Flat Sales And Low Margins Weigh On Revlon’s Q2 Performance

by Trefis Team
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Revlon (NYSE:REV) recently reported its Q2 2013 results. Organic sales growth remained tepid due to limited investment in advertising and R&D. Net sales for the quarter fell by 1.96% to $350.1 million from $357.1 million in Q2 2012. Excluding the impact of unfavorable currencies, net sales dropped marginally for the quarter. Geographically, sales improved in Europe, Asia Pacific, the Middle East & Africa, offset by a decline in net sales from Latin America and Canada. Sales in the U.S. were largely flat over Q2 2012.

Operating income margins for the second quarter of 2013, 2012 and 2011 were 16.98%, 11.98% and 13.61% respectively. The increase in operating income primarily came on a $18.1 million gain on insurance proceeds during the quarter. Excluding one-time gains from operating profits, margins for Q2 of 2013 and 2012 fell to 11.71% and 10.61% respectively. The company’s business performance has been sluggish due to rising costs and flat sales. Due to weak sales growth, the management is focusing on cost-cutting programs to improve operating and net income margins.

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Revlon turns to cost-cutting and debt servicing for margin improvement

The second quarter sales in 2013, 2012 and 2011 have been stagnant at $350.1 million, $357.1 million and $351.2 million, respectively. Net income during the same periods were $24.7 million, $11.1 million and $6.5 million. Excluding one-time gains of $18.1 million in 2013 and $4.9 million in 2012 from insurance proceeds, net income in Q2 of 2013, 2012 and 2011 were flat at $6.6 million, $6.2 million and $6.5 million. To improve its bottom-line, the company has undertaken steps to reduce costs and expenses.

A reduction of $13.6 million in SG&A expenses resulted over Q2 2012 due to operational restructuring such as consolidating its Latin American and Canadian business, and selling its manufacturing facilities in France and Maryland. The company incurred $3.8 million in 2012 and $13.2 million in the first six months of 2013 in expenses related to restructuring, with the remaining $7 million to be paid in the next six months. Revlon expects savings up to $7 million from restructuring in the second half of 2013 and annualized savings of $10 million from 2014.

Revlon has a sizable debt load on its books which has contributed to high interest expenses over the years. Interest expenses in Q2 2012 and Q2 2011 amounted to more than 45% of operating profits. However, after refinancing its debt in February 2013, interest expenses as a percentage of operating profits have softened to 26.7%. This has partially improved net income for Q2 2013 to $24.7 million from a loss of $6.9 million in Q1 2013. Going forward, we expect lesser interest expenses and lower costs from the company to boost EBITDA margins and add to the improvement in bottom-line.

We are updating our $15.72 price estimate for Revlon to reflect the recent Q2 2013 results.

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