FY1H22 earnings beat our forecast
　　L’Occitane reported its FY1H22 (April 2021-September 2021) results: FY1H22 revenue increased 12.9% YoY to EUR696mn (excluding EUR28.6mn sales from L’Occitane in US during its deconsolidation period from April to August 2021). We have discussed the sales performance in previous trading update1. Net profit attributable to shareholders came in at EUR60mn, up 298% YoY from EUR15mn in FY1H21.
　　We attribute FY1H22 outperformance to visible leverage effect. OPM increased from 5.2% in FY1H21 to 11.3% in FY1H22, supported by: 1) an 11.5ppt uplift from leverage effect (+8ppt from distribution expenses, +1.5ppt from marketing expenses, and +1.8ppt from G&A expenses); and 2) a EUR12.8mn one-off benefit from US deconsolidation (+1.1ppt).However, the results were dragged by: 1) an absence of COVID-19 subsidies (-3ppt); 4) increasing marketing expenses for ELEMIS (-3ppt); and 5) unfavorable channel mix (-1.1ppt). GPM declined from 82.1% in FY1H21 to 79.7% in FY1H22 due to US deconsolidation (-1.3ppt) and channel mix (-0.7ppt).
　　Trends to watch
　　Management said during the earnings call that: 1) OPM by brand was 12.6% for LeP (vs. 4.3% in FY1H21) driven by operating leverage, 17.3% for ELEMIS (vs. 30.5% in FY1H21) due to increasing marketing expenses (from 14% in FY1H21 to 23% in FY1H22) and distribution expenses incurred due to an expanding footprint (new branded stores in China, Middle East and Southeast Asia in FY1H22), -5.5% for Limelife and -2.2% for other brands; 2) L’Occitane was the No.1 body care and hand care brand by sales during Chinese Singles’ Day shopping festival in November, and that sales of LeP and ELMEIS rose 42% and 8% compared with 2019 during Black Friday; and 3) FY22 guidance was for mid-teens sales growth (incl. consolidation of Sol de Janeiro since FY4Q22), 15%+ overall OPM and 20%+ for ELEMIS from previous 25%+ due to increasing marketing and expansion investments.
　　Management said there would be increased investment in ELEMIS, related to marketing and capex for stores and channels (entering Japan, Chinese Taiwan and Korea in FY2H22). The company remains open to accretive MA opportunities (i.e. OPM benchmark around 10-20%) after the latest acquisition of Sol de Janeiro2 in November 2021. We believe these actions are strategically important to L’Occitane’s evolution from a model brand company into a geographic balanced multi-brand group.
　　Financials and valuation
　　We leave our FY22 revenue forecast intact and lift our FY22 net profit forecast 3% given margin improvements. We leave our FY23 revenue and net profit forecasts intact, given trends remain on track. We maintain our OUTPERFORM rating and target price of HK$36 (offering 20% upside), based on 24x FY23e P/E. The stock is trading at HK$30.05, implying 19x FY23e P/E.
　　Risks
　　Slower-than-expected Elemis ramp up; COVID worsening; forex fluctuations.