Focus on Brand Building Could Benefit Revlon

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Revlon

Revlon (NYSE:REV) manufactures color cosmetics, women’s hair color, skin care, fragrances, antiperspirants & deodorants and beauty tools, and sells primarily through large mass retailers and chain drug stores. It competes with consumer goods and beauty product companies like Procter & Gamble (NYSE:PG), Unilever (NYSE:UL), Colgate Palmolive (NYSE:CL), L’Oreal (PINK:LRLCY), and Estee Lauder (NYSE:EL).

Revlon’s global market share in the make-up business has consistently declined in the past few years, from 4% in 2009 to 3% in 2010, due to a variety of factors – a) increasing competition from new product launches, b) rising marketing expenses by the cosmetic industry, and c) heavy debt.

Revlon is making efforts to remedy the situation by maintaining its debt levels and leveraging its reputation as one of the leading players of color cosmetics – which should help boost its market share. However, limited presence in emerging markets and smaller R&D and advertising budgets compared to that of peers could weigh on the company.

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We currently maintain a $14.88 price estimate for Revlon’s stock, about 5% below market price.

Revlon’s Make-Up Share Should Stabilize in the Coming Years

Revlon progressively lowered its debt levels over 2006-09 by directing cash flows towards debt reduction. As a result, advertising and R&D spending declined and market share took a hit. After Revlon maintained its debt levels over 2009-10, we expect more cash flow going forward to be directed towards advertising and R&D in order to regain lost market share.

Revlon increased its advertising expense by nearly $34 million in 2010 to support the company’s brands but partly offset this by realizing over $19 million in savings on cost of goods sold, thereby improving gross margins (see: Revlon Sustains Margins In Another Tough Year).

While Revlon still draws almost 55% of its total sales from the United States, the U.S. market has shown a decline of 4% and 3% in 2009 and 2010, respectively. In comparison, Revlon’s sales in the Asia-Pacific region grew at over 11% in 2010. Since Revlon’s competitors have wider presence outside the U.S., they can protect themselves from an economic downturn but also gain from significant growth in emerging markets.

Revlon has to expand its R&D, marketing and advertising budgets to match competitors like P&G, L’Oreal and Unilever in order to recover its lost market share. We believe that Revlon can see upside if it spends additional resources on initiatives to maintain its brand value, especially in color cosmetics where it possesses a strong market presence and has a good chance of defending its market share (see: Despite Debt, Revlon Should Spend on Branding Color Cosmetics).

Given the significance of the color cosmetics business to Revlon’s overall operations, we pose the following question:

What Percent of Revlon’s Stock Value Comes from Color Cosmetics?

A) 35%

B) 48%

C) 64%

D) 82%

See our full analysis and $14.88 price estimate for Revlon stock