1HFY24 profit performance was slightly lower than our expectations
L'Occitane announced 1HFY24 (April 2023 to September 2023) results: revenue increased 24.9% year-on-year at a fixed exchange rate to 1.07 billion euros. We have already done relevant analysis in our previous performance overview. Net profit attributable to shareholders was €33.91 million, down 45% year-on-year from €61.83 million in 1HFY23. 1HFY24's profit performance was slightly lower than our expectations. 1) The gross margin was 78.3%, and 1HFY23 was 80.2%, mainly due to changes in channels and brand portfolios (ELEMIS and SDJ had lower gross margins for wholesale sales). 2) The operating profit margin fell from 9.7% of 1HFY23 to 7.2% (excluding one-time effects, adjusted operating margin fell from 11.5% to 8.4%), mainly affected by strategic marketing investment (-7 percentage points), one-time project and freight time difference effects (-2 percentage points), cost increases, and inflation (-1.6 percentage points). 3) Financial costs rose to 26.39 million euros, mainly due to increased interest expenses.
Development trends
Management stated at the performance meeting: 1) Operating profit margins for each brand: Provence L'Occitane (LeP) is 0.1%, 1HFY23 is 9.1%; adjusted operating margin is 2.2%), Sol de Janeiro (SDJ) is 28.9% (1HFY23 is 28.4%), ELEMIS is 6.5% (1HFY23 is 10.8%), and other brands are -9.2% (1HFY23 is -7.3%). For LeP, marketing expenses increased from 16% of 1HFY23 to 22% of 1HFY24; 2) Holiday performance: During the Double Eleven Shopping Festival, in a competitive atmosphere dominated by discounts and promotions, the company's total brand sales increased 6% year over year. Tmall's revenue fell 7% year over year, but the volume of the new Douyin channel partially made up for the decline in traditional e-commerce channels, accounting for 15% of total revenue. In the US, Black Friday sales increased 2% year over year.
3) Brand strategy: Strategic investments in social media and marketing campaigns have increased search traffic and exposure to key products from key brands. 4) The FY24 guidelines remain basically unchanged: revenue increased by about 17% year-on-year (revenue of 25-2.6 billion euros), and operating profit margin of about 12%, mainly due to an increase in marketing expenses (FY24 marketing expenses ratio companies expect to reach 20%, falling back to 15-17% as revenue increases).
Profit forecasting and valuation
We kept our FY24 and FY25 revenue forecasts unchanged and lowered our FY24 and FY25 net profit forecasts by 10% and 3% to €226 million and €314 million, respectively, to take into account increased marketing expenses. Although the net profit forecast was lowered, considering the visibility of medium-term growth due to enhanced marketing, we maintained an outperforming industry rating and target price of HK$28 (55% upside), based on a 22x FY24 price-earnings ratio. The current stock price is HK$18.12, corresponding to 14.3 times and 9.5 times FY24 and FY25 price-earnings ratios.
risks
The volume of ELEMIS fell short of expectations; macroeconomic adverse factors such as the epidemic; risk of exchange rate fluctuations.