By Geoffrey Smith
Investing.com -- The wonder of French cosmetics giant L’Oreal (OTC:LRLCY) has been for a long time that it depends largely on everyday products but trades like a luxury stock. The group’s full-year results, released late Thursday, show just why that is.
In a year when the motivation for buying beauty products was sorely weakened by the pandemic L’Oreal gained market share without sacrificing profitability, and enters 2021 on a trend of accelerating sales.
The most important elements of that performance are the ‘how?’ and the ‘where?’
Consumer product groups have largely stood or fallen in the last year on the basis of their ability to distribute online. Those chained to their physical stores have been devastated by lockdowns, while those able and willing to adapt have survived. L’Oreal falls emphatically into the second category: e-commerce sales were up 62% across all divisions and geographies, and now account for over a quarter of total sales.
The other pillar of L’Oreal’s strength is its geographical distribution. It invested early and heavily in China, meaning that it has a high exposure to the only major economy to show overall growth last year. Sales in China grew 27% last year, and 56% of that came through online channels.
Management can hardly be begrudged congratulating itself on what it called a “spectacular” performance in the country.
On a worldwide basis, the figures are hardly less impressive: while the global beauty market shrank by around 8% last year, L’Oreal’s sales fell only 4%. Even more remarkably, the company defended its operating margin, which stayed flat at 18.6%, some achievement given the number of retail outlets that have been left unable to earn their keep.
Management were also sunny in their outlook, albeit while keeping their fingers crossed.
“We are confident in our capacity to outperform the market again this year and, subject to the evolution of the sanitary crisis, achieve a year of growth in sales and profits." (our italics)
Of course, all this quality comes at a price for investors. The shares are priced at a handsome 43 times earnings – more than twice the multiple for Nestle or Unilever (NYSE:UL), in line with the likes of Christian Dior and Moncler, and at only a small discount to LVMH. L’Oreal (PA:OREP) stock in Paris rose 2.2% on the back of the results, amid broad declines in European stock prices on Friday.
The company could do more to justify that valuation by raising payouts to shareholders: it still sat on net cash of nearly 4 billion euros at the end of the year, and the dividend recommendation, up only 4%, is little to get excited about. Still, for those afraid that the current asset bubble has to burst sometime, L’Oreal has everything one could want from a defensive stock.