FY24 performance falls short of our expectations
L'Occitane announced FY24 (April 2023 to March 2024) results: operating income fixed exchange rate (CER) increased 24.1% year over year to 2.54 billion euros. Net profit attributable to mother was €93.89 million, a year-on-year decrease of 18%. Results fell short of our expectations, mainly due to lower-than-expected sales growth for ELEMIS and Sol de Janeiro (SDJ), the impact of one-time impairment charges, interest charges, and increases in effective tax rates.
Development trends
At the performance meeting, management discussed:
1) Revenue by brand: L'Occitane en Provence (LeP) CER increased 2.7% year over year, ELEMIS CER increased 1.3% year over year, and SDJ CER increased 167.1% year over year. 2) Operating margin (OPM) by brand: LeP fell from 14.6% of FY23 to 9.5% (adjusted OPM was 10.5%); SDJ was 23.6% (FY23 was 24.6%); ELEMIS was 7.8% (FY23 was 20.2%), and other brands were -37.3% (FY23 was -45.3%). 3) Year-over-year growth trend of CER sales this quarter to date (i.e., early April 2024 to date): LeP grew slightly, ELEMIS grew in double digits, and SDJ grew strongly in double digits. 4) FY25 and Interim Results Guidelines. 5) Privatization:
Since the controlling shareholder is advancing the company's privatization plan, FY24 is not declaring dividends. The process for accepting offers has not yet been opened. The company and controlling shareholders will publish a comprehensive document (i.e., an offer document) on or before July 2, containing the timeline and process for acceptance of the offer. See main text for details.
Profit forecasting and valuation
As ELEMIS and SDJ revenue grew slower than we expected, and the company lowered its financial guidance, we lowered our FY25 revenue and net profit forecasts by 4% and 17%, respectively. We introduced FY26 revenue and net profit forecasts of 3.3 billion euros and 345 million euros respectively, which are higher than the market's agreed expectations of 4% and 4%, respectively, mainly considering that operating leverage will benefit from the increased share of SDJ revenue for brands with higher profit margins. We maintained our outperforming industry rating and raised our target price by 21% to HK$34.00 (2.3% upside compared to the current share price), corresponding to 16.6 times the FY26e price-earnings ratio. We switched our valuation base to FY26 in view of the company's clear medium-term growth prospects. The privatization offer purchase price was HK$34.00. The current stock price is HK$33.25, corresponding to FY25e and FY26e price-earnings ratios of 20.4 times and 16.2 times.
risks
ELEMIS volume falls short of expectations; macro adverse factors; risk of exchange rate fluctuations; possibility of privatization.