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Investment Overview for Revlon (NYSE:REV)
- Revlon's Market Share of Global Color Cosmetic Market: We currently forecast Revlon to grow in line with the overall color cosmetics market with its share of the color cosmetics market remaining flat by the end of our forecast period. There could be a 15% upside to the Trefis price estimate if the market share increases to 3.5%, and a 30% upside if the market share were to rise to the 2005-06 levels of 3.9% by the end of our forecast period.
- Revlon's Color Cosmetics EBITDA Margin: We currently forecast Revlon's Color Cosmetics EBITDA Margin to stay flat at current levels of 20.4% in 2012. There could be 5% downside to Trefis price estimate if the margins were to decrease to 20%.
- Revlon's Market Share of Global Hair Care Market: We currently forecast Revlon's Market Share to remain flat at around 0.3% over 2011-19. There could be a 15% upside to Trefis price estimate if the market share for Revlon's hair care were to rise to the 2005 levels of 0.5% over our forecast horizon.
Revlon manufactures color cosmetics, women’s hair color, skin care, fragrances, antiperspirants & 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 fewer but larger retailers constitute a significant portion of Revlon's sales, with Wal-Mart making up about 24% of the company'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 55% of Revlon's net sales come from the US, with Europe contributing 12% and Asia-Pacific and Latin America contributing the remaining 17% and 15%, respectively.
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
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.
Revlon’s business is characterized by its heavy indebtedness of over $1.1 billion with just $1.4 billion in annual sales. 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 2007-09 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.
Relatively low marketing & R&D budget
On the basis of revenue, Revlon ($1.3 billion) is much smaller than L'Oreal (at $24 billion), Avon ($10.6 billion) and Estee Lauder ($7.9 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 2009, 2010, and 2011 the company spent $23.9 million, $24.0 million and $23.8 million on research and development activities, which is low compared to that of its competitors like L'Oreal and Estee Lauder.
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 & 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 2008-09 has led to consumers shifting to the upper price band of mass products from the prestige segments. The ‘masstige’ products are priced at this price range.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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