Revlon (NYSE:REV) will report its first quarter earnings on April 25. It has a leading market position in the U.S. mass retail channel for color cosmetics, women’s hair color and beauty tools. The company reported 3.2% revenue growth in FY 2012 to $1.4 billion, which includes the negative impact of unfavorable foreign currency movement of 1.4%. The revenue growth was driven by higher sales in the U.S., Latin America, Canada and Asia Pacific, partially offset by lower net sales in Europe, the Middle East and Africa. 
Net income however declined to $51.1 million in 2012 from $53.4 million in 2011 primarily due to higher cost of sales and loss due to loan refinancing activities. Revlon has huge debt on its books and a decline in net income will leave the company with even less leverage to spend money on advertising and research and development. We estimate revenues for this quarter to remain stable considering the modest stance of the company towards revenue growth.
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Focus on advertising and research and development
Advertising and promotions is important for any cosmetics company to push its products across the shelves and to build brand loyalty. However, Revlon has been trying to hold its advertisements expenditure over the past three years despite increasing sales to save cash for its huge debt servicing burden. The company spent $269 million, $271 million and $265 million in 2012, 2011 and 2010 respectively on advertising, although sales grew by 3.2%, 4.5% and 2% during the same periods. The company will be able to generate higher sales if it starts allocating a higher portion of its revenues towards advertising as is evident from the performance of its competitors like Estee Lauder(NYSE:EL), Avon Products (NYSE:AVP) and L’Oreal (PINK:LRLCY). 
Along with advertising, the expenditure on research and development is equally important to launch new and improved products keeping in mind the changing requirements of consumers. In 2012, Revlon spent only $23.8 million on R&D activities which is low among its peers.
Color Cosmetics to drive revenues as U.S. economy recoups
The U.S. market contributes almost 56% to Revlon’s revenues. In 2012, the revenue growth from the U.S. was primarily driven by higher net sales of Revlon color cosmetics, SinfulColors color cosmetics and Pure Ice color cosmetics. Although sales declined in Europe, the Middle East and Africa by 11.6%, they were offset by solid growth in sales from Latin America and Canada. 
Cosmetics spending is discretionary and tends to decline with a decline in overall economic activity. With U.S. consumer spending trending higher, we higher spending on cosmetics during the first quarter of 2013, which should result in a positive impact on Revlon’s revenue. 
We will update our $16.50 price estimate for Revlon after the company files its financials with the SEC.Notes: