Goldman Sachs Maintains Buy Rating on L'Oréal, Optimistic About Q2 Growth Momentum

Overview

Goldman Sachs released a research report maintaining its 'Buy' rating and €435 target price for L'Oréal (OREP.PA). Following a 6.7% increase in underlying same-store sales in Q1, the firm expects L'Oréal's robust momentum to continue into Q2. Despite challenges such as reporting volatility due to IT system upgrades and certain macroeconomic headwinds, the firm projects underlying organic sales growth of 5.8% for Q2. Over the long term, leveraging strengths in hair care and fragrance, L'Oréal is expected to outperform the broader beauty market, with current valuations appearing attractive.

Core views

Growth Drivers and Regional Performance: The report forecasts that L'Oréal's organic sales growth will reach 5.5% in FY2026, surpassing the overall beauty market's roughly 4% growth rate. This outperformance is primarily attributed to the strong momentum of hair care (accounting for 18% of group sales) and fragrance (16%). Although color cosmetics growth remains sluggish, skincare divisions—particularly La Roche-Posay and SkinCeuticals—are showing signs of improvement. Regionally, the U.S. market (25% of sales) demonstrates solid performance, with Nielsen data indicating a 7.0% sales increase over the 12 weeks ending May 16, including 28.1% growth for La Roche-Posay and 12.3% for Paris L'Oréal. Europe also exhibits resilience, posting a 4.8% sales increase in May, outpacing the European beauty market's 3.1% growth. China continues its recovery, with GMV on Tmall/Taobao/Douyin rising 16% in May, largely driven by skincare products. IT Transformation and Financial Impact: 2026 marks a pivotal year for L'Oréal's IT transformation, with plans to complete 60% of the overall upgrade process (nearly 30% completed between 2024 and 2025). While this transition does not impact full-year growth, it introduces quarterly fluctuations in reported figures. The report estimates that IT-related impacts will shave approximately 180 basis points from Q2's reported same-store sales growth, resulting in an estimated 7.6% reported growth versus 5.8% underlying organic growth. Additionally, due to U.S. tariffs, Middle East conflicts, and Kering Beauty integration, the group's first-half profit margin is expected to remain flat year-over-year. Earnings Forecast Adjustments: Based on recent industry trends and currency movements, Goldman Sachs has slightly raised its diluted EPS forecasts for 2026–2028 by about 1%. Currently, its projections for 2026–2028 exceed market consensus by 2–4%.

Analysis framework

Bottom-Up Segment and Regional Breakdown: The firm employs a standard consumer goods analysis framework, beginning with high-frequency data—such as Nielsen retail metrics and e-commerce GMV—to track sales performance across key regions (U.S., Europe, China) and core brands (La Roche-Posay, Kérastase, etc.), thereby validating short-term growth momentum. Volume-Price and Structural Analysis: When projecting overall growth, analysts consider not only total volume but also dissect the contribution of each category—hair care, fragrance, skincare, color cosmetics—to identify hair care and fragrance as current alpha sources. They further distinguish between "reported organic growth" and "underlying organic growth," stripping away one-time base effects caused by IT system changes to reveal genuine operational trends. Hybrid Valuation Model: For pricing, a hybrid approach combining DCF cash flow discounting and multiple-based valuation methods, each accounting for 50% of the assessment. The DCF model assumes a WACC of 7.1% and a terminal growth rate of 2.5%; the multiple method applies a forward P/E ratio of 28x. This dual validation aims to balance long-term intrinsic value with short-term market sentiment.

Methodology notes

• Valuation MethodDCF Cash Flow Discounting

  DCF cash flow discounting model

  Calculates intrinsic value by discounting future free cash flows to their present value. The report sets a weighted average cost of capital (WACC) of 7.1% and a perpetual growth rate of 2.5%, standard parameters for assessing companies with stable long-term growth.

• Valuation MethodPE/PEG valuation

  Price-to-Earnings Multiple Approach

  Estimates stock price by multiplying expected earnings per share by an industry or historical average P/E ratio. For L'Oréal, the report assigns a forward P/E of 28x, reflecting market premium recognition of its status as a high-quality consumer leader.

• Industry/Segment Analysis FrameworkVolume-price decomposition

  Volume-Price Split Analysis

  Breaks down sales growth into volume increases and price/mix changes. Citing Nielsen data, the report notes that U.S. sales volume grew by 9.9%, outpacing overall sales growth, indicating demand-driven expansion rather than simple price hikes.

• Corporate Fundamentals and Financial Framework

  Report Adjustments and Non-GAAP Metrics Analysis

  Distinguishes between 'reported figures' and 'underlying/adjusted data.' Due to IT system transitions affecting shipment rhythms, analysts exclude one-time impacts (180 bps) to help investors discern true organic growth trends and avoid being misled by timing of accounting recognition.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• L'Oréal (OREP.PA)

  Directly covered and recommended asset

  Strengths

  Strong growth in hair care and fragrance; excellent performance of skincare division (La Roche-Posay, SkinCeuticals); robust recovery in U.S. and Chinese markets; powerful brand portfolio mitigating risks associated with single-category exposure.

  Weaknesses

  Slow growth in color cosmetics; short-term reporting volatility due to IT transformation; gross margins pressured by tariffs and geopolitical factors.

  Comparison

  Expected FY26 organic growth of 5.5%, outpacing overall beauty market growth by ~4%; EPS forecast exceeds market consensus by 2–4%.

  Risks

  Slower-than-expected recovery in China; adverse macroeconomic conditions in the U.S.; digital transformation potentially eroding market share; exchange rate volatility; negative impacts of Middle East conflicts and U.S. tariffs on gross margins.

Key data

• Q2 Underlying Organic Sales Growth Forecast+5.8%True business growth after removing IT transformation effects
• Q2 Reported Same-Store Sales Growth Forecast+7.6%Includes 180 bps positive impact from IT phase-in
• FY26 Organic Sales Growth Forecast+5.5%Outpaces overall beauty market growth by about 4%
• Target Price€435.00Based on hybrid DCF and multiple valuation, implying 12.3% upside
• 2026E EPS Forecast€13.97Slightly revised upward by about 1% compared to previous forecast
• Q2 U.S. Market Growth Forecast+6.8%Strong recent sales growth according to Nielsen data

Impact & implications

The report concludes that L'Oréal demonstrates exceptional resilience and growth potential amid current macroeconomic conditions. For investors, the central thesis is that the company successfully offsets weakness in mass-market color cosmetics through premiumization (fragrance, skincare) and product innovation (hair care). Although IT transformation may temporarily introduce noise into financial reports, it does not alter the long-term fundamentals. With a forward P/E ratio of around 25x for 2027, the stock appears attractively valued, especially given its proven compounding growth trajectory and superior market share gains relative to peers.

Risks

• China's market demand recovering slower than anticipated, particularly following changes in cross-border purchasing policies
• U.S. market conditions deteriorating due to macroeconomic headwinds or shifting consumer trends
• Digital transformation reducing barriers to entry, possibly leading to loss of market share for L'Oréal
• Exchange rate fluctuations and uncertainty regarding overall consumption demand in key markets
• Middle East conflicts and U.S. tariffs negatively impacting gross margins

What to watch

• Specific impacts of IT transformation on shipments revealed in the Q2 earnings report on July 29
• Alignment between sell-out and sell-in metrics in the U.S. market
• Continued growth rate of skincare categories in the Chinese market
• Potential €90–100 million impact on second-half EBIT if oil prices remain near $90 per barrel