When it comes to growth, fashion companies frequently choose to buy it off the rack. They expand by acquiring already-popular luxury brands and build a robust portfolio of different products that can include alcoholic beverage and skincare brands as well as clothing.
In recent history, a big catalyst for luxury goods sales has been the rise of social media. Content creators and influencers have contributed to a broader democratization of luxury goods. It is not uncommon to see pictures of non-celebrities on Instagram or Snapchat flaunting expensive clothing or vacationing in exotic locales.
This is one reason that stocks like Ulta Beauty, LVMH Moet Hennessy, and L'Oreal SA (LRLCY 0.07%) have been performing handsomely for investors. All three have returned well over 100% over the last five years. And L'Oreal just made a new $2.5 billion acquisition -- its biggest deal ever. Let's see what that could mean for the company and its investors.
The name of the game is consolidation
Unlike technology companies, luxury brand operators don't always allocate heavily into the development of innovative, new products. Rather, these companies tend to acquire brands when they want to diversify their offerings.
Over the last few years, several big names in luxury fashion have been purchased. For example, LVMH bought Tiffany's for around $16 billion in 2021. In November 2022, Estée Lauder acquired the Tom Ford brand in a deal that put an enterprise value of $2.8 billion on it.
The rationale behind these deals is that the acquiring company is getting much more than a brand or new suite of products. In a way, it is buying history. Well-known brands tend to have fiercely loyal customers. (Look at Apple as a prime example.)
L'Oreal recently found its way into the deal mix when it approached Natura & Co to acquire beauty and wellness unit Aēsop. According to L'Oreal's press release, Australia-based Aēsop generated $537 million in sales in 2022. That gives it a valuation of 4.7 times revenue based on the deal price.
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Is the juice worth the squeeze?
It's not every day that a company makes its biggest acquisition ever. Following the deal, Yahoo Finance interviewed Pauline Brown, the former head of LVMH North America for her take. She asserted that L'Oreal had paid a premium for Aēsop, but that it still got a good deal on it, and she suspected that the bidding process was intense.
Perhaps some validation can be provided to investors regarding the price tag, because according to public reports, rivals including LVMH and Japanese skincare conglomerate Shiseido were competing with L'Oreal to ink deals for Aēsop. Moreover, Axios reported that several private equity firms, including KKR, were also interested.
Good times ahead?
While makeup and skincare products straddle the line between consumer staples and consumer discretionary goods, sales of cosmetics tend to be resilient during times of recession. As Brown pointed out:
Beauty has outgrown all categories of consumer goods for as long as I can remember. [The] premium segment of beauty even outgrows the total market of beauty. And I would put this [Aēsop] in the premium segment .... It has obviously during the pandemic moved largely online. Aēsop is about 30% online penetration in terms of its total sales, but more importantly here, it has way outpaced the growth of the total beauty sector, and I would say it's probably outpaced almost all of the L'Oreal brands in terms of its recent performance top and bottom line.
This sentiment should excite investors. And if that weren't enough, it's important to keep in mind that Aēsop primarily operates in the Americas, Europe, and Australia. The company just entered China last year.
OTC: LRLCY
Key Data Points
Management consulting firm McKinsey & Co. published a report in November about the state of luxury fashion. McKinsey found that "the luxury sector is expected to grow between 5 and 10 percent in 2023, driven by strong momentum in China (projected to grow between 9 and 14 percent) and in the United States (projected to grow between 5 and 10 percent)."
While cosmetics is a component of fashion, it's safe to assume that markets like China will play an integral role in luxury skincare for years to come. So while Aēsop has a minute footprint in China, the brand should be able to leverage L'Oreal's operations and storefronts there to penetrate a new market. Now could be a really exciting opportunity to buy L'Oreal stock.
