Stock Deep Dive - L'Oréal: Creating the Beauty That Moves the World
A deep dive into the largest beauty and health cosmetics company in the world
Dear reader,
Welcome back to another deep dive into a wonderful company.
This time, we're putting L'Oréal under the lens—the largest name in the cosmetics industry—as the stock has been performing poorly in 2024. We’ll find out how this French giant came to be, how it operates today, and what the future holds. As a result, we’ll learn whether investing in L’Oréal can be rewarding or not.
Table of Contents
L’Oréal’s History
Eugène Schueller
Post-World War
L’Oréal’s Business
Products
Moat
Key Financials
Insiders
Risks and Conclusion
L’Oréal’s History
Eugène Schueller
L’Oréal’s roots stretch back to the late 19th century, and its story is anything but ordinary—a tale woven with dark secrets, family dynamics, and betrayal.
We must go back to Paris, France, on March 20, 1881. That day, one Eugène Schueller was born to Charles Schueller and Amélie Denisot, who ran a pastry shop together. Eugène grew up in the shop, helping to prepare pastries by waking up early before heading off to school each day.
“Life was very rude and very hard for us and it’s in this atmosphere of effort and work that I was raised, under the example of my hardworking parents.”
In 1891, the family’s savings were wiped out by the collapse of the Panama Canal Company, regarded as the largest financial scandal of the 19th century. Forced to move to a less expensive neighborhood, fortune struck when the family bought another pastry shop and began supplying bread to an elite private school. In return, the school admitted Eugène as a student.
Eugène flew through his academic career with top grades in all classes, before eventually graduating in 1904 from the Institute of Applied Chemistry. After graduation, he became a laboratory assistant at Sorbonne University. He seemed destined for a career in research—until a chance encounter changed everything.
A local barber approached Eugène’s professor, Victor Auger, seeking help with developing a synthetic hair dye. At the time, most hair dyes were toxic and caused scalp irritation, with some even claiming their usage “damages the brain and the eyesight”. Eugène became the barber’s technical advisor, but that didn’t last long—he soon cut ties with the barber and struck out on his own.
His first attempts didn’t sell, leaving him struggling.
“It was a very difficult time. I lived alone, cooked my own meals, and slept in a little camp bed in my laboratory, and when I think back on those days, I wonder how I got through it.”
After much trial and error, Eugène finally created a high-quality hair dye in 1907, enabling him to launch his own company. In 1909, he founded the Société française de teintures inoffensive pour cheveux—the French Company of Inoffensive Hair Dyes. He soon renamed it L’Oréal after his first product, “Auréale”, a name inspired by a popular hairstyle at the time and a play on the word auréole, meaning halo.
L'Oréal started by selling hair dyes to Parisian salons, but the company quickly expanded. With a new partner, Eugène secured capital, hired a salesman, and launched a promotional magazine. He also opened a hair-dyeing school, recruited representatives outside Paris, and commissioned the company's first poster.
During the First World War, Eugène’s wife, Louise Madeleine Berthe Doncieux, managed the business while he volunteered for the war effort. Upon his return, he found his business thriving, yet he did not give his wife a larger role, believing “a woman’s place was at home”. Eugène can hardly be blamed—he was a product of his time.
Following the war, the company was booming thanks to the roaring 1920s. Hair dyes became more popular, and L’Oréal expanded internationally, reaching Italy, England, Holland, and even the United States and Brazil.
As the company grew, it introduced new products through a combination of innovation and acquisitions. Eugène and his team of chemists are credited with creating the first commercially available sunscreen, Ambre Solaire. Other new products included O’Cap, Monsavon (which Eugène acquired), and Dop, the first mass-market shampoo.
The 1930s, while a great period for L’Oréal, marked a turbulent period for Europe, with Hitler’s Nazi Party coming to power in 1933. Eugène found himself entangled in nasty business, including providing financial support to the Comité secret d’action révolutionnaire (CSAR), a radical far-right group aiming to establish a dictatorship in France. CSAR is linked to several political assassinations, bombings, and even a failed coup attempt in 1937.
Under German Occupation, Eugène grew increasingly pro-Nazi, making disturbing statements along the way:
“None of these three peaceful revolutions can happen without first of all a… preliminary revolution, of both purification and revival, and that one… can only be bloody. It will consist quite simply of quickly shooting fifty or a hundred important personages.”
“The essential thing for us is a complete and definitive break with the recent past, with the men and methods of the Third Republic, with free-masonry and the Jews.”
It is even said he had direct contact with German officials involved in deporting French Jews to concentration camps and executing Resistance members.
After the war, a series of executions of collaborators commenced, known as the épuration légale, or the legal purge. Eugène avoided punishment by claiming he had sheltered Jewish employees, supported staffers who resisted forced labor in Germany, and secretly financed the Resistance, backed by various witnesses.
During the war, L’Oréal’s revenue strangely quadrupled, further raising questions about Eugène’s ties with the occupying forces.
In the end, a mix of connections, money, and luck spared Eugène from being branded a collaborator, a label that could have led to imprisonment or even execution.
Post World-War
Eugène’s activities during the war remain a dark page on L’Oréal’s history, yet they seem to have been largely forgotten over time.
When Eugène passed away in 1957, his daughter, Liliane Bettencourt, inherited L’Oréal as its sole owner. However, she wouldn’t be running the company—Eugène had maintained the belief that a woman’s place was at home. Instead, he had picked François Dalle as his successor. François began at Monsavon in 1945, which was still a separate entity from L’Oréal but also owned by Eugène. He quickly rose through the ranks to become the head of Monsavon. In 1948, he transitioned to L’Oréal, where he worked alongside Eugène to lead the company.
François was one of the best things that happened to L’Oréal. Under the motto “Savoir saisir ce qui commence”—seize new opportunities—L’Oréal entered a period of spectacular growth driven by strategic acquisitions and new product development. By the time François stepped down in 1984, the company’s revenue had grown fortyfold.
Although Liliane wasn’t CEO, her influence was significant as the company’s principal shareholder. She regularly met with L’Oréal’s leadership and held final say over critical decisions, according to an insider. Still, her main role was that of an “ambassador” for the company, focusing on public relations.
The company went public in 1962, and in 1974, Liliane sold nearly half her stake in the company.
François’s tenure as CEO ended in 1984, and he was succeeded by Charles Zviak, who had a strong background in research and development. Under his leadership, L’Oréal placed significant emphasis on product research. Unfortunately, Charles was forced to step down as CEO in 1988 due to illness and passed away in 1989.
At just 42 years old, Lindsey Owen-Jones was appointed CEO of L’Oréal. Under his management, L’Oréal grew into the largest cosmetics firm in the world, expanding its global brand presence and making further acquisitions. Lindsey led L’Oréal until 2011, when Jean-Paul Agon took over. Jean-Paul stepped down in 2021, and Nicolas Hieronimus became only the sixth CEO in the company’s long history.
Today, L’Oréal stands as the largest cosmetics company globally, boasting 37 brands across four divisions. The Bettencourt family retains over 34% of L’Oréal, making Françoise Bettencourt Meyers, Liliane's daughter and Eugène's granddaughter, the richest woman in the world.
There’s much more to explore about L’Oréal’s story and the Bettencourt family, but this has been covered extensively elsewhere. For those interested in learning more, I recommend reading The Bettencourt Affair by Tom Sancton.
L’Oréal’s Business
Products
L’Oréal, with a portfolio of 37 brands, organizes its offerings into four complementary divisions, reaching over 150 countries. Products are distributed through multiple channels, including retail, e-commerce, and travel retail, covering a range of price points.
L’Oréal’s core focus centers on beauty and health, two closely related pillars of well-being. Beauty, a timeless desire that spans cultures and borders, contributes meaningfully to mental health, self-confidence, and self-expression. With this in mind, L’Oréal’s products play a bigger role in personal care than you might realize at first.
The four operational divisions are as follows:
Professional Products
The Professional Products division is L’Oréal’s oldest, with its roots dating back to the founding of the company by Eugène, when he began selling hair dyes to hairdressers. Today, L’Oréal partners closely with hairstylists around the world, connecting 3.5 million hairdressers to its ecosystem and offering educational resources to over a million through its online platform. Indeed, the company’s professional products go beyond just cosmetics. By partnering with and educating hairstylists, L’Oréal builds lasting relationships with its customers.
Naturally, this division mainly focuses on haircare, with leading brands like L’Oréal Professionnel and Kérastase. Products range from shampoos and conditioners to hair dyes, dryers, oils, and much more.
The Professional Products brands. In 2023, this division generated €4.7 billion, representing 11% of total sales, with a 21.6% operating margin.
Consumer Products
L’Oréal’s Consumer Products division, its largest by sales, includes a diverse range of brands and products sold directly to consumers across various channels—mass retail, drugstores, pharmacies, and duty-free stores, as well as e-commerce platforms like Amazon and their own online platforms. The division’s products are also available in specialty beauty stores such as Ulta Beauty and Sephora, as well as through L’Oréal’s own mobile apps and social media. The division’s flagship brand, L’Oréal Paris, ranks as the world’s top beauty brand according to Euromonitor, with Garnier and Maybelline New York among its other notable brands.
The Consumer Products brands. This division contributed €15.2 billion to 2023 sales, or 36.8% of the total, with an operating margin of 20.5%.
Luxe
The Luxe division is all about luxury beauty. Alongside owning its own brands, L’Oréal also works with licensed brands like Giorgo Armani and Prada. Luxury brands agree to license to L’Oréal for several reasons: first, L’Oréal’s deep expertise in beauty and fragrance; second, its extensive distribution networks; third, licensing allows these brands to focus on their core strengths, which is typically fashion; and finally, it offers them additional exposure—essentially free marketing.
The company owns brands like Lancôme, Yves Saint Laurent Beauty and Kiehl’s.
The Luxe brands. The Luxe division recorded €14.9 billion in revenue in 2023, or 36.2% of total revenue, with a 22.3% operating margin.
Dermatological Beauty
L’Oréal’s fourth and final division, Dermatological Beauty, focuses on dermocosmetics—products that combine cosmetics and pharmaceuticals. Targeted primarily toward skincare, this division addresses needs like acne and anti-aging treatments. Distribution channels include healthcare retail, medi-spas, and e-commerce.
The Dermatological Beauty brands. The division generated €6.4 billion in revenue in 2023, or 15.6% of total sales, with an operating margin of 26%.
The company’s products are well diversified across its operational divisions, with Consumer Products and Luxe being the most important. Additionally, L’Oréal’s offerings span a wide range of categories, including skincare, make up, haircare, hair colorants, perfumes, and more.
L’Oréal also has a strong global presence, with the majority of sales in Europe, followed closely by North America and North Asia.
Moat
As the market leader in the cosmetics industry, L’Oréal enjoys a wide economic moat supported by strong intangible assets and substantial cost advantages.
Intangible Assets
L’Oréal’s intangible assets are built on brand equity, patents, and significant R&D investments. The company owns both mass-market and premium brands across all beauty categories, with 11 of these brands—such as L’Oréal Paris, Garnier, Maybelline New York, as well as Lancôme, Yves Saint Laurent, and Kiehl’s—each generating over $1 billion in annual sales. L’Oréal holds leading market positions in nearly all product categories. The company carefully nurtures its brands by investing heavily into marketing and R&D.
Source: L’Oréal Group Investor Relations. Its marketing efforts have grown steadily, both in absolute terms and as a percentage of sales. Comparatively, L’Oréal’s primary peers—Estée Lauder, Procter & Gamble, and Unilever—allocated 23%, 11%, and 14% of their latest fiscal year to marketing, respectively. Of course, Procter & Gamble and Unilever sell a broad range of products beyond personal care and beauty, yet the difference is striking, especially compared to Estée Lauder.
This commitment to marketing keeps L’Oréal’s brands top-of-mind with consumers.
In R&D, the company allocates around 3-3.5% of revenue annually. By contrast, Estée Lauder, Procter & Gamble, and Unilever allocated 2.3%, 2.4%, and 1.6%, respectively, in their latest fiscal year.
Source: L’Oréal Group Investor Relations. L’Oréal brand strength is further reflected in its high gross margins, north of 70%. This margin is particularly impressive for a company with substantial appeal towards mass markets. Despite offering relatively affordable products, L’Oréal has managed to improve gross margins over time—even in a high-inflation environment—demonstrating some degree of pricing power.
Source: L’Oréal Group Investor Relations. Additionally, L’Oréal’s brands help establish strong relationships with retailers, who are eager to include the company’s products on their shelves. These partnerships are reinforced through in-store promotions, retailer-exclusive products, purchase incentives, and advertising campaigns designed to boost store traffic.
Cost Advantage
L’Oréal also benefits from significant cost advantages due to its large scale and strong brand portfolio. High gross margins allow the company to allocate relatively more to marketing, R&D, and other such activities. Among its peers, only Estée Lauder, with its premium-only brands, boasts similar gross margins, while Unilever’s hover around 40% and Procter & Gamble’s around 50%. Higher gross margins translate to greater flexibility in operational spending, giving L’Oréal a competitive edge.
As the largest cosmetics company in the world, L’Oréal also poses substantial scale benefits. The company’s extensive distribution network enables rapid growth for smaller brands within its portfolio. For instance, when L’Oréal acquired CeraVe, AcneFree, and Ambi in 2017, the three brands together generated $168 million in revenue. By 2022, CeraVe alone surpassed $1 billion in sales—growth that would have been nearly impossible without L’Oréal’s vast distribution network.
Source: L’Oréal Group Investor Relations. Further, the company’s scale provides bargaining power with suppliers, allowing it to secure favorable terms on raw materials like ingredients and packaging.
Moreover, marketing efforts are consolidated across products and regions, sharing resources like ad creatives and campaigns. Its scale has also allowed it to negotiate with a large number of influencers and content creators, including Zendaya Coleman and Julia Roberts for Lancôme, Eva Longoria and Camila Cabello for L’Oréal Paris, Zoë Kravitz for Yves Saint Laurent Beauty, and Gigi Hadid for Maybelline New York. L’Oréal Group’s extensive roster of brand ambassadors is unmatched by its peers, a testament to the company’s significant scale.
Through its portfolio of globally recognized brands and significant cost advantages, L’Oréal has maintained a wide moat that continues to shield it from competition.
Key Financials
L’Oréal has maintained a consistent track record of revenue growth since 2013, except for a dip in 2020 due to the pandemic.
The compound annual growth rates (CAGR) for revenue vary by period:
10-year CAGR: 6.4%
5-year CAGR: 8.9%
3-year CAGR: 13.7%
1-year CAGR: 7.6%
Revenue growth has reaccelerated recently, fueled by a post-pandemic surge, although 2023 and 2024 year-to-date have shown slower growth. L’Oréal appears to be affected by a regional slump in Asia, where other players like Estée Lauder have fared worse, showcasing L’Oréal’s resilience in a difficult environment.
In recent years, revenue growth has been driven mostly by the Luxe and Dermatological Beauty divisions, which have outpaced Professional Products and Consumer Products.
Since 2013, Luxe’s CAGR has been 9.8% and Dermatological Beauty’s has been 15.1%, making these two divisions increasingly important within L’Oréal. Both segments also have higher operating margins, resulting in a higher overall margin. Meanwhile, Consumer Products and Professional Products have grown only slightly above inflation.
Future revenue growth should be supported by a number of pillars, including but not limited to:
Acquisitions: L’Oréal has a robust history of acquiring and integrating brands, such as CeraVe, and most recently, Aesop, an Australian luxury skincare brand added to the Luxe division for $2.5 billion.
Premiumization: With consumers shifting toward luxury products, L’Oréal, especially its Luxe division, is positioned to benefit. The Aesop acquisition aligns with this trend.
Emerging Markets: Asia, Africa, and Latin America are already meaningful markets for the company, but there’s a lot more room for secular growth. L’Oréal itself highlights the projected increase of 800 million middle-class individuals by 2030, offering substantial growth potential.
L’Oréal has demonstrated solid profit growth, especially in recent years.
Net income CAGR rates by period:
10-year CAGR: 7.7%
5-year CAGR: 9.7%
3-year CAGR: 20.2%
1-year CAGR: 8.4%
The growth pattern mirrors revenue but with higher gains, thanks to margin expansion.
For free cash flow:
10-year CAGR: 8.6%
5-year CAGR: 9.6%
3-year CAGR: 3.7%
1-year CAGR: 23.9%
Free cash flow has been more volatile, as expected, but remains largely in line with net income. With an average cash conversion of 105% since 2013, L’Oréal consistently generates slightly more cash than its net income.
However, for acquisition-heavy companies like L’Oréal, considering acquisition-related cash outflows is helpful for understanding how they allocate capital.
Adjusting for acquisitions, free cash flow remains somewhat unaffected as most acquisitions have been relatively minor, though adjusted free cash flow was notably lower than net income in 2023 due to the substantial Aesop acquisition. Cash conversion is still impressive at 90%.
L’Oréal’s Return on Invested Capital (ROIC) is impressive, consistently exceeding 20%, even when including goodwill—a large portion of the company’s invested capital given its acquisition-heavy strategy.
This high ROIC demonstrates L’Oréal’s ability to generate returns above its cost of capital, underlining its competitive strengths.
As of December 31, 2023, L’Oréal’s balance sheet is solid. It holds €4.3 billion in cash and equivalents against €8.7 billion in debt, of which €6.1 billion is long-term. This equates to a net debt-to-free cash flow ratio of about 1.4, indicating that the company could pay down its debt within 1.4 years using free cash flow and existing cash alone. Interest expenses are very manageable, with a 36x interest coverage ratio in 2023.
Overall, L’Oréal’s fundamentals are strong, with the only downside being its limited revenue growth as it finds itself in a mature phase. Nevertheless, secular trends and acquisitions should continue to drive growth.
Insiders
L’Oréal’s current CEO, Nicolas Hieronimus, is the sixth leader of the over a century-old company. He assumed the role in 2021, but his journey with L’Oréal began in 1987 after graduating. With over 30 years at the company and a key role in developing its skincare business, Nicolas brings extensive experience and appears well-suited for the position.
Interestingly, Nicolas will have to step down in five years when he reaches L’Oréal’s mandatory retirement age of 65, a policy of which the previous CEO was also a victim. Until then, however, he’s at the helm.
Regarding share ownership, L’Oréal doesn’t specify how many shares Nicolas holds personally. However, all employees collectively own 1.89% of the company, and the Bettencourt Meyers family holds nearly 35%, making L’Oréal a family-led company with substantial insider alignment. This strong ownership is reassuring for individual shareholders, as it aligns the interests of insiders with those of shareholders.
Other notable insiders include Deputy CEO Barbara Lavernos, with L’Oréal since 1991; CFO Christophe Babule, with the company since 1988; and COO Antoine Vanlaeys, who joined in 2002. It’s striking how many of L’Oréal’s leadership team have built (almost) their entire careers within the company, a testament to L’Oréal’s internal culture and development.
Risks and Conclusion
To wrap up, let’s consider the specific risks for L’Oréal shareholders and the current valuation of the stock. While all companies face risk, L’Oréal has its own unique challenges.
Key risks for L’Oréal shareholders include:
Maturity and Growth Limitations: L’Oréal is a 115-year-old company generating over €40 billion in annual sales—the company is well-established but also mature. It’s already experienced slower growth in recent years, and the question remains whether L’Oréal can sustain meaningful revenue growth as it has in the past 3-5 years. Consistent and high revenue growth is crucial for a successful investment, as limited revenue growth inherently restricts profit growth. Secular trends and acquisitions, however, should support continued growth.
Digitalization: Digitalization is both an opportunity and a threat for the company. On the positive side, digital is a huge channel, especially among younger consumers, and L’Oréal is investing heavily in its digital presence, indicating the company is doing everything to seize the opportunity. On the other hand, digitalization has led to more competition from smaller, digital-native brands. L’Oréal must stay agile and continuously adapt to evolving consumer needs in this competitive landscape.
Emerging Markets Exposure: L’Oréal’s strong presence in emerging markets is another double-edged sword, offering significant growth potential but also increased risk and volatility. For example, a slowdown in China’s beauty market has contributed to L’Oréal’s underperformance this year. Investors must be prepared for these regions' volatility while remaining aware of the long-term growth potential.
L’Oréal stock is significantly underperforming broader markets in 2024. This was the initial reason why I began investigating the company.
L’Oréal stock today trades at a trailing P/E ratio of 28, while its 5-year average is 38. Additionally, the company trades at a 3.3% free cash flow yield based on 2023 free cash flow, which appears reasonable. However, I’m holding off on buying L’Oréal stock at this point. While an exceptional company, sentiment has become increasingly negative, and the question remains whether L’Oréal can significantly grow revenue in the future. Moreover, I already own LVHM, which means I already have exposure to some overlapping market segments, limiting diversification benefits. I’ll seriously consider purchasing L’Oréal stock if it becomes a no-brainer.
Thank you for reading, and I hope this gave you valuable insights into L’Oréal. Let me know if you own the stock or if you’re considering taking the plunge!
Disclaimer: the information provided is for informational purposes only and should not be considered as financial advice. I am not a financial advisor, and nothing on this platform should be construed as personalized financial advice. All investment decisions should be made based on your own research.
Interesting article, especially on the CAGR part. Do you think L'Oreal's moat is strong enough with more competition coming in the luxury beauty industry?
Great post. Didn't know that about the founding!