L’Oréal: Strong Sales Performance Despite Challenges Across Chinese Market (LRLCY)

Investment Thesis: I take the view that L’Oréal S.A. (OTCPK:LRLCF) (OTCPK:LRLCY) can continue to see upside from here, owing to strong sales performance and an attractive P/E ratio.

At the end of January, I made the argument that L’Oréal S.A. could see upside ahead on the basis of an attractive P/E ratio as well as low long-term debt levels.

We can see that the stock has had a significant run-up in January before trading in a stationary manner of late:

The purpose of this article is to assess whether the stock continues to have bullish upside ahead on the basis of recently released 2022 annual results.

Performance

When looking at a breakdown of sales growth by division, we can see that, on a percentage basis, the Active Cosmetics division showed the most growth.

With that being said, it is notable that the Consumer Products division had posted its best growth in 20 years – with the Makeup segment being the fastest growing segment in the division. Performance was particularly strong in countries including Mexico, India and Brazil – which compensated for the challenges faced across the Chinese market.

While I had previously stated that I expect a resurgence in demand across China as a result of the lifting of COVID lockdowns – the fact that other regions have made up sales growth is highly encouraging, and demonstrates that the division is not overly dependent on China to bolster sales growth as a whole.

Additionally, it is also notable that, in spite of a slowdown in the Chinese market for the second half of 2022 – L’Oréal Luxe (the largest segment by sales) continued to show double-digit growth on a yearly basis, with market share in Europe and North Asia showing significant growth.

Moreover, certain divisions such as Professional Products have in fact seen strong growth from China in spite of macroeconomic pressures – with both the mainland as well as India and Brazil showing strong performance.

From a balance sheet standpoint, it is notable that the ratio of non-current borrowings and debt to total assets has increased quite significantly:

	Dec 2019	Dec 2021	Dec 2022
Non-current borrowings and debt	9.6	10.7	3017.6
Total assets	43809.8	43013.4	46844.2
Non-current borrowings and debt to total assets ratio	0.02%	0.02%	6.44%

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Source: Figures sourced from L’Oréal 2022 Annual Results. Figures provided in € millions, except the non-current borrowings and debt to total assets ratio – ratio calculated by author.

This is primarily down to current borrowings and debt from 2021 having been reclassified as non-current borrowings and debt for 2022 – which could indicate that L’Oreal was not able to clear its current liabilities as quickly as envisaged or otherwise arrange to pay off such debt over a longer period.

From this standpoint, while sales growth has been encouraging overall – investors could increasingly look to see if L’Oréal is able to reduce its non-current borrowings and debt going forward.

Looking Forward

Going forward, I still see potential for upside in L’Oréal S.A. given that the share price still remains attractive relative to earnings on a long-term basis.

With that being said, I take the view that the extent of the potential upside in the short to medium-term will hinge significantly on the degree to which we see a significant recovery in the Chinese market across the Consumer Products and L’Oréal Luxe divisions, along with the capacity for L’Oréal to reduce its long-term debt load.

Given the strong sales performance we have seen in spite of macroeconomic pressures, I am optimistic that L’Oréal has the capacity to see further growth from here.

Conclusion

To conclude, L’Oréal S.A. has continued to see strong sales performance in spite of macroeconomic pressures. While an increase in non-current borrowings may be of concern for investors – non-current borrowings as a whole still remains quite low relative to total assets. With L’Oréal S.A. stock also trading at an attractive P/E ratio, I take a bullish view on the stock overall.

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