Revlon (NYSE:REV) is due to announce its Q1 results Thursday morning. In 2011, Revlon sales grew at 4.5% supported by the acquisition of Sinful Colors, which also helped reverse the declining sales in its largest U.S. market over the last few years. As a result, its sales finally crossed the pre-recession 2007 levels. It also improved its capital structure by refinancing and reducing debt.
Revlon continues to be heavily levered with a debt load in excess of $1.1 billion, with just $1.4 billion in annual sales. This quarter we will watch for continued improvement in sales, particularly color cosmetics and the U.S. market. The company has also managed to sustain its margins at healthy levels over the last three years and we expect the trend to continue. Revlon competes with other consumer goods and beauty product companies like Procter & Gamble (NYSE:PG), Unilever(NYSE:UL), Colgate-Palmolive (NYSE:CL) and Estee Lauder (NYSE:EL).
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Revenue Outlook Improves in 2011
In 2011, Revlon’s sales grew by 4%-5% with improved sales in the U.S., which makes up over 55% of Revlon’s sales. The growth was primarily driven by the March 2011 acquisition of Sinful Colors as well as improved sales of Almay color cosmetics and Revlon Color Silk, partially offset by lower sales of Revlon color cosmetics and beauty tools and the losses from Venezuela’s June fire.
The U.S. sales grew 4% in 2011, and Asia-Pacific (1/6th of Revlon’s sales in 2011) continued to be its fastest growing market, growing in double digits. The company’s EBITDA margins also stayed healthy, declining only slightly to 20.5%, from 21% in prior years.
Increasing Marketing Budget To Defend Market Share
With lean cash flows, the company’s marketing budget is also small compared to its giant competitors like L’Oreal and Estee Lauder. The marketing spend further weakened during the 2007-09 recession with focus on retiring some debt, leading to market share losses for Revlon. However, the company has now increased its advertising spend over the past few quarters to improve sales and defend market share, hoping to improve sales and margins to generate additional resources to pay down debt.
We value Revlon stock with a $17 price estimate, almost in-line with the current price.