / Revenues (%)
3,6
4,1
5,0
2,5
1,7
2,6
3,1
5,1
3,6
3,4
2,9
2,9
2,9
2,9
2,9
Current assets / Revenues (%)
35,6
36,5
40,1
37,3
39,1
41,3
41,7
45,4
42,7
38,8
44,6
50,1
55,3
60,4
65,2
Current liabilities / Revenues (%)
Working Capital
Net debt
L'Oréal: Balance sheet ratios
Net debt / Total Equity (%)
Investment / Depreciation & amort. (%)
41,1
31,1
41,8
30,3
33,4
35,9
29,4
29,4
41,8
32,8
33,0
32,9
32,8
32,7
32,6
Current assets / Current liabilities (x)
0,9
1,2
1,0
1,2
1,2
1,1
1,4
1,5
1,0
1,2
1,4
1,5
1,7
1,8
2,0
Inventories / Revenues (%)
8,9
9,1
9,3
8,5
9,3
10,1
9,1
9,4
10,0
9,7
9,7
9,7
9,7
9,7
9,7
16,2
15,3
15,4
14,0
13,8
14,7
14,1
13,7
14,6
14,4
14,4
14,4
14,4
14,4
14,4
Accounts receivable / Revenues (%)
Other current assets / Revenues (%)
5,6
5,7
9,2
8,1
8,1
8,4
8,2
10,3
9,5
9,2
9,0
9,0
9,0
9,0
9,1
Accounts payable / Revenues (%)
15,7
14,8
15,1
14,9
16,2
16,0
14,9
14,7
15,3
15,6
15,6
15,6
15,6
15,6
15,6
Other current liabilities / Revenues (%)
11,3
11,2
13,7
13,2
13,3
14,6
13,3
13,6
15,3
14,4
14,6
14,6
14,6
14,6
14,6
ROE (%, Adjusted NP/ Sharehldrs' Eq.)
12,5
15,0
16,9
13,2
15,1
13,8
13,7
13,1
24,3
14,0
13,2
13,1
12,9
12,6
12,5
ROE (%, Reported NP/ Sharehldrs' Eq.)
14,1
19,5
16,9
13,2
15,1
13,8
13,7
13,1
24,3
14,0
13,2
13,1
12,9
12,6
12,5
ROCE pre-tax (%, Adjusted EBITA/CE)
13,2
16,4
15,3
13,4
17,3
16,8
16,5
16,5
15,4
16,9
18,0
18,7
19,4
20,0
20,6
ROCE post-tax (%, Adjusted EBITA/CE)
10,5
12,4
11,4
9,7
12,3
11,8
12,1
12,1
11,0
12,4
12,6
13,1
13,6
14,0
14,4
ROCE pre-tax (%, Reported EBIT/CE)
12,9
20,0
15,3
13,4
17,3
16,8
16,5
16,5
15,4
16,9
18,0
18,7
19,4
20,0
20,6
ROCE post-tax (%, Reported EBIT/CE)
10,3
15,1
11,4
9,7
12,3
11,8
12,1
12,1
11,0
12,4
12,6
13,1
13,6
14,0
14,4
Dividend pay-out (%)
39,7
41,0
44,5
50,1
48,3
49,5
48,8
51,2
30,9
52,8
53,4
53,5
53,4
54,2
54,6
28
GARP
L'Oréal
NORMALISED VALUATION MULTIPLES
The regular growth profile of the global HPC market, particularly for beauty products at around 4% per year, in a low interest
rate environment (lower cost of capital) has automatically pushed up sector multiples. Relatively speaking, L’Oréal has seen
its premium fall vs its peers for three reasons: 1) growth in revenues has normalised; 2) its operating leverage seems
relatively limited; 3) more marginally speaking, its financial stake in Sanofi slightly underperformed its own.
Historical multiples
The group is currently trading on multiples above its historical multiples over a long period at 18x EV/EBIT vs 15x (+20%) after
adjustment of the stake in Sanofi. With no noteworthy acceleration in its profits, this can be explained by the general appreciation of
affordable consumer goods stocks (as opposed to luxury goods) globally on the back of strong resilience of these markets in a context
of lower interest rates, which lowers the cost of capital. According to the Gordon-Shapiro share valuation formula, the “r” or cost of
capital has fallen while the “g” or growth has remained the same at around 4% (for the short and medium term).
L'Oreal SA: Historical valuation multiples & Prospective valuation
20-year AVG
10-year AVG
Current multiples
5-year AVG
Comments
Med
Mean
AVG
Med
Mean
AVG
Med
Mean
AVG
FY1
FY2
FY3
2.5
2.6
2.6
2.5
2.5
2.5
2.8
2.6
2.7
3.2
3.1
2.9
EV : excl. Sanofi
EV/EBITDA - Adjusted (x)
13.3
14.8
12.5
12.3
13.4
12.7
EV/EBITDA - Reported (x)
12.6
14.7
11.4
11.7
12.9
12.3
12.8
14.9
14.1
13.2
EV : excl. Sanofi
EV/EBIT - Adjusted (x)
16.5
18.6
15.5
15.3
16.5
15.5
EV/EBIT - Reported (x)
15.3
18.5
14.1
14.3
15.8
14.9
15.7
18.1
17.0
15.9
EV : excl. Sanofi
P/E (x)
25.6
28.6
27.1
21.5
22.2
21.9
25.0
23.6
24.3
25.5
23.9
22.3
Dividend Yield (%)
1.6
1.5
1.5
2.0
2.1
2.1
2.1
2.2
2.1
2.0
2.2
2.4
Earnings Yield (%)
3.9
4.1
4.0
4.6
4.6
4.6
4.0
4.3
4.2
3.9
4.2
4.5
P/B (x)
3.8
4.7
4.3
3.2
3.2
3.2
3.3
3.2
3.2
3.7
3.4
3.2
EV/CE (x)
2.9
3.5
3.2
2.6
2.6
2.6
2.9
2.8
2.9
3.5
3.5
3.5
EV/Sales (x)
13.9
17.2
12.0
14.8
EV : excl. Sanofi
Peer comparisons
Over a long period, L’Oréal’s valuation has followed the opposite path of Bic, its neighbour in the Paris suburb of Clichy. Bic long traded
at a discount to its peers but closed the gap in 2014-2015 thanks to its steady growth profile, its exposure to the dollar and the visibility
of its financial policy.
Conversely L’Oréal, which over a long period benefited from its positioning in the dynamic beauty subgroup of the HPC sector, the
outperformance of its consumer business and a speculative premium in view of Nestlé’s position in its capital, has gradually lost its
valuation premium of 15% to its main competitors. After adjustment for Sanofi, the L’Oréal share is trading at EV/EBIT of 17.6x vs a
median of 17.4x. Estée Lauder, L’Oréal’s closest peer in selective circuits is trading at 21.6x 2016 EBIT and 30.8x its expected profits.
Conversely, LVMH appears less strongly valued with luxury offering less visibility (11.6x EV/EBIT and 18.2x P/E). L’Oréal’s P/E gives
rise to a premium due to a low dividend ratio on Sanofi’s stake.
L'Oreal SA: Sector valuation multiples
P/E (x)
EV/EBIT (x)
EV/EBITDA (x)
EV/Sales. (x)
Dividend yield (%)
2015
27,1
2016E
26,3
2017E
24,5
2015
18,0
2016E
17,6
2017E
16,5
2015
15,9
2016E
15,5
2017E
14,5
2015
2,6
2016E
2,6
2017E
2,5
2015
0,9
2016E
0,9
2017E
0,9
Procter & Gamble Company
32,9
22,0
20,0
19,7
17,4
16,9
15,7
14,3
14,0
3,2
3,8
3,7
3,3
3,3
3,4
Unilever NV Cert. of shs
22,4
20,6
19,2
10,6
10,0
9,4
9,0
8,6
8,0
1,5
1,5
1,5
3,1
3,3
3,5
Henkel AG & Co. KGaA Pref
22,8
19,8
18,6
16,3
14,8
13,9
14,0
12,9
12,2
2,5
2,4
2,3
1,5
1,6
1,7
Colgate-Palmolive Company
46,8
25,4
23,3
24,6
17,8
16,6
21,3
15,9
14,9
4,4
4,6
4,4
2,1
2,2
2,3
Johnson & Johnson
20,5
17,1
16,1
15,1
13,9
12,9
12,7
11,8
11,1
4,3
4,2
4,0
2,6
2,8
2,9
LVMH Moet Hennessy Louis Vuitton 20,7
SE
18,2
16,8
13,1
11,6
10,7
10,4
9,2
8,7
2,2
2,2
2,0
2,4
2,7
2,9
Coty Inc. Class A
46,9
25,8
26,7
48,6
26,1
10,3
27,6
18,3
7,9
3,4
3,4
1,5
0,8
0,8
1,1
Estee Lauder Companies Inc. Class34,4
A
30,8
27,3
22,8
21,4
19,1
18,2
17,2
15,6
3,4
3,3
3,1
1,0
1,2
1,3
L'Oreal SA
27,1
24,9
23,3
17,6
17,6
16,5
14,6
14,5
13,7
3,2
3,1
3,0
1,9
2,0
2,2
Mean excluding L'Oréal
30,5
22,9
21,4
21,0
16,7
14,0
16,1
13,8
11,9
3,1
3,1
2,8
2,0
2,1
2,2
Median excluding L'Oréal
27,1
22,0
20,0
18,0
17,4
13,9
15,7
14,3
12,2
3,2
3,3
2,5
2,1
2,2
Beiersdorf AG
L'Oréal vs Mean
L'Oréal vs Median
2,3
-11%
9%
9%
-16%
5%
18%
-10%
6%
15%
4%
0%
7%
-2%
-1%
1%
0%
13%
16%
-2%
1%
18%
-7%
2%
12%
-1%
-5%
19%
-8%
-7%
-2%
L'Oreal SA: Sector valuation multiples
P/E (x)
EV/EBIT (x)
28,0x
EV/EBITDA (x)
20,0x
20,0x
16,0x
16,0x
EV/Sales (x)
Dividend Yield (%)
2,5
3,5x
24,0x
3,0x
20,0x
2,0
2,5x
16,0x
12,0x
12,0x
12,0x
8,0x
8,0x
1,5
2,0x
1,5x
8,0x
1,0
1,0x
4,0x
4,0x
4,0x
0,5
0,5x
0,0x
2015
2016E
2017E
0,0x
2015
2016E
2017E
0,0x
-
0,0x
2015
2016E
2017E
2015
2016E
2017E
2015
2016E
2017E
29
GARP
L'Oréal
P/E comparison
Over the past ten years, the L’Oréal share has lost its valuation premium against its peers.
L'Oréal: P/E (x)
L'Oréal vs Estée Lauder: P/E (x)
Sources: CM-CIC Market Solutions, FactSet
L'Oréal vs Coty: P/E (x)
L'Oréal vs Beiersdorf: P/E (x)
L'Oréal vs Henkel: P/E (x)
L'Oréal vs Unilever: P/E (x)
Sector transactions
The contribution of P&G’s Beauty activities distributed through selective circuits to Coty should be finalised in September 2016 after a
long procedure. This is the first significant transaction (in USDm) in the HPC world, limited to Perfumes & Cosmetics, since 2011 when
Unilever acquired Alberto-Culver. The EV/EBITDA multiples of significant transactions carried out in the past ten years range between
10x and 15x. Transactions involving high-growth niche brands in make-up and perfumes were carried out at the highest multiples.
Sector Transaction multiples samples - Perfumes & Cosmetics
Date
Pending
Target
Bidder
Deal value
Buy-out
multiple
Comments
EV/EBITDA 10.9x ; ending in September 16
P&G Selective Beauty
Coty
USD12,500m
EV/sales 2.1x
2015
Rochas
Interparfums
USD108m
EV/sales 3.0x
2014
Bourjois (Chanel)
Coty
EUR207.6m
EV/sales 0.8x
2013
Vinda Int. Holding
Svenska AB
HKD6,272m
EV/sales 2.2x
Sanex (Unilever)
Colgate Palmolive EUR672m
EV/sales 3.6x
Annick Goutal
Amore Pacific
(est.)EUR13m
EV/sales 3.0x
Alberto-Culver
Unilever
USD3,701.34m
EV/sales 2.4x
Jean-Paul Gaultier
Puig
EUR181m
EV/sales 1.5x
Kalina
Unilever
EUR407m
EV/sales 2.0x
EV/EBITDA 9.57x
Bare Escentuals
Shiseido
USD1,832m
EV/sales 3.3x
EV/EBITDA 10.4x
Sara Lee (Personal Care Europe)
Unilever
EUR1,275m
Philosophy
Coty
USD1,000m
OPI
Coty
USD1,000m
2011
2010
EV/EBITDA 13.5x
EV/EBITDA 15.5x
EV/sales 5.0x
Smashbox Beauty Cosmetics
Estee Lauder
USD256m
2005
UCI (Unilever)
Coty
USD800m
EV/sales 1.1x
2003
Wella AG
P&G
EUR5,423m
EV/sales 2.0x
EV/EBITDA 15.1x
Source: CM-CIC Market Solutions, FactSet, Bloomberg
30
GARP
L'Oréal
DISCOUNTED CASH FLOW
Given the visibility and recurrence of the group’s cash-flow generation, the use of a DCF model seems appropriate. Based on
this method, L’Oréal’s current valuation works out at EUR148 per share.
From 2021, we are forecasting revenue growth of 4% per annum until 2027, and a slight growth in the EBIT margin to beyond 18%. We
have assumed a growth rate 50% higher than the global GDP growth rate of 3%. We have quickly normalised capex and
depreciation/amortisation expense at 4.5% of revenue, and working capital at 4%.
L’Oréal’s beta has been a particularly low 0.87 since the creation of the CAC 40 on 1 January 1988. We assume the same, thereby
obtaining a cost of capital of 7.9%. Lastly, we do not apply a discount to the 9.05% stake in Sanofi, based on the fact that an investment
would generate transaction costs roughly similar to the target profitability over one year.
The issue of licences
L’Oréal Luxe is expected to generate revenue of EUR7.5bn and EBIT of EUR1.6bn in 2016. The share of brands managed under
licences (Armani, Saint-Laurent, Ralph Lauren, Cacharel, etc.) totals EUR3bn, weighing in at 11% of EBIT according to our estimates.
When licensing agreements expire, licensors potentially have the possibility of recovering their freedom without compensation, either to
integrate it themselves (Burberry with Interparfums in 2012), or to entrust it to another operator (L’Oréal lost Boucheron to Interparfums
in 2010). L’Oréal does not disclose the termination dates of its licences, but our understanding is that they are fairly remote. However,
our valuation takes into consideration the short-term nature of the group’s assets (assuming average portfolio duration of 15 years) and
a risk of non-renewal of agreements when they expire (15% chance). This has an impact of EUR1.2 per share compared with a model
based on assets owned outright.
The valuation of EUR148 per share implies the following current-year multiples: P/E 2016 of 25.0x and EV/EBIT of 16.5x.
L'Oreal SA: DCF Inputs & Outputs
Inputs
Comments
Outputs
Comments
Risk-free rate (%):
3,5
CM-CIC Market Solutions long-term assumption
Discounted free cash flows (EURm):
Equity risk premium (%):
5,0
Net fin. debt (-) / cash (+) (EURm):
Beta (x):
0,9
Beta rel. STOXX600:0,96
Cost of equity (%):
7,8
CAPM-derived
Cost of debt (%):
89 289
Net financial debt (+) / cash (-) (EURm):
-2 080
Enterprise value (EURm):
87 209
-3
Associated companies (EURm):
8 489
Other non-current assets (EURm):
30,0
Market capitalisation (EURm):
Other non-current liabilities (EURm):
Stock Price: EUR158,6
2 080
Annualized Volatility:26,0% Minority interests (EURm):
3,0
Theoretical corporate tax rate (%):
73 971
Nber shares (m): 563,0 Risk / License business
-667
Theoretical Equity value (EURm):
Theor. Equity value (EUR per share):
Weighted average cost of capital (%):
7,9
CAPM-derived
Depreciation & amortisation (%):
4,5
CAPEX intensity (%):
4,5
Working capital intensity (%):
4,0
Long-term growth rate (%):
3,0
1.5x GDP growth
548
-877
Probability of 15% in 2032
83 540
148
Potential upside / downside (%):
-6
L'Oreal SA: Free cash flow forecasts
Revenues (EURm)
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
2026E
2027E
25 705
26 872
28 103
29 395
30 751
32 170
33 456
34 795
36 186
37 634
39 139
40 705
4,5
4,6
4,6
4,6
4,6
4,0
4,0
4,0
4,0
4,0
4,0
Growth (%)
EBIT (EURm)
4 498
4 756
5 028
5 282
5 547
5 819
6 069
6 329
6 600
6 883
7 178
7 485
Margin (%)
17,5
17,7
17,9
18,0
18,0
18,1
18,1
18,2
18,2
18,3
18,3
18,4
5,7
5,7
5,1
5,0
4,9
4,3
4,3
4,3
4,3
4,3
4,3
3 149
3 329
3 519
3 698
3 883
4 074
4 248
4 430
4 620
4 818
5 025
5 240
12,2
12,4
12,5
12,6
12,6
12,7
12,7
12,7
12,8
12,8
12,8
12,9
5,7
5,7
5,1
5,0
4,9
4,3
4,3
4,3
4,3
4,3
4,3
Growth (%)
NOPAT (EURm)
Margin (%)
Growth (%)
Depreciation & amortisation (EURm)
1 157
1 209
1 265
1 323
1 384
1 448
1 506
1 566
1 628
1 694
1 761
1 832
Net working capital (EURm)
1 028
1 075
1 124
1 176
1 230
1 287
1 338
1 392
1 447
1 505
1 566
1 628
-83
47
49
52
54
57
51
54
56
58
60
63
CAPEX (EURm)
1 157
1 209
1 265
1 323
1 384
1 448
1 506
1 566
1 628
1 694
1 761
1 832
Free cash flow (EURm)
3 231
3 283
3 470
3 646
3 829
4 017
4 197
4 377
4 564
4 760
4 964
5 177
12,6
12,2
12,3
12,4
12,5
12,5
12,5
12,6
12,6
12,6
12,7
12,7
1,6
5,7
5,1
5,0
4,9
4,5
4,3
4,3
4,3
4,3
4,3
Working capital change (EURm)
Margin (%)
Growth (%)
L'Oreal SA: Valuation sensitivity to WACC (%, horizontal) and long-term growth rate (%, vertical)
Long-term growth rate
(%)
Weighted average cost of capital (%)
#########
6,6
6,9
7,1
7,4
7,6
7,9
8,1
8,4
8,6
8,9
9,1
2,75
186
176
167
159
151
145
138
133
128
123
119
3,00
194
183
173
164
156
148
142
136
131
126
121
3,25
203
190
179
169
161
153
146
139
134
128
124
31
GARP
L'Oréal
FROM ENTERPRISE VALUE TO INTRINSIC VALUE
The use of normalised parameters applied to 2016 estimates yields a slightly lower intrinsic value of EUR146 per share for
L’Oréal, assuming a multiple of roughly 15x operating assets and an underlying EBIT of about EUR4.7bn in 2016.
Operating assets
We are forecasting a recurring EBIT of EUR4.7bn in 2016, i.e. operating income (EBIT) of EUR4.5bn after taking into account
EUR180m in various non-recurring expenses. We apply differentiated valuation multiples to each division to reflect the potential of each,
from The Body Shop (12.5x) to Active Cosmetics (16.5x).
Financial and operating commitments
We reintegrate most operating liabilities, i.e. EUR159m in pension commitments, EUR90m in provisions and EUR877m in deferred
taxes, largely in respect of the unrealised capital gain on the Sanofi securities.
L'Oreal SA: From Enterprise Value to Present Value
Stake value
Comments
% EV
EURm
EUR p.s.
ENTERPRISE VALUE
83 785
149,3
100
l Operating assets
71 014
126,5
85
Implicit Target EV/EBIT of 15,2x
x
Normalised EBIT pre-exceptional items of EUR4679m
36 589
65,2
44
Target EV/EBIT multiple of 14,5x
x
Normalised EBIT of EUR2523m
 Pro
9 553
17,0
11
x
 Luxe
26 695
47,6
32
x
 Active
7 516
13,4
9
x
765
1,4
1
x
-9 204
-16,4
-11
x
Recurrent cash costs of EUR614m
-900
-1,6
-1
x
Recurrent cash costs of EUR60m
3 619
6,4
4
 Mass
 The Body Shop
 Corporate costs
 Recur. restruct. costs
l Financial Assets
 Cash & equivalents
2 861
5,1
3
EUR2861m Estimates
Dec. 16E
100%
 Derivatives
283
0,5
0
EUR283m
Dec. 15
100%
 Treasury shares
475
0,8
1
Mkt value of 159EUR p.s. x
l Other non-current Assets
9 151
16,3
11
 Equity investments
8 489
15,1
10
 Other investments
114
0,2
0
EUR114m
Book value
Dec. 15
100%
EUR548m
Book value
Dec. 15
100%
 Deferred tax assets
LIABILITIES
3,0m shares
EUR8489m Market Value as of 15 apr 100%
548
1,0
1
2 115
3,8
3
987
1,8
1
782
1,4
1
EUR782m
Estimates
Dec. 16E
100%
0
0,0
0
EUR0m
Book value
Dec. 15
100%
EUR205m
Book value
Dec. 15
100%
l Financial liabilities
 Gross financial debt
 Hybrid securities
 Derivatives
205
0,4
0
1 128
2,0
1
249
0,4
0
159
0,3
0
EUR159m
Book value
Dec. 15
100%
Restructuring
12
0,0
0
EUR12m
Book value
Dec. 15
100%
Litigation
53
0,1
0
EUR53m
Book value
Dec. 15
100%
Other provisions
25
0,0
0
EUR25m
Book value
Dec. 15
100%
877
1,6
1
EUR877m
Book value
Dec. 15
100%
3
0,0
0
EUR3m
Book value
Dec. 15
100%
EUR0m
Book value
Dec. 15
100%
l Operating liabilities
 Provisions
9
9
9
9
Book value
Pension liabilities
 Deferred tax liabilities
 Minority interests
l Other non-current liab.
0
0,0
0
Present value (IV)
81 669
146
97
Market value (MV)
Share of 9.05% in Sanofi
Net financial debt (+) / cash (-): EUR-2080m
Mainly related to the capital gain on Sanofi
Intrinsic Value implies a P/E of 23,7x its 2016 estimates, falling to 22,6x in 2016E according to FactSet consensus estim.
89 011
159
Market Value implies a P/E of 25,8x its 2016 estimates, falling to 24,6x in 2016E according to FactSet consensus estim.
Theoretical up./downside
-8%
-8%
Consensus Target Price: EUR166,2 / 26 sell-side analysts currently covering the stock
Margin of safety
10%
10%
9
Entry price (EP)
Entry price vs. market price
73 502
131
-17%
-17%
Basic number of shares
561,2
Fully diluted no. of shares
561,2
L'Oreal SA: Sensitivity analysis of Present Value to target EV/EBIT (x) & normalised EBIT (EURm)
Target EV/EBIT
Normalised EBIT
##########
12,7x
13,2x
13,7x
14,2x
14,7x
15,2x
15,7x
16,2x
16,7x
17,2x
17,7x
EUR4379m
118
122
126
130
134
137
141
145
149
153
157
EUR4529m
121
125
129
133
137
141
145
150
154
158
162
EUR4679m
125
129
133
137
141
146
150
154
158
162
166
EUR4829m
128
132
137
141
145
150
154
158
162
167
171
EUR4979m
131
136
140
145
149
154
158
163
167
171
176
The assumption of an EBIT multiple close to 15x is consistent with a DCF model based on a cost of capital of 7.9% and perpetual
growth of 3%.
Sensitivity analysis of target EV/EBIT multiple to WACC (%, horizontal) and long-term growth rate (%, vertical)
Long-term growth rate
(%)
Weighted Average Cost of Capital (%)
#########
6.6
6.9
7.1
7.4
7.6
7.9
8.1
8.4
8.6
8.9
9.1
2.50
17.4
16.4
15.5
14.7
14.0
13.3
12.7
12.2
11.7
11.2
10.8
2.75
18.5
17.4
16.4
15.5
14.7
14.0
13.4
12.8
12.2
11.7
11.3
3.00
19.9
18.6
17.5
16.5
15.6
14.8
14.1
13.4
12.8
12.3
11.8
3.25
21.4
19.9
18.6
17.5
16.5
15.6
14.8
14.1
13.4
12.8
12.3
3.50
23.1
21.4
20.0
18.7
17.5
16.5
15.6
14.8
14.1
13.5
12.9
32
GARP
L'Oréal
PROSPECTIVE VALUATION
Applying L’Oréal’s historical valuation multiples to our five-year projections yields a per-share valuation of EUR184 in 2020,
i.e. a present value of EUR152 (based on a cost of equity of 7.8%) and an entry point of EUR142 (based on an IRR of roughly
10%, i.e. a risk premium of 200bp on top of the aforementioned cost of equity).
This method is based on the normalisation of EV/EBIT valuation multiples over the coming five years at 15.2x. It has the merit of
identifying the group’s value in the event of the normalisation of interest rate conditions and the return to the multiples that prevailed for
20 years in the HPC sector. Despite organic growth of 4.5% and the 130bp improvement in operating margin, the share would offer an
IRR of 5.5% per annum over the investment period. An entry point of EUR142 would generate an IRR of roughly 10%.
L'Oreal SA: Prospective valuation details
CM-CIC Market Solutions estimates
Comments
2015E
2016E
2017E
2018E
2019E
2020E
25 257
25 705
26 872
28 103
29 395
30 751
2015-2020 CAGR: 4,0%
2016-2020 CAGR: 4,6%
EBITDA - Adjusted (EURm)
5 157
5 654
5 965
6 291
6 604
6 930
2015-2020 CAGR: 6,1%
2016-2020 CAGR: 5,2%
EBITA - Adjusted (EURm)
4 194
4 498
4 755
5 027
5 281
5 546
2015-2020 CAGR: 5,8%
2016-2020 CAGR: 5,4%
EPS - Adjusted (EUR)
5,88
6,00
6,36
6,73
7,10
7,50
2015-2020 CAGR: 5,0%
2016-2020 CAGR: 5,8%
DPS (EUR)
3,10
3,20
3,40
3,60
3,85
4,10
2015-2020 CAGR: 5,8%
2016-2020 CAGR: 6,4%
Net fin. debt (+) / cash (-) (EURm)
-618
-2 080
-3 615
-5 242
-6 953
-8 748
23 614
25 394
27 329
29 371
31 512
33 752
2014-2020 CAGR: 7,4%
2015-2020 CAGR: 7,4%
7 651
7 844
8 043
8 245
8 452
8 663
Capital Employed (EURm)
24 757
25 163
25 656
26 167
26 699
27 252
Nber of shares - Basic (m)
554,2
554,2
554,2
554,2
554,2
554,2
Nber of shares - Diluted (m)
561,2
561,2
561,2
561,2
561,2
561,2
15,2
15,2
15,2
15,2
15,2
15,2
Enterprise value (EURm)
63 742
68 363
72 283
76 405
80 275
84 305
Equity value (EURm)
72 011
78 287
83 940
89 892
95 680
101 715
129,9
141,3
151,5
162,2
172,6
183,5
Equity val. p.s. (EUR) - Average
-
141
151
162
173
184
Theoret. Stock return - Period total (%)
-
-10,9
-4,5
2,3
8,8
15,7
Theoret. Stock return - Annual Avg. (%)
-
-
-4,5
1,1
2,9
3,7
Present value (EUR)
-
141
141
140
138
136
Sales (EURm)
Shareholders' funds (EUR)
Other items (EURm)
 EV/EBIT (x)
Equity value p.s. (EUR)
Provisions (-), Minority int. (-), Associates (+), etc.
Discount rate: Cost of Equity of 7,8%
L'Oreal SA: Expected Return vs. Required Return (%) / Present Value & Entry Price (EUR)
Assumptions / Annual basis
Comments
● Expected Return (IRR at current price, %)
 Capital gain/loss (%)
9
9
EPS growth (CAGR 2015-2020, %)
Valuation multiple expansion/contraction (%)
5,5
Prospective value EUR183,5p.s.
3,7
Investment horizon: 4 years
5,8
2020E EPS of EUR7,5
vs.
2016E EPS of EUR6,0

EPS growth 2016-2020: 25,2%
Implicit 2020E P/E: 24,5x
vs.
2016E P/E: 26,5x

PEG (P/E to 5-year EPS CAGR) of 4,6
-2,1
Current market value: EUR158,6 p.s.
Consensus TP: EUR166,2 p.s.
 Dividend yield (%)
1,8
● Required Return (%)
9,8
Cost of equity + investor specific risk premium (i.e. additional safety margin)
 Cost of Equity (%)
7,8
CAPM-derived
8,5
CM-CIC Market Solutions long-term assumption re. the Equities asset class return (o/w 6% capital gain + 2.5% div. yield)
- Risk-free rate (%)
3,5
- Equities market risk premium (%)
5,0
9
9
Equities asset class risk premium (%)
Company specific risk premium/discount (%)
 Investor specific risk premium (%)
-0,8
2,0
Average over the period
Adjusted Beta relative to STOXX 600: 0,85
Annualized volatility index: 26,0%
CM-CIC Market Solutions assumption
Present value/fair value (EUR)
152
Based on a dscnt rate of 7,8% (CoE). Present val. of 2020 prospec. val. (EUR136,2) + present val. of div. stream (EUR16,3)
Entry price (EUR)
142
Based on a discnt rate of 9,8% ; Required return (including div.) = CoE (7,8%) + Investor specific risk premium (2%)
L'Oreal SA: Sensitivity analysis of present value to target P/E (x) & cost of equity (%)
Target P/E (x)
Cost of equity
#########
(%)
22,0
22,5
23,0
23,5
24,0
24,5
25,0
25,5
26,0
26,5
27,0
7,3
141
144
147
150
152
155
158
161
164
167
169
7,8
139
141
144
147
150
152
155
158
161
164
166
8,3
136
139
141
144
147
150
152
155
158
161
163
Summary valuations
Among our valuation methods, the DCF and Prospective value methods both yield a per-share valuation of EUR150 for L’Oréal. These
two methods seem more appropriate than the EV/IV method, which is more static, to take account L’Oréal’s investment case and a
return to normal value for the HPC sector with regard to rates. We thus assume a present value for the share at EUR150. The current
share price gives rise to a four-year IRR of 5.5%, which we see as narrow. An entry price of EUR140 would be liable to generate a more
satisfactory IRR of roughly 10%, which is, however, difficult to obtain in light of the quality of the investment case.
L'Oreal SA: Valuation summary
162
157
EUR152p.s
152
EUR149p.s
EUR148p.s
147
EUR146p.s
142
137
DCF
WACC: 7.88% +/- 0.25%
g = 3.0% +/- 0.25%
Intrinsic Value
EBIT 2016E: EUR4,679m +/- EUR20m
EV/EBIT 2016E: 15.3x +/- 0.5x
Prospective Value
Target P/E 2020: 24.4x +/- 0.5x
Required IRR: 7.8% +/- 0.5%
Average Valuation
33
GARP
L'Oréal
M ANAGEMENT, GOVERNANCE, SHAREHOLDER STRUCTURE
The company’s management is structured around the heads of the group’s business and functional divisions, backed up by
the heads of the large geographical areas. This assures permanent dual control over all of its activities. Like many other
members of the Executive Committee, Jean-Paul Agon, CEO since 2006 and Chairman since 2011, has spent his entire career
at L’Oréal. Liliane Bettencourt, daughter of Eugène Schueller, founder of L’Oréal, is still the main shareholder through Téthys,
whose concert arrangement with Nestlé controls 50% of capital and voting rights.
Management
L’Oréal is a veritable management school, placing a premium on continuity and training its own elite. The company has had five CEOs
in a little over a century, all of whom spent their entire career within the group – a characteristic they share with a large majority of
members of its Executive Committee. Jean-Paul Agon, who turns 60 this year, can chair the Board of Directors until he turns 71
pursuant to the articles of association.
Joint management of the Selective Divisions under Nicolas Hieronimus was set up in 2013 to combine L’Oréal Luxe, Professional
Products and Active Cosmetics; it is now at least on a par with the Consumer Products division. The group also announced, in
conjunction with the release of its Q1-2016 revenue, the retirement of Marc Menesguen, President Consumer Products, aged 60, and
his replacement by Alexis Parakis-Valat, Executive Vice-President Asia-Pacific. The division’s underperformance vs the market in two
successive years probably helped accelerate this part of the story. The division soon will have its third leader in four years, but the
momentum will be better for the newcomer.
The company’s organisation chart, split between heads of operating divisions and heads of geographic areas, ensures permanent dual
control. Among the sixteen members of the executive committee are:
● Jean-Paul Agon: 60 years old, Chairman of L’Oréal since 2011. Jean-Paul Agon has spent all of his career at L’Oréal since
graduating from HEC in 1978, becoming successively General Manager of L’Oréal Paris in France in 1985, International Managing
Director of Biotherm in 1989, head of L'Oréal Asia in 1997, President of L'Oréal USA in 2001, before succeeding Lindsay Owen-Jones
as CEO in 2006 and then Chairman of L’Oréal in 2011.
● Laurent Attal: 58 years old, Vice-President, Managing Director R&I since 2010. Trained as a doctor specialising in dermatology and
holder of an MBA from INSEAD, Laurent Attal had a long career in L’Oréal’s Active Cosmetics before being appointed President and
CEO of L’Oréal USA.
● Nicolas Hieronimus: 52 years, President Selective Divisions joined the group in 1987 after graduating from ESSEC. In 2011, he was
appointed President of L’Oréal Luxe before becoming President Selective Divisions (Luxury, Active Cosmetics, Professional Products,
The Body Shop) in 2013.
● Christian Mulliez: 56 years old, Executive Vice-President Chief Financial Officer and an ESSEC graduate. Christian Mulliez spent the
first half of his career at Synthélabo, which became Sanofi in 2000, where he went on to become Executive Vice-President Finance. He
joined L’Oréal in 2002, taking up the position of Executive Vice-President Chief Financial Officer in January 2003.
● Lubomira Rochet: 39 years old, Chief Digital Officer and a graduate of Ecole Normale Supérieure, Sciences-Po Paris and the
College of Europe in Bruges. Lubomira Rochet began her career at Capgemini before joining Microsoft and then becoming Deputy CEO
of the digital marketing agency Valtech. Lubomira Rochet joined L’Oréal in March 2014 as Chief Digital Officer and member of the
Group’s Executive Committee.
Compensation
In its 2015 registration document L’Oréal clearly and comprehensively sets out the compensation of its board of directors and executive
officers. Each director receives EUR5,000 for each board meeting to which can be added compensation for participation in committee
meetings. The amount of EUR1.2m was paid to the sixteen board members in 2015. The directors’ compensation policy aims at an
alignment with the interests of all stakeholders, not just shareholders, and factors in precise evaluation criteria of a financial nature
(60%) with regard to the company’s economic performance and of an extra-financial nature (40%). The short-term financial targets to
determine variable compensation are well balanced between the level of activity attained on a comparable basis, market share, rise in
EPS and operating free cash flow. The extra-financial component is based on the corporate social and environmental responsibility
“Sharing Beauty with all” programme, HR criteria such as gender balance, digital development and perception of the company’s image.
Incentives for long-term performance are reflected in the allocation of performance shares with a four-year maturity, widely distributed
within the group (2,000 beneficiaries, 3.72% intended for Jean-Paul Agon). Target compensation thus includes incentive compensation
at 75%.
L'Oreal SA: Group Executive Committee
First
End of
appointed
term
Jean-Paul Agon
2011
-
CEO and Chairman
Laurent Attal
2010
-
Executive Vice-President Research & Innovation
Nicolas Hieronimus
2011
-
President Selective Divisions
Barbara Lavernos
2014
-
Executive Vice-President Operations
Brigitte Liberman
2007
-
President Active Cosmetics Division
Christian Mulliez
2003
-
Executive Vice-President Chief Financial Officer
Marc Menesguen
2005
2016
President Consumer Products Division. He will be replaced by Alexis Perakis-Valat in Sept. 2016
Alexis Perakis-Valat
2013
2016
Executive Vice-President Asia Pacific Zone. He will be replaced by Jochen Zaumseil in 2016
Alexandre Popoff
2013
-
Isabel Marey-Semper
2015
Lubomira Rochet
2014
-
Chief Digital Officer
Frédéric Rozé
2013
-
Executive Vice-President of the Americas Zone
Geoff Skingsley
2012
-
Executive Vice-President Africa - Middle East Zone
Jérôme Tixier
2005
-
Executive Vice-President Human Resources and Advisor to the Chairman
An Verhulst-Santos
2011
2016
President Professional Products Division. She will be replaced by Nathalie Roos in 2016
Jochen Zaumseil
2013
2016
Executive Vice-President Western Europe Zone. He will be replaced by Vianney Derville in 2016
Other main appointments or positions held
Executive Vice-President Eastern Europe Zone
Executive Vice-President Communication, Sustainability and Public Affairs
34
GARP
L'Oréal
Governance
The Board of Directors has 15 members. Chaired by Jean-Paul Agon, it has three directors representing the founding family, namely
Françoise Bettencourt-Meyers, her husband Jean-Pierre Meyers and their son Jean-Victor, two representatives of Nestlé, two employee
representatives, and seven independent directors who have held the highest level of responsibility in groups working in highly
complementary fields (industry, services, consumer, finance, chemical/pharmaceutical).
L'Oreal SA: Board of Directors
First
End of
appointed
term
Jean-Paul Agon
2006
2018
Chairman of the Strategy and Sustainable Development Committee
Jean-Pierre Meyers
1987
2016
Vice-Chairman of the Board of Directors, Nestlé SA Board member
Peter Brabeck-Letmathe
1997
2017
Vice-Chairman of the Board of Directors Chairman of the Board of Directors of Nestlé
Ana Sofia Amaral
2014
2018
Scientific and Technical Affairs Director for L’Oréal Portugal
Françoise Bettencourt Meyers
1997
2017
Chairwoman of the family-owned holding company Téthys Chairwoman of the Bettencourt Schueller Foundation
Charles-Henri Filippi
2007
2019
Former Chairman and CEO of HSBC France, Chairman of Citigroup for France
Xavier Fontanet
2002
2018
Former Chairman and CEO of Essilor
Bélen Garijo
2014
2018
President and CEO of Merck Serono
Bernard Kasriel
2004
2016
Former CEO of Lafarge
Chrisitane Kuehne
2012
2016
With Nestlé since 1977 and Head of the Food Strategic Business Unit
Georges Liarokapis
2014
2018
Coordinator of Sustainability for L’Oréal Western Europe
Jean-Victor Meyers
2012
2016
Member of the Supervisory Board of Téthys
Virginie Morgon
2013
2017
Member of the Executive Board of Eurazeo and Chief Investment Officer
Sophie Bellon
2015
2019
Chairman of the Board of Directors of Sodexo
Louis Schweitzer
2005
2017
Chairman and CEO of Renault from 1992 to 2005
Other main appointments or positions held
Shareholders
The Bettencourt-Meyers family and Nestlé are the company’s leading shareholders, holding stakes of 33.0% and 23.1% respectively,
and act in concert. On 8 July 2014, L’Oréal announced the purchase of 48.5m of its own shares (8% of capital) held by Nestlé, partly in
kind with the transfer of its 50% stake in Galderma to Nestlé, and partly in cash with the purchase of 27.3m shares for EUR3.4bn. More
than 99% of the Bettencourt-Meyers family’s shares (32.9%) are held in full ownership or usufruct by Téthys; Liliane Bettencourt holds in
usufruct almost all Téthys shares and voting rights.
L'Oreal SA: Shareholder structure
% held
Capital
Comments
Vot. rights
Bettencourt Meyers family
33.0
33.2
Mrs. L. Bettencourt holds almost all the shares and attached voting rights in beneficial ownership
Nestlé
23.1
23.2
The Bettencourt Meyers family and Nestlé S.A. act in concert
0.5
0.0
Tresury stock
Company savings plan
Free float
0.8
0.8
42.6
42.8
Performance for shareholders
Since 1998, the IRR for L’Oréal’s shareholders with reinvested dividends came to 10% per year. This is well within the sector average
between P&G (7%) and Estée Lauder (13%). Revlon (-11%, 88% of capital losses) and Avon (-7%, 50% of capital losses) show that
success is not always guaranteed in the Beauty industry.
Household & Personal Care sector relative stock market performances (div. reinvested, basis 100 in 1998)
900
800
Estee Lauder Companies Inc. Class A
Beiersdorf AG
Henkel AG & Co. KGaA Pref
L'Oreal SA
Johnson & Johnson
Sanofi
Unilever NV Cert. of shs
Procter & Gamble Company
Shiseido Company,Limited
Avon Products, Inc.
700
600
500
400
Revlon, Inc. Class A
300
200
100
0
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
35
APPENDIX 1: GLOBAL BEAUTY PRODUCTS MARKET
WW Beauty market - L'Oréal definition - EURm - 2005-2016E : +3.8% CAGR
210
203
200
195
189
182
174
150
139
146
153
158
159
2008
2009
166
100
50
0
2005
2006
2007
2010
2011
2012
2013
2014
2015
2016E
WW Beauty Market growth vs WW GDP - 1991-2015
300,0
e0,0415x
Beauty Market
R² = 0,9959
250,0
GDP
200,0
e0,0337x
R² = 0,9961
150,0
100,0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sources: CM-CIC Market Solutions, Euromonitor, World Bank
WW Beauty market by geography - as a % of total market - 2015
2015
Colour Cosmetics
Asia Pacific
Western Europe
Eastern Europe
Fragrances
(incl. Deo)
Skin Care
(incl. Sun)
Hair Care
Total
5%
4%
2%
6%
7%
5%
18%
8%
32%
22%
1%
2%
1%
2%
6%
North America
4%
3%
4%
5%
17%
Latin America
2%
7%
5%
4%
18%
Middle East & Africa
1%
2%
1%
1%
6%
18%
22%
24%
37%
100%
World
Sources: Euromonitor, CM-CIC Market Solutions
Cosmetics as % of Household Consumption - 2009-2014
140
3,0%
Asia
120
100
Western E
80
LatAm
NorthAm
60
40
Eastern E
LatAm
2,5%
2,0%
Eastern E
1,5%
1,0%
Asia
MEA
Western E
NorthAm
0,5%
MEA
20
Beauty Market as % of Household
consumption, 2014
Million USD
Beauty Market vs Household Consumption - 2009-2014
Beauty Market
GARP
L'Oréal
0,0%
0
0
5
10
Household consumption - Current USD
Sources: CM-CIC Market Solutions, Euromonitor, Worldbank
15
Trillions
0
5
10
Household consumption - Current USD
15
Trillions
Sources: CM-CIC Market Solutions, Euromonitor, Worldbank
36
GARP
L'Oréal
APPENDIX 2: M ARKET SHARES OF THE GROUP AND KEY COMPETITORS BY GEOGRAPHIC REGION
L'Oréal - Beauty Market share in Europe - 2015
L'Oréal - Beauty Market share in North America - 2015
L'Oréal - Beauty Market share in Asia Pacific - 2015
37
GARP
L'Oréal
CONT.
L'Oréal - Beauty Market share in Latin America - 2015
Brazil
L'Oréal - Beauty Market share in Eastern Europe - 2015
L'Oréal - Beauty Market share in MEA - 2015
12% in region where the group is present
38
L'Oréal
APPENDIX 3: 25-YEAR PROFILE
L'Oreal SA
F a c t S e t S e c t o r: C o ns um e r N o n- D ura ble s | F a c t S e t Indus t ry: H o us e ho ld/ P e rs o na l C a re | Lis t ing c urre nc y: E UR | R e po rt ing c urre nc y: E UR
02/05/2016 EUR 158.6
IP O Date: 02/01/1985
FRA NCE
Ho useho ld/P erso nal Care
H IS T O R IC A L M ULT IP LE S 19 8 6
P rice (High)
P rice (Lo w)
P rice (A verage)
P /E (High): 23,6x
P /E (Lo w): 18,1x
P /E (A verage): 21,4x
P /B V (High): 3,9x
P /B V (Lo w): 2,9x
P /B V (A verage): 3,4x
EV/Sales (High): 2,5x
EV/Sales (Lo w): 1,9x
EV/Sales (A verage): 2,3x
EV/EB ITDA (High): 13,1x
EV/EB ITDA (Lo w): 9,6x
EV/EB ITDA (A verage): 11,0x
EV/EB IT (High): 16,5x
EV/EB IT (Lo w): 12,0x
EV/EB IT (A verage): 13,8x
4,65
3,24
4,02
22,0
15,3
19,0
2,7
1,9
2,4
0,9
0,5
0,7
5,8
3,7
4,8
7,3
4,6
6,1
19 8 7
5,62
2,87
4,71
22,0
11,2
18,4
3,2
1,6
2,7
1,0
0,5
0,8
6,5
3,0
5,3
8,1
3,7
6,7
19 8 8
6,10
3,19
4,51
20,1
10,5
14,9
3,0
1,6
2,2
1,0
0,6
0,8
6,5
3,5
4,9
8,2
4,4
6,2
6,88
5,43
6,03
13,1
10,3
11,5
3,0
2,3
2,6
1,1
0,8
0,9
8,0
6,4
7,1
10,6
8,5
9,4
7,69
5,82
6,94
20,0
15,2
18,1
2,9
2,2
2,7
1,1
0,2
1,0
7,6
1,2
6,9
10,4
1,7
9,4
19 8 7
Sales
EB ITDA
EB ITDA M argin (%)
EB IT
EB IT M argin (%)
Net P ro fit
Dividend
Nb emplo yees
Shareho lders Equity
M ino rity Interests
P ro visio ns
Net Financial Debt
Capital Emplo yed
A sso ciated Co mpanies
Go o dwill & Intangibles
Nb shares (m)
EP S
DP S
B VP S
ROCE (%)
ROE (%)
Dividend pay-o ut (%)
EV/Sales (x)
EV/EB ITDA (x)
EV/EB IT (x)
P /E (x)
P /B (x)
Dividend Yield (%)
3 063
3 727
472
592
15,4
15,9
378
466
12,3
12,5
161
192
34
51
26 860
27 570
1097
1289
126
101
0
0
-257
54
967
1444
180
0
--629,7
633,1
0,3
0,3
0,1
0,1
1,7
2,0
27,4
22,6
14,7
14,9
20,0
22,8
2 0 16
ESN
A ll
-3,1
-14,4
-17,4
-24,6
-3,6
-2,1
4 142
4 628
544
654
13,1
14,1
410
478
9,9
10,3
334
245
58
75
28 401 29 286
1474
1665
103
105
227
187
-95
84
1708
2 041
24
34
--635,8
637,8
0,5
0,4
0,1
0,1
2,3
2,6
16,8
16,4
22,7
14,7
15,8
25,3
2 0 17
ESN
A ll
-2,9
-13,5
-16,3
-23,1
-3,3
-2,3
E P S ( E UR )
2 0 16
2 0 18
F O R WA R D M ULT IP LE
EP S High Estimates
EP S A VG Estimates
EP S Lo w Estimates
Number o f Estimates
Estimates up (1mo nth)
Estimates do wn (1mo nth)
6,6
6,4
6,3
29
6
15
C O M P A N Y D E S C R IP T IO N
2 0 17
7,6
6,9
6,6
26
7
10
19 8 9
19 9 0
H IS T O R IC A L KP Is ( E UR m ) 19 8 6
2 764
410
14,8
326
11,8
132
30
26 700
1067
88
0
-396
759
127
-625,6
0,2
0,0
1,7
30,1
12,4
18,0
19 8 8
19 8 9
Target P rice (ESN):
Target P rice (A ll):
8,3
7,4
7,0
17
5
7
19 9 0
19 9 1
10,41
6,20
8,18
20,3
12,1
15,9
3,4
2,0
2,7
1,3
0,8
1,0
9,5
5,8
7,6
13,0
7,9
10,3
19 9 1
19 9 2
14,79
9,98
12,26
26,1
17,6
21,6
4,4
3,0
3,7
1,6
1,1
1,3
11,3
7,7
9,4
14,8
10,1
12,3
19 9 2
5 099
5 727
685
820
13,4
14,3
503
627
9,9
10,9
329
363
86
73
29 877
31908
1945
2 132
131
264
205
267
146
-173
2 428
2 489
250
66
--639,6
640,1
0,5
0,6
0,1
0,1
3,0
3,3
14,5
17,6
16,9
17,0
22,7
23,5
2 0 18
ESN
A ll
-2,8
-12,7
-15,3
-21,5
-3,1
-2,5
19 9 3
18,65
13,61
15,45
31,6
23,0
26,2
4,9
3,6
4,1
2,0
1,4
1,6
13,7
9,5
11,0
17,9
12,5
14,4
19 9 4
19 9 5
19,24
14,29
16,52
28,8
21,4
24,7
4,0
3,0
3,4
1,8
1,4
1,6
12,2
9,3
10,7
15,9
12,0
13,9
79 136
89 289
-1866
3
1003
9 294
18,53
14,69
17,15
26,1
20,7
24,1
3,6
2,9
3,3
1,7
1,3
1,5
11,3
9,1
10,5
14,5
11,7
13,5
Upside / Do wnside (ESN):
Upside / Do wnside (A ll):
19 9 6
29,79
18,17
23,43
37,8
23,0
29,7
5,2
3,1
4,1
2,4
1,5
1,9
16,9
10,8
13,6
21,5
13,8
17,2
19 9 3
19 9 4
19 9 5
6 123
885
14,5
676
11,0
378
84
32 261
2 414
266
305
-305
2 681
82
-640,1
0,6
0,1
3,8
17,7
15,7
25,3
7 260
1071
14,8
827
11,4
452
95
38 972
3 268
287
395
207
4 157
75
-676,1
0,7
0,2
4,8
13,9
13,8
25,3
8 136
9 200
1199
1295
14,7
14,1
933
1019
11,5
11,1
481
533
113
123
39 929
43 158
3 464
3 904
345
393
416
470
279
911
4 504
5 678
35
34
2 133
3 003
676,1
676,1
0,7
0,8
0,2
0,2
5,1
5,8
14,5
12,6
13,9
13,7
25,9
27,1
2 0 16
ESN
A ll
-25 702
-5 510
-4 559
-3 622
-24 970
--1866
2 0 16
ESN
A ll
-----21,4
-17,7
-14,1
-14,5
E S T IM . ( E UR m )
Sales
EB ITDA
EB IT
Net P ro fit
Shareho lders Eq.
Net Financial Debt
E N T E R P R IS E V A LUE ( E UR
Rm
AT
) IO S
Enterprise Value
M arket Cap.
Net Financial Debt
M ino rity Interests
P ro visio ns
A sso ciated Co s.
-EUR 166.2
NFD/EB ITDA (x)
NFD/Equity (%)
EB ITDA M argin (%)
EB IT M argin (%)
NP M argin (%)
ROE (%)
19 9 6
19 9 7
39,39
27,94
33,03
43,8
31,1
36,8
6,1
4,3
5,1
2,7
2,0
2,3
19,1
13,9
16,2
24,1
17,6
20,5
19 9 7
19 9 8
61,59
33,63
46,20
-32,7
44,9
8,7
4,8
6,6
3,8
2,2
2,9
25,9
14,7
19,7
32,2
18,2
24,5
19 9 8
10 537
11498
1498
1688
14,2
14,7
1186
1357
11,3
11,8
608
680
142
128
47 242
49 665
4 381
4 661
426
486
506
482
1126
1114
6 439
6 744
63
67
3 413
3 511
676,1
661,1
0,9
1,0
0,2
0,3
6,5
7,1
12,9
14,1
13,9
14,6
27,1
27,4
2 0 17
ESN
A ll
-26 892
-5 846
-4 851
-3 859
-26 911
--3 634
2 0 17
ESN
A ll
-----21,7
-18,0
-14,4
-14,3
19 9 9
79,65
54,70
61,76
-44,7
-10,2
7,0
7,9
5,1
3,5
3,9
37,1
25,6
28,8
46,4
32,0
36,1
19 9 9
2000
93,50
60,70
78,97
-40,9
-10,9
7,1
9,2
5,2
3,4
4,4
36,0
23,8
30,6
46,5
30,8
39,5
2000
-5%
2001
91,30
66,85
78,61
-36,9
43,4
10,1
7,4
8,7
4,7
3,5
4,0
31,1
23,1
26,9
40,3
29,9
34,9
2001
M arket Cap. (EURm):
To tal number o f shares:
2002
87,35
64,55
76,70
46,2
34,2
40,6
9,6
7,1
8,4
4,3
3,2
3,8
30,2
22,6
26,6
40,1
30,0
35,3
2002
10 751
12 671
13 740
14 288
1471
1816
2 060
2 023
13,7
14,3
15,0
14,2
1176
1407
1587
1523
10,9
11,1
11,6
10,7
787
1004
1188
1277
127
267
345
427
42 164
48 222
49 150
50 491
5 162
5 641
5 930
5 906
11
10
11
12
475
640
1458
1468
1175
2 774
2 252
1946
6 823
9 065
9 650
9 331
971
1197
1406
1444
3 138
3 590
3 719
3 666
664,1
659,0
655,4
649,4
1,2
1,5
1,8
1,9
0,3
0,4
0,5
0,6
7,8
8,6
9,0
9,1
12,1
10,9
11,5
11,4
15,3
17,8
20,0
21,6
27,8
29,6
29,8
33,9
2 0 18
S T O C K P R IC E
ESN
A ll
-28 242
200
-6 213
180
-5 166
160
-4 132
140
-29 035
120
--5 448
100
2 0 18
ESN
A ll
80
--60
--40
-22,0
20
-18,3
0
-14,6
02/85
02/87
-14,2
2003
74,85
50,75
62,08
33,9
23,0
28,1
7,4
5,0
6,1
3,7
2,5
3,1
23,5
16,1
19,6
30,4
20,8
25,3
2004
68,95
51,75
60,27
12,8
9,6
11,2
4,8
3,6
4,2
3,1
2,3
2,7
8,7
6,4
7,5
9,8
7,2
8,5
2005
66,80
55,15
60,88
21,3
17,6
19,5
2,8
2,3
2,6
2,5
2,0
2,3
12,2
9,8
11,0
14,9
11,9
13,5
2006
81,70
62,60
73,81
24,3
18,6
22,0
3,4
2,6
3,1
2,9
2,2
2,7
14,1
10,7
12,7
17,1
13,1
15,5
2007
2004
2005
14 534
5 122
35,2
4 561
31,4
3 626
543
52 081
9 236
4
1262
1518
12 020
4 896
3 515
638,3
5,4
0,8
14,5
26,6
39,3
15,2
: OR -F R
14 533
15 790
17 063
3 005
3 307
4 384
20,7
20,9
25,7
2 463
2 717
3 725
17,0
17,2
21,8
1972
2 061
2 656
563
634
726
52 403
60 851 63 358
14 655,7
14 622
13 619
2
2
3
1117,6
992
904
2 217
3 329
2 373
17 992
18 945
16 899
10 589
10 088
7 446
3 837
4 054
4 344
620,0
605,7
595,3
3,1
3,4
4,4
1,0
1,2
1,4
23,6
24,1
22,9
9,6
10,0
15,4
13,5
14,1
19,5
31,9
35,1
31,2
| M ult iple s ha re c la s s e s :
2007
02/89
02/91
02/97
2009
97,98
57,21
72,65
29,6
17,3
21,9
4,8
2,8
3,6
3,4
1,9
2,5
16,8
9,5
12,2
21,0
11,8
15,3
14 029
2 198
15,7
1698
12,1
1492
488
50 500
6 609
12
1399
1154
9 174
1529
3 591
649,6
2,2
0,7
10,2
13,0
22,6
33,0
T ic k e r
02 /95
A VG daily vo lume (1year): 634k shares / EUR101.4m
Latest / next co mpany repo rt: 31/12/2015 / 28/07/2016
2008
99,21
74,25
86,26
22,4
16,8
19,5
4,3
3,2
3,8
3,3
2,5
2,9
13,0
9,9
11,3
15,3
11,6
13,4
2003
02/93
2006
89 289
562 983 375
2008
2 0 10
78,72
46,96
60,34
25,6
15,3
19,7
3,4
2,0
2,6
2,5
1,4
1,9
13,1
7,4
9,8
17,1
9,6
12,8
2009
2 0 11
87,43
71,37
80,45
22,9
18,7
21,1
3,5
2,8
3,2
2,5
2,0
2,2
12,1
9,7
11,1
15,0
12,0
13,7
2 0 10
2 0 11
17 542
17 473
19 496
3 546
3 344
3 963
20,2
19,1
20,3
2 840
2 563
3 196
16,2
14,7
16,4
1948
1792
2 240
849
852
922
67 662
64 643
66 619
11826
13 595
14 863
3
3
3
806
1147
1310
3 700
1958
-42
16 335
16 704
16 134
5 368
6 510
5 657
5 533
5 466
5 730
583,1
584,7
589,7
3,3
3,1
3,8
1,4
1,5
1,8
20,3
23,3
25,2
12,2
10,7
13,9
16,5
13,2
15,1
43,5
48,9
47,1
N o | E xc ha nge : E uro ne xt
02/99
02/01
02/03
90,22
71,22
81,62
22,0
17,3
19,9
3,0
2,4
2,8
2,4
1,8
2,1
11,3
8,7
10,1
13,7
10,5
12,2
02/05
20 343
4 257
20,9
3 515
17,3
2 438
1108
68 886
17 634
3
1355
-618
18 375
6 709
6 205
594,4
4,1
2,0
29,7
13,4
13,8
48,7
P a ris |
02/07
2 0 12
2 0 13
2 0 14
2 0 15
106,40
80,01
93,62
22,2
16,7
19,5
3,0
2,3
2,7
2,5
1,8
2,1
11,8
8,3
10,0
14,3
10,1
12,2
136,65
103,75
123,58
27,6
21,0
25,0
3,6
2,7
3,3
3,1
2,3
2,8
14,6
10,6
13,0
17,8
13,0
15,9
140,15
115,20
125,72
16,5
13,5
14,8
3,8
3,2
3,5
3,2
2,6
2,9
14,9
12,3
13,8
18,2
15,1
16,9
179,25
134,15
163,04
30,3
22,7
27,5
4,3
3,2
3,9
3,6
2,6
3,3
16,6
11,9
14,9
20,1
14,5
18,1
2 0 12
2 0 13
2 0 14
2 0 15
22 463
22 977
22 532
25 257
4 751
4 954
4 799
5 504
21,2
21,6
21,3
21,8
3 910
4 054
3 928
4 541
17,4
17,6
17,4
18,0
2 868
2 958
4 910
3 297
1268
1427
1589
1535
72 637
77 452
78 611
82 881
20 932
22 637
20 185
23 614
5
6
4
3
1408
1163
1673
1003
-1738
-2 420
409
-901
20 607
21386
22 271
23 719
8 440
9 118
8 945
9 294
6 478
6 458
7 526
8 152
598,4
599,8
554,2
560,0
4,8
5,0
8,5
5,9
2,3
2,5
2,7
3,1
35,0
37,7
36,4
42,2
13,3
13,3
12,3
13,4
13,7
13,1
24,3
14,0
48,0
50,5
31,7
52,4
R a w B e t a : 0 .8 5 | A djus t e d B e t a :
0 .9 0 | V o la t ilit y: 2 3 .5 %
02/09
02/11
02/13
02/15
C ha irm a n & C hie f E xe c ut iv e O f f ic e r: J e a n- P a ul A go n | E xe c ut iv e V ic e P re s ide nt - O pe ra t io ns : B a rba ra La v e rno s | 4 1, rue M a rt re , P a ris , Ile - D e - F ra nc e 9 2 117 F ra nc e ; F R A N C E | ht t p:/ / www.lo re a l.c o m
L'Oréal SA engages in the manufacture and sale o f beauty and hair pro ducts. It o perates thro ugh the fo llo wing segments: P ro fessio nal P ro ducts, Co nsumer P ro ducts, L'Oréal Luxury, and A ctive Co smetics. The P ro fessio nal P ro ducts segment manufactures pro ducts which are used and so ld in hair salo ns. The Co nsumer P ro ducts
segment o ffers beauty and care pro ducts fo r men and wo men which are so ld in mass market retail channels. The L'Oréal Luxury segment markets high-end skin care and beauty pro ducts in selective retail o utlets such as department sto res, perfumeries, and travel retail. The A ctive Co smetics segment o ffers dermo co smetic skincare
pro ducts which are so ld in pharmacies and specialist sectio ns o f drugsto res. The co mpany was fo unded by Eugène Schueller in 1909 and is headquartered in P aris, France.
S o urc e : F a c t s e t , C M - C IC M a rk e t S o lut io ns
39
GARP
L'Oréal
INVESTMENT OPPORTUNITIES METHODOLOGY
Value

Companies targeted:
-
Stocks trading below their normalised multiples (historical, peers, M&A)
-
Companies operating below their normalised earnings capacity

Balance sheet clean-up (hybrids, provisions, off-balance sheet items, seasonal effects, etc.)

Intrinsic value: Normalised multiples x normalised earnings (return to normal, mid-cycle)

Entry price = intrinsic value after applying a margin of safety (25% on average)
Turnaround

Companies targeted:
-
Stocks facing a major reorganisation
-
Valuation of the recovery plan after closures, disposals, etc.


Intrinsic value: Normalised multiples x normalised earnings after execution of a restructuring plan

Entry price = intrinsic value after applying a margin of safety (30% on average)
Special Situation

Companies targeted:
-
Stocks in a sector undergoing concentration (M&A) and that could be the object of a bid
-
Estimated net present value of the merger-related synergies


Determination of two bounds:
-
Intrinsic value (“standalone”): Normalised multiples x normalised earnings (return to normal, mid-cycle)
-
Speculative value (“combined”): intrinsic value + present value of synergies
GARP

Companies targeted:
-
Stocks with a more attractive Growth-Value dimension than the European equity market
-
Stocks with a PEG ratio (PE/5-year EPS CAGR) of < 1.8 (14x/8% for the equity market)
-
EPS CAGR > 8% (i.e. average LT equity market growth); mainly organic growth
-
P/E < 14x (i.e. average long-term equity market valuation)

Estimated/projected earnings in five years’ time


Prospective value: normalised multiples (sector, historical) applied to five-year projections

Present value: prospective value discounted at the appropriate Cost of Equity

Entry price: prospective value discounted at a required IRR reflecting the Cost of Equity increased by an additional risk premium
specific to the investor (300bp on average)
Growth

Companies targeted:
-
Stocks with strong forward earnings growth
-
Capacity to double EPS in five years (i.e. 15% p.a. on average)

Estimated/projected earnings in five years’ time


Prospective value: normalised multiples (sector, historical) applied to five-year projections

Present value: prospective value discounted at the appropriate Cost of Equity

Entry price: prospective value discounted at a required IRR reflecting the Cost of Equity increased by an additional risk premium
specific to the investor (300bp on average)
40
GARP
L'Oréal
CLARIFICATIONS ON POSSIBLE CONFLICTS OF INTEREST
Has the analyst (or analysts) who prepared this report ever been employed by the issuer as manager or member of the board of
directors?
Does the CM-CIC Group own more than 5% of the total share capital issued by the issuer or vice versa?
No
Is CIC, alone or jointly with other private individuals, linked to the issuer via other significant financial interests?
No
No
Does CIC provide liquidity for the issuer?
Has CIC, alone or jointly with other private individuals, intervened in the course of the last 12 months as a lead or co-lead
manager on a debt offer covering financial instruments issued publicly by the issuer?
Has CIC provided investment services, such as for proprietary trading (as part of a share buyback programme, for example),
underwritten shares, guaranteed a placement or provided related services such as advisory services to companies (regarding
their capital structure or industrial strategy, for example) or underwriting services on condition that this did not lead to the
disclosure of confidential commercial information and that the agreement in place in the last 12 months gave rise to a payment or
a promise of payment in the last 12 months?
Have CIC and the issuer agreed that the former will supply the latter with a production and distribution service regarding the
latter’s investment recommendation?
Was this report submitted to the issuer prior to its publication?
If so, were the analysts’ conclusions modified?
No
No
No
No
Yes
No
41
GARP
L'Oréal
BLANK PAGE
42
GARP
L'Oréal
BLANK PAGE
43
FRANCE
UNITED STATES
CM-CIC Market Solutions
GSN North America
CIC
6, avenue de Provence
75009 Paris
Member FINRA / SIPC
c/o CIC New York
520 Madison Ave.
New York, NY 10022
Tel. : +33 (0)1 53 48 81 93
Tel. : +1 (212) 659 6250
Fax : +1 (212) 715 4472
Disclaimer
CM-CIC Market Solutions is a Business Unit of CIC (Crédit Industriel et Commercial), a credit institution authorised by the ACPR (Autorité de Contrôle
Prudentiel et de Résolution) and part of the CM11-CIC Group. CIC is a member of the European Securities Network (ESN) and supervised by the French
prudential authority ACPR (Autorité de Contrôle Prudentiel et de Résolution) and the French market regulator AMF (Autorité des Marchés Financiers)..
CIC has implemented an organisation and procedures (or Chinese Wall) aimed at guaranteeing the independence of financial analysts and the primacy of
clients’ interests. In particular, financial analysts are expressly forbidden from trading financial instruments on their own behalf directly with issuers and on the
sectors they follow.
The present document was prepared and published by CIC.
Neither CIC nor its affiliates (or their directors and employees) can be held liable for the proper and complete transmission of this document or any delay in its
receipt. Any unauthorised use, disclosure, copying or distribution of the present document is strictly forbidden. The views and expressions in the present
document are expressions of opinion and are given in good faith, but are subject to change without notice. The present document may not be reproduced in
whole or in part or passed to third parties without permission. The present document has been prepared and published by CIC. The information herein was
obtained from various sources. CIC and their affiliates (and any director, officer or employee thereof) do not guarantee their accuracy or completeness, and
neither CIC nor its Members’ affiliates (nor any director, officer or employee thereof) shall be liable in respect of any errors or omissions or for any losses or
consequential losses arising from such errors or omissions.
Neither the information contained in the present document nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any
securities or any kind of financial instrument. CIC and its affiliates (or their directors and employees) can provide investment or related services or seek
mandates to provide investment or related services to companies or individuals or other entities mentioned in the present document.
The present document is prepared solely for the clients of the CIC and its affiliates. It does not have regard to specific investment objectives, financial
situation and the particular needs of any specific person who may receive it. Investors should seek financial advice regarding the appropriateness of investing
in any securities or investment strategies discussed or recommended in these reports and should understand that statements regarding future prospects may
not be realised. Investors should note that income from such securities may fluctuate and the share price may rise or fall. Accordingly, investors may receive
less than their original investment. Past performances in no way guarantee future performance.
Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in the present document.
Moreover, investors in securities such as American Depositary Receipts (ADR), whose value is influenced by the currency of the underlying security,
effectively assume currency risk.
This research is intended solely for internal use by the recipient, unless prior agreement for another use is expressly given.
This document is destined for clients deemed as “professional” or “eligible counterparties” based on the MiFID definition. If a “non-professional” individual
were to gain possession of the present document, s/he should not base his/her future investment decisions solely on the basis of the aforementioned
document but should consult his/her own investment advisers.
For any additional information or specific disclaimer, please consult the CM-CIC Market Solutions website: www.cmcicms.com

G - CM-CIC Market Solutions

Transcription

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