Revlon (NYSE:REV) reported 3% revenue growth in FY 2012 to $1.4 billion. Revenues were inclusive of the acquisition of certain assets of Bari Cosmetics in July 2012. The overall effect of the acquisition was however minimal. In particular, the U.S. market, that accounts for more than half of Revlon’s sales, grew by 6%. The results were supported by strong growth in Latin American markets where sales grew by about 11%. A weak European market however cast its shadow on what was otherwise a growth story as sales declined by 12% in Europe, the Middle East and Asia.
The revenue growth was supported by higher net sales of Revlon color cosmetics, Revlon ColorSilk hair color and SinfulColors color cosmetics, partially offset by lower net sales of fragrances and other beauty care products. As makeup is a discretionary expense, its sales tend to be economically sensitive. With the U.S. economy improving, we expect sales to continue to rise and counteract the slump in Europe. Strong growth in Q4 sales resulted in Q4 net profits rising from $36 million last year to $46.5 million in 2012. However, annual net income registered a decline of 4% to $51.1 million.
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 $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 (in excess of $1.1 billion) which puts it in a highly unenviable position while competing against these bigger companies 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 year, Revlon’s sales in the EMEA region declined 12% although its Asia-Pacific sales increased by 3%. The slowdown in growth from the region, particularly China, remains a concern while L’Oréal and Estée Lauder have been highly dependent on the region for their recent growth.
Needs To Improve Marketing & R&D Budget, But Hands Are Tied
With lean cash flows, the company’s marketing and R&D budget is quite low compared to its competitors mentioned above. Even though the company has increased its advertising spend over the year, the slowdown in sales growth warrants more resources and a better strategy to defend market share. Despite efforts to improve its capital structure last year through debt refinancing and retirement, the company is still heavily levered with debt in excess of $1.1 billion, with $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 $15 price estimate for Revlon.