Revlon (NYSE:REV) recently announced its first quarter results with weakened sales. In the U.S., which is its largest market, sales declined 1% compared to the same period last year despite the acquisition of Sinful Colors in March 2011. Sales outside the U.S. were flat with unfavorable currency fluctuations. The company has a highly leveraged capital structure and much lower annual turnover compared to its competitors, and this constrains it from spending more on R&D and marketing, leading to an adverse impact on its market share. Revlon competes with other beauty product companies such as L’Oreal (NYSE:PG), Avon Products (NYSE:AVP) and Estee Lauder (NYSE:EL).
U.S. Sales Decline, A Cause For Worry
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Revlon’s sales in the U.S. declined this quarter in contrast to a 4% sales growth in fiscal 2011. The reason for the decline was lower sales for Almay Color Cosmetics, which saw an improving sales trend until last year. The revenue decline despite the acquisition of Sinful Colors in March-mid last year does not indicate a healthy trend. Revlon’s beauty tools sales have already been sliding over the past few quarters. Even though Revlon has managed to maintain sales for Revlon color cosmetics and hair color, there wasn’t much growth in these categories. The U.S. accounts for more than half of Revlon’s sales.
Outside the U.S., the sales volume was almost flat with unfavorable currency fluctuations leading to a decline in net sales in Europe, Middle East & Africa, offset by some improvements in Latin America and Asia-Pacific. European sales suffered with lower fragrance sales while Latin American sales were depressed due to incomplete business resumption in Venezuela since the June 2011 fire.
Needs To Improve Marketing & R&D Budget, But Hands Tied
With lean cash flows, the company’s marketing and R&D budget is very low compared to its bigger competitors L’Oreal and Estee Lauder. Even though the company has increased its advertising spend over the past few quarters, the decline in sales warrants more resources and better strategy to defend market share. Despite efforts to improve its capital structure last year through some debt refinancing and retirement, the company is still heavily levered with debt in excess of $1.1 billion, with just $1.4 billion in annual sales. This continues to constrain Revlon’s investments to defend its market share.
We are in the process of revising our $17 price estimate for the Revlon stock.