Revlon (NYSE:REV) reported 3% growth in revenues to $347 million in Q3, inclusive of its acquisition of certain assets of Bari Cosmetics in July 2012. The overall effect of the acquisition is however minimal. In particular, the U.S. market, that accounts for more than half of Revlon’s sales, grew by 4%. The results were supported by growth in Latin American and Canadian markets where sales grew by about 20% and 11%, respectively. The prevailing situation in the European market cast its shadow on what was otherwise a growth story as sales declined by 14% in Europe, the Middle East and Asia. Color Cosmetics continued to be a major contributor to overall growth, and it makes up 60% of Revlon’s stock value by our estimates.
The company has a highly leveraged balance sheet 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 beauty product companies such as L’Oreal (NYSE:PG), Avon Products (NYSE:AVP) and Estee Lauder (NYSE:EL).
Debt Burden And Small Marketing Budget Limit Reach
With annual sales of close to $1.4 billion, Revlon competes with beauty product giants like L’Oreal and Estee Lauder, which generate $25 billion and $10 billion respectively in annual sales globally. The beauty company suffers from weak cash flows and high debt burden (in excess of $1.1 billion) which puts it in a highly unenviable position while competing against L’Oreal and Estée Lauder that have stronger marketing and R&D budgets to expand market share.
This has also constrained Revlon’s ability to expand its presence in markets such as EMEA (Europe, Middle East and Africa) and Asia Pacific, which have been the primary growth drivers for L’Oreal and Estee Lauder over the past few quarters. Last quarter, Revlon’s sales in EMEA region declined 14% and though Asia-Pacific sales increased by 5% on strong sales of color cosmetics in Japan, the slowdown in the rest of the region, particularly China, remains a concern.
Needs To Improve Marketing & R&D Budget, But Hands Are 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 Revlon.