Given its better prospects, we believe that L’Oréal stock (OTCMKTS: LRLCY) is a better pick than its peer Ulta Beauty stock (NASDAQ: ULTA). LRLCY stock trades at a higher valuation multiple of 5.2x trailing revenues, versus 1.6x for ULTA stock. Investors have assigned a higher valuation multiple for L’Oréal, given its superior profitability and financial position, and we think the stock will maintain this valuation gap in the coming years. There is more to the comparison, and in the sections below, we discuss why we think LRLCY will outperform ULTA in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation.
1. ULTA Stock Has Outperformed L’Oréal Lately
LRLCY stock has shown gains of 15% from levels of $75 in early January 2021 to over $85 now, vs. around 30% gains for ULTA stock from levels of $285 to $370, over this period. In comparison, the S&P500 has risen 55% over this roughly four-year period.
However, the changes in these stocks have been far from consistent. Returns for LRLCY stock were 27% in 2021, -24% in 2022, and 41% in 2023, while those for ULTA were 44%, 14%, and 4%, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating LRLCY underperformed the S&P in 2022 while ULTA underperformed the S&P in 2023.
In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector including PG, and EL, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
2. Ulta’s Revenue Growth Is Better
L’Oréal has seen its revenue rise at an average annual rate of 9.6% from $33.9 billion in 2020 to $44.6 billion in 2023. On the other hand, Ulta saw its top line expand at an average rate of 22.8% from $6.2 billion to $11.2 billion over the same period.
L’Oréal’s revenue growth has been driven by increased fragrances and skin care product sales. While skin care saw a 65% rise in sales between 2020 and 2023, fragrance sales were up 60%. Lately, the company is seeing growth in both North America and Europe, driven by its mass market range and dermatological products.
Ulta Beauty’s revenue growth is being led by retail price increases and new products. Ulta also offers beauty salons in all of its stores. While the sales growth has been solid between 2020 and 2023, it has slowed lately, with its six-month sales for the period ending July 2024 up a mere 2%. This can be attributed to a weak consumer sentiment and a shift toward value proposition amid the higher inflationary environment. Moreover, there is an increased competition, especially in the prestige beauty space.
Looking forward, L’Oréal’s sales are expected to rise at a high single-digit average annual growth rate over the next three years, while that for Ulta is expected to be low single-digits.
3. L’Oréal Is More Profitable
L’Oréal’s operating margin increased slightly from 19.1% in 2020 to 19.8% in 2023, while Ulta’s operating margin expanded from 6% to 15% over this period. Ulta’s gross margins have been adversely impacted lately amid slowing sales growth, which has resulted in increased promotional spending for the company.
4. L’Oréal Also Comes With Lower Financial Risk
Looking at financial risk, L’Oréal has an edge over Ulta. Its 4% debt as a percentage of equity is lower than 11% for Ulta. Furthermore, its 8.3% cash as a percentage of assets is slightly higher than 7.2% for Ulta, implying that L’Oréal has a better debt position, and it has more cash cushion.
5. The Net of It All
We see that L’Oréal is more profitable and has a better financial position, while Ulta has seen better revenue growth. Now, looking at prospects, we believe L’Oréal is the better choice of the two. At its current levels, L’Oréal stock is trading at 5.2x revenues, versus the 6.0x average P/S ratio seen over the last three years. In comparison, Ulta stock trades at 1.6x revenues, versus its average P/S ratio of 2.8x seen over the last three years. Although Ulta’s current P/S ratio is much lower than its historical average, this decline seems justified, given the significant decline in sales growth over the recent quarters. Furthermore, the company’s profitability has also declined lately. Overall, we think LRLCY is likely to offer better returns than ULTA in the next three years.
While LRLCY may outperform ULTA in the next three years, it is helpful to see how Ulta Beauty’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
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