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Investment Overview for Revlon (NYSE:REV)
WHAT HAS CHANGED
Revlon delivered a healthy 2014 primarily after integrating The Colomer Group (TCG), into its operations. With the TCG consolidation, Revlon has diversified its product portfolio with the addition of professional cosmetics products. The robust growth from the Professional segment masked the weakness in Revlon's own Consumer line of products. However, Revlon’s performance was significantly thwarted due to the weak currencies in international markets, such as South Africa, Australia, Canada, and Argentina.
- The Colomer Group (TCG) acquisition diversified Revlon’s portfolio
- Revlon’s Professional segment witnessed impressive growth in 2014, primarily due to the acquisition of TCG in later half of 2013. Professional segment net sales in 2014 were $502.7 million, reflecting an 8% growth in Pro Forma net sales over 2013. Professional segment profit in 2014 was $104.8 million and it grew by 49.5% year-on-year, on a constant currency basis.
- TCG helped diversify Revlon’s product mix. Erstwhile, Revlon had primarily been a specialty color cosmetics manufacturer, deriving more than 60% of revenues from Color Cosmetics. The acquisition of TCG diversified Revlon’s portfolio of products by adding a mix of Professional Products.
- Revlon expanded its fragrance portfolio
- In April 2015, Revlon acquired U.K. based fragrance company CBBeauty (CBB) and its U.K. distributor, SAS & Company. CBB products are available in over 80 countries, and the company provides sales and strategic services to select celebrity and fashion fragrance brands. SAS & Company distributes and markets perfumes and beauty products from leading brands such as Burberry, Carven, One Direction, and Rihanna.
- In October, Revlon launched its new perfume, Love Is On, in the TFWA show in Cannes (also known as, The Duty Free & Travel Retail Global Summit). This had been Revlon's first fragrance launch in over a decade.
- After its acquisitions in the fragrance segment, Revlon is steadily building a stronger fragrance portfolio. Also, Revlon is targeting a new customer base in the travel retail segment for achieving significant growth. Travel retail, which is mostly dominated by premium cosmetics, will help Revlon find a new set of customers who are looking for affordable makeup products through this channel.
- In its Q2 2015 earnings call, Revlon's management spoke about the potential for growth in the fragrance business, which is currently in a fragmented state and lacks fierce competition. This provides Revlon with the opportunity for licensing smaller brands and developing those into bigger brands.
- Revlon's brand support activities
- In the first nine months of 2015, the company has spent almost $36 million more in brand support versus 2014. Revlon is investing in channels such as media, more store activation, and promotional activities in the stores. Revlon is also trying to expand its geographical presence where it is progressing aggressively post its acquisition of The Colomer Group (TCG), and currently post CBB, it is also expanding in the U.K. with respect to fragrance labels. The company is launching new brands in regions like Australia and Japan. However, the majority of the investments had been completed through the third quarter, and investments are expected to be reduced in Q4.
- Currency headwinds dampened Revlon's performance
- In 2014, Revlon’s net sales for international operations declined by 2.2% to $919.1 million, mainly due to the international currency depreciation with respect to the U.S. dollar. International net sales increased by 4% on a constant currency basis.
- TCG increased Revlon’s exposure to international markets. For 2013, the company derived approximately 56% of its revenues from the U.S. and the remaining 44% from other geographies (reported revenues). This ratio changed to 53% for U.S. and 47% from international geographies in 2014, owing to the fact that TCG generates more than 50% of its sales from the EMEA (Europe, the Middle East, and Africa) region.
- Also, since TCG is growing at a higher pace than the rest of Revlon's business, the revenue distribution between the U.S. and International markets is expected to normalize close to the half-way point in the future. Hence, even though TCG helped Revlon in geographic and portfolio expansion, the increased exposure to foreign currency is subjecting the company to temporary problems.
- Revlon's Market Share of Global Color Cosmetic Market: Revlon's market share expanded from 2.9% in 2012 to 3.4% in 2014, driven by a bounce back in retail gross margins. We currently forecast Revlon's share in the global color cosmetics market to increase to 3.6% over our review period. There could be a 20% upside to the Trefis price estimate if the market share reaches 4.5% by the end of our review period.
- Revlon's Color Cosmetics EBITDA Margin: EBITDA margin for Revlon declined from 21.6% in 2012 to 19.2% in 2013, weighed down by the acquisition of TCG in the fourth quarter. The EBITDA margin increased slightly to 19.5% by 2014. Going forward, we expect margins to remain under pressure as sales from the lower margin TCG business gain traction and outpace Revlon's core business growth. We currently forecast Revlon's Color Cosmetics EBITDA Margin to increase marginally to reach 20% by the end of our forecast period, below historical margin levels of over 22%. There could be 30% upside to the Trefis price estimate if the margins were to expand back to historical levels of around 26% by the end of our forecast period.
- Revlon's Market Share of Global Hair Care Market: Revlon's hair care market share expanded from 0.44% in 2012 to 0.66% in 2013, boosted by an increase in revenues as well as an expansion in retail gross margins. The share increased to 1.3% in 2014, resulting from the full year addition of TCG's hair care product sales. Post 2014, we expect Revlon's hair care market share to increase marginally and reach close to 1.5% by the end of our forecast period. There could be around 20% upside to the Trefis price estimate if the market share for Revlon's hair care were to rise to 2% over our forecast horizon.
Revlon manufactures color cosmetics, women’s hair color, skin care, fragrances, antiperspirants and deodorants, and beauty tools. Revlon sells predominantly through large mass retailers and chain drug stores such as Wal-Mart, Target, Sears, Walgreens, Rite Aid, CVS, and Longs Drug Stores in the US; A.S. Watson & Co. in Europe and Asia-Pacific, and Boots in the UK. These few but larger retailers constitute a significant portion of Revlon's sales, with Wal-Mart making up approximately 25% of Revlon's net sales.
The major brands include: Revlon (for color cosmetics, women’s hair color, and beauty tools), Almay (for hypo-allergenic, fragrance free cosmetics), Charlie and Jean Nate (for Fragrances), Mitchum (for antiperspirants /deodorants) and Ultima II and Gatineau (for skin care).
Despite a global presence, about 53% of Revlon's net sales come from the U.S., with the rest coming from international regions including Europe, Asia-Pacific, and Latin America.
Revlon has significant outstanding debt, with about 50% of the debt being tied to floating interest rates. Revlon competes with bigger players such as L’Oreal, Avon, and Estee Lauder, among others.
Second largest market share in color cosmetic in US
The US is a major market for color cosmetics, amounting to over 18% of the global market size and Revlon commands over 20% share of the US market in color cosmetics.
Colomer acquisition adds weight to product diversification
TCG adds close to $530 million in revenues to Revlon's core business, taking the total revenues to $1.9 billion in 2014, reflecting a 1.7% year on year growth as compared to pro forma revenues of 2013. For 2014, the constant currency growth rate was 4.7% on a year-on-year basis. With a product portfolio that is heavy on hair care products, TCG should be able to create product diversification. Additionally, the acquisition also adds value to its skin care business which is witnessing the strongest growth across all segments globally. TCG also adds geographic diversity to Revlon's business, with the company deriving close to 50% of its revenues from the EMEA market.
Revlon’s business is characterized by its heavy indebtedness of over $1.87 billion with just $1.9 billion in annual sales in 2014. Such high levels of indebtedness, make the earnings highly volatile and vulnerable to market fluctuations and interest rates. Apart from high interest expenses, this leaves it with much less money to spend on marketing and advertising.
Revlon progressively reduced its debt burden from $1.4 billion over 2007-2009, which led to limited investments in advertising, R&D, and capacity expansion, thereby hitting its market share. However, Revlon has increased its advertising spend over the past few quarters hoping that if margins and pricing hold up, the company can use these additional resources to pay down debt.
Taking advantage of the favorable fund-raising environment, Revlon has also refinanced its outstanding $792 million loan in May 2011 with an $800 million loan, while reducing its effective interest rate and extending its maturity (to Nov 2017 from Mar 2015). In June 2011, it also refinanced its existing revolving credit facility that was set to expire in March 2014, pushing its new $140 million revolving credit facility to June 2016 while securing better financing terms from the banks underwriting these loans.
Its recent acquisition of The Colomer Group added about $700 million in debt onto Revlon's balance sheet and inflated its total outstanding debt to $1.9 billion. We expect the company's debt levels to pare down to $500 million by the end of our forecast period, in accordance with its debt payment schedule. There would be a considerable downside risk to the company's stock if the company takes on additional debt, or is not able to pay its debt on time.
Relatively low marketing & R&D budget
On the basis of revenue, Revlon ($1.9 billion revenues) is much smaller than L'Oreal (over $30 billion), Avon (~$9 billion) and Estee Lauder (~$11 billion), therefore Revlon has less money to spend on marketing, an extremely important factor for success in the cosmetics industry.
A heavy debt burden with moderately growing sales also constricts Revlon's ability to invest in R&D, which is crucial for an industry thriving on innovation. In 2012, 2013, and 2014, the company spent $24.2 million, $26.9 million, and $31.6 million on research and development activities, which is low compared to that of its competitors like L'Oreal and Estee Lauder. L'Oreal's R&D budget was over $1 billion in 2014. Estee Lauder's research and development costs totaled $157.9 million in fiscal 2014 (ended in June 2014)
Booming skin care segment on account of anti-aging creams
Anti-aging creams and anti-cellulite skin care products are in high demand among an aging population in the developed countries notably Japan (with the oldest demographic), the US, and Western Europe.
Introduction of men specific product range
"Beauty care products for men" is the latest niche targeted by beauty and personal care companies globally. In evolved markets like the US and Western Europe, the introduction and extension of men’s product lines is a major source of revenue growth.
Increasing focus on natural products
There is a growing demand for natural / organic products in most developed countries, a trend led by the evolved markets of the US and Western Europe. There is an increased preference for less synthetic, eco-friendly, and natural products and packaging.
Rise of the 'masstige' product segment
There is a growing trend towards the so-called 'masstige' products which are premium brands sold at lower prices through mass distribution.
- To reach greater distribution, prestige and premium brands are taking the route of mass distribution.
- The mass products and smaller players are catching up in terms of innovation and product quality, which prevents the big brands from charging a significant premium.
- The recessionary macroeconomic outlook over 2008-2009 has led to consumers shifting to the upper price band of mass products from the prestige segments. The ‘masstige’ products are priced in this price range.
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