What's new
L’Occitane announced a FY3Q20 （October-December 2019） trading update: total net sales grew 17.9% YoY to EUR579mn （+15.2% at constant currency）， with growth slowing from FY2Q20’s 25.5% （+21.7% at constant currency）。
In FY3Q20, L’Occitane en Provence （LeP） sales growth slowed from FY2Q20’s 10.6% to 8.8% YoY. LimeLife accelerated from FY2Q20’s +10.1% YoY to FY3Q20’s 14.4%. Elemis growth slowed from FY1H20’s 25% to 20% （unaudited）。
Chinese mainland growth rose to 34.0% YoY in FY3Q20, from FY2Q20’s 18.6%, benefiting from a successful Double 11 campaign and festive seasonal offerings. The company’s UK and US segments decelerated, as their main growth driver Elemis took a breather.Japan saw visible impact from a consumption tax hike （the tax climbed from 8% to 10% in October 2019） growing only 3.0% in FY3Q20, compared with FY2Q20’s 11.4% （constant currency growth turned negative to -3.5% YoY）。 The Hong Kong domestic market’s sales downturn was more than offset by strong Macau retail and Asia travel retail - the three area’s combined sales grew 1.8% YoY.
Comments
Despite slower-than-expected Elemis trends, we remain bullish on L’Occitane’s outlook in the Chinese mainland （now its second-largest market） and believe Elemis’ growth could be rejuvenated when it officially enters the Chinese mainland （we estimate FY1Q21 - i.e.April-June 2020）。
Valuation and recommendation
We fine tune our FY20e and FY21e revenue forecasts -0.9% and -1.3% and fine tune our FY20e and FY21e earnings forecasts -2.6% and +0.3% on the slower-than-expected Elemis growth.
We reiterate our OUTPERFORM rating and target price of HK$24.00, based on 26x and 21x FY20e and FY21e P/E. The stock is trading at HK$18.92, implying 21x and 17x FY20e and FY21e P/E. Our TP offers 26.8% upside.
Risks
Slower-than-expected Elemis ramp up; uncertainty of Elemis’ performance in emerging markets including China; forex fluctuations.