Revlon (NYSE:REV) is set to report its Q4 earnings results on February 5, and we will be interested in seeing how the Revlon and Almay brands have performed. During the first nine months of the year, the company’s revenue growth slowed down to 1.3% year-over-year, as the company experienced sluggishness in Continental Europe, and persistent consumer uncertainties in several countries outside of Europe, including China and Australia. However, the impact was mitigated by growth in Latin American and Canadian markets where sales grew by about 20% and 11% respectively in the third quarter. The United States accounts for about 55% of Revlon’s total sales, and we expect sales from the region to define the trend for the fourth quarter earnings.
After a lackluster performance in Q3, the company has been trying to improve its product mix. Revlon has a highly leveraged balance sheet and much lower annual turnover compared to its competitors. This constrains it from spending more on R&D and marketing, leading to an adverse impact on its product portfolio and market share. Revlon competes with other beauty product companies such as L’Oreal (NYSE:PG), Avon Products(NYSE:AVP) and Estee Lauder (NYSE:EL).
Color Cosmetics account for about 65% of Revlon’s total sales. Sales from the segment have grown at about 5% during the first nine months of the year, mostly as a result of new product introductions in the PhotoReady franchise. This segment was the driving factor behind sales growth in the U.S., which helped the company offset the lower net sales of Almay color cosmetics and Revlon ColorSilk in the region. We will look out for the performance of the products from this segment and their impact on net sales. The company has been experimenting with customer engagement, using social media platforms such as Twitter and YouTube, for digital advertising. We are keen to know the impact of these initiatives as well as the company’s strategy in leveraging social media.
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Increasing Marketing Budget To Defend Market Share
With lean cash flows, the company’s marketing budget is small compared to its bigger competitors L’Oreal and Estee Lauder. The beauty company also suffers from weak cash flows and high debt burden (debt in excess of $1.1 billion with just $1.4 billion in annual sales), which puts puts competitors L’Oreal and Estee Lauder in an enviable position since they have stronger marketing and R&D budgets to expand market share. We will be looking for any hints on the company’s strategy in the domain.
Improving Margins To Fund Expansion Plans
Revlon has positive cash flows, enabling it to make interest payments. It has also managed to reduce interest rates and extend maturities on its substantial debt, through refinancing of the 2010 term loan facility and the 2010 revolving credit facility. This led to an improvement in the company’s credit ratings and should help it secure loans to fund future growth, while navigating through debt payments. ((Moody’s upgrades Revlon’s ratings, including CFR to B1, Moody, April 2011))
The company plans to exit certain manufacturing facilities and streamline operations in the under performing markets of France, Italy and Latin America. It expects to save $10 million annually through these cost reductions, which would then be reinvested in other cost reduction strategies. Revlon also plans to develop its brand and invest in advertising and promotion with the help of its retail partners. We expect these initiatives will help company-wide operating margins to return to their higher levels, after being under pressure this year.
We have a $15 Trefis price estimate for the Revlon stock.