Yesterday, L'Occitane published good half-year results. Sales were up 25% on the first six months of last year, while operating profit was down 12% following a redoubling of efforts in marketing investments.
Reflecting the premiumization strategy, gross margin of 78% is higher than that of L'Oréal or Estée Lauder. All brands in the portfolio reported sales growth, including the historic L'Occitane en Provence franchise, which still accounts for 55% of consolidated sales.
Sol de Janeiro, in particular, underpinned the overall dynamic. Bought two years ago for $450 million - in retrospect, a superb deal - Sol saw its sales increase by 189% over the half-year, and now accounts for a quarter of consolidated sales.
The Group's sales remain well diversified between the Europe & Middle East, Asia-Pacific and Americas zones. Growth was most pronounced in the Americas, with 64% of additional sales largely due to the success of Sol de Janeiro.
At less than x1.4 sales and x15 profits expected this year, the current valuation seems quite reasonable. The company's listing in Hong Kong and the fact that Reinold Geiger controls three-quarters of the share capital have undoubtedly contributed to this.
In addition, the market did not appreciate the margin squeeze revealed in yesterday's publication - even though the marketing investments behind it are producing encouraging results. This morning, the stock was down 7.5%. Could the "Sol de Janeiro effect" be fading like a bellows, or could the historic brand be returning to declining sales?
For those convinced otherwise, the situation doubles as a potential arbitrage opportunity. While such comments are not binding, last summer Reinold Geiger hinted that he was considering taking the Group private, and that the price of a buyout offer would be no less than HKD 26 per share.