L’Oréal/Aesop: deal tags premium beauty as absolutely fabulous

Knights of old risked life and limb for the promise of eternal youth. The embattled shoppers of today are willing to pay up for soaps and unguents that promise them young-looking skin. Premium beauty is one of the fastest-growing segments of the consumer goods market. L’Oréal’s $2.5bn acquisition of luxury beauty brand Aesop is right on trend. 

For all the glitz and glamour of this sector, L’Oréal is not overpaying for the Australian brand. The transaction values Aesop at 4.5 times last year’s sales, and 23.4 times ebitda. That is a pretty penny, to be sure. But, to paraphrase the L’Oréal strapline, Aesop should be worth it. 

The brand has increased sales by almost 20 per cent a year since 2016, according to Bernstein Research. That is an impressive rate. And Aesop’s rosiest patch may be ahead. Its focus on clean, sustainable ingredients is beloved by millennials, its first shop in China has been doing brisk trade, and it now has L’Oréal’s might behind it. Aesop’s new owner thinks it can double sales, from the current €502mn to a billion or above.

Meanwhile, it turns out that pricey soaps — typically costing about £30 for a 500ml bottle — are not all that expensive to make. Aesop’s gross margin is a staggering 87.1 per cent, higher even than L’Oréal itself. 

On these numbers, the transaction does not look out of whack with valuations in the sector. L’Oréal is buying fast-growing and profitable Aesop at a discount to its own trailing multiple of 5.55 times sales, and broadly in line with that of chocolatier Lindt. Lindt, however, is only increasing revenues in the high single digits and has much lower gross margins.

The Aesop acquisition, touted as L’Oréal’s largest to date, adds just over 1 per cent to the beauty behemoth’s sales. It is hardly going to be transformational. But it should further strengthen L’Oréal’s record as a canny spotter of high-potential brands — a key ingredient of its own, luxurious, valuation.