Revlon (NYSE:REV) is one of the largest beauty and cosmetics company around the world with revenues well over $1.2 billion. The company is a leading manufacturer and mass retailer of cosmetics, women’s hair color, beauty tools, deodorants, fragrances, skincare and other beauty care products. It was founded by Mr. Charles Revson, 80 years ago, and holds a dominant position in a number of principal product categories in the U.S. mass retail channel, including color cosmetics (face, lip, eye and nail categories), women’s hair color and beauty tools.
The company boasts of a strong product portfolio including well known brands like Revlon, Almay, SinfulColors, Pure Ice, Jean Naté and Mitchum. With such a glittery product portfolio, it would be fair to question what could possibly be wrong with the company.
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Customer Concentration: Revlon Depends On Walmart Big Time
Revlon conducts its business mainly through mass volume retailers and chain drug stores, including CVS, Walgreen, Walmart and Target in the United States, Shoppers DrugMart in Canada, A.S. Watson & Co. retail chains in Asia-Pacific and Europe, and Boots in the United Kingdom. Walmart is a major buyer for Revlon as it accounted for 22% of its total revenues in each of the past three years and sources products worth $300 million from Revlon. Although this is a very big number for Revlon, it contributes only 0.6% to the health and beauty category spends of Walmart. This exposes the company to a huge risk as Walmart may force Revlon to provide its products at wafer thin margins or no margins at all.
We currently estimate Revlon’s intrinsic value per stock at around $16, with almost two-third of the stock’s value coming from color cosmetics division. If in future Walmart stops channeling its orders to Revlon or even changes its purchasing behavior slightly, we may see a large impact to the stock’s value.
Huge Debt Burden A Cause For Concern
Revlon is currently reeling under a debt load of around $1.2 billion and its operating earnings are 2.76 times of its annual interest expense, much lower than its peers like L’Oreal (PINK:LRLCY), Estee Lauder (NYSE:EL) and Avon Products (NYSE:AVP). The company recently refinanced a part of its earlier debt having a 9.75% coupon with a $500 million aggregate principal amount of 5.75% Senior Notes due in 2021 (the “5 3/4% Senior Notes”). The company also paid down about $100 million on a term loan using the recent proceeds.
While paying down some of its outstanding debt will certainly help in addition to refinancing to take advantage of the low interest rate environment, the high debt levels and ongoing interest payments greatly limit Revlon’s cash flow and flexibility in the future should something unforeseen arise.