Revlon Q3 Preview: Value Addition From Colomer Acquisition & Restructuring Initiatives Under Focus

by Trefis Team
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Beauty product company Revlon (NYSE:REV) is scheduled to report its third quarter earnings for fiscal 2013 on October 24. Revlon’s business performance has been sluggish due to flat sales and declining margins. On a q-o-q basis, revenues for the previous quarter fell approximately 2% to $350 million. Operating margins had improved in the last quarter due to a one-time gain of $18 million in insurance proceeds. Excluding one-time gains, the operating profit margin was marginally up at 11.7% in Q2FY13. This compares to the 10.6% figure achieved in the prior year period.

On October 9, the company announced the completion of its acquisition of The Colomer Group (TCG). TCG is a beauty product player that markets and sells professional products to salons and other professional channels not currently served by Revlon. Revlon reports that TCG’s annual sales are estimated at approximately $500 million, which are about a third of Revlon’s revenues. A $500 million addition to existing Revlon sales could boost the top line by 33%.

A synergistic association between the two companies could create top line growth of more than 33% in revenues as well as meaningful cost deductions. Although we are positive about the top line growth prospects resulting from the TCG acquisition, we are cautious about Revlon’s ability to reign in costs and have a healthy bottom line in the short term, which is reflected in our $24.6 price estimate for Revlon.

See Our Full Analysis for Revlon

TCG Could Help Plug Declining Market Share For Revlon

According to our estimates, the revenue contribution from Revlon’s hair care product sales declined from 8.7% in FY2012 to 8.4% in the first half of FY2013. In the past five years, Revlon’s hair care market share dipped from 0.46% to 0.28%. The company has been losing market share to products such as Wella from Procter & Gamble (NYSE:PG) and Garnier and L’Oreal Professional from L’Oreal (PINK:LRLCY). Factors attributable to the decline in revenues from the hair care segment include limited investments into R&D and advertising & marketing, and lower focus on high growth markets such as Latin America and Asia-Pacific.

With hair care products being TCG’s leading product line, we estimate that hair care sales account for a majority of TCG’s $500 million sales. If this were the case, the acquisition could definitely provide the required impetus for a revival in Revlon’s hair care and hair color segments. EBITDA margins on the other hand witnessed an improvement from 17.8% to 20.4% between 2007 and 2012, following a string of cost-cutting and restructuring measures taken by the management. Despite this steady improvement, we could see a dip in operating margins in the short term following the consolidation of TCG’s operations into Revlon.

Debt Burden Continues To Be A Cause For Concern Despite Cost-Cutting Efforts

Revlon has undertaken a $24 million restructuring program in 2013, by exiting owned and leased manufacturing facilities in France and Maryland, resizing operations in Europe, and consolidating operations in Latin America and Canada to save on costs. The company has incurred $8.3 million in employee severance costs and other charges between September 2012 and March 2013, with the rest of $15.7 million to be paid out during the remaining quarters in 2013. Benefits from this restructuring program are expected to amount to $7.5 million in 2013 and $10 million annually thereafter.

With the acquisition of The Colomer Group complete, Revlon has incurred additional debt of $700 million. This means that the company’s total debt stands close to $1.8 billion. Despite efforts taken by the company’s management to cut down expenses and maintain healthy net income margins, this increase in debt would weigh on margins for fiscal 2013 with increased interest payments. In addition to the increase in interest payments, the acquisition might add to the tax payable which could result in a net loss for the quarter.

International Sales Should See Revival In The Long Term

The global beauty and personal care market is estimated to be worth $232 billion in 2013 and is expected to grow at a CAGR of 3.4% between 2012 and 2017. Much of this growth is expected to be fueled by increasing demand from the Asia-Pacific and European markets. [1] However, Revlon has seen declining sales from overseas geographies, especially Asia-Pacific and EMEA. In constant dollar terms, the company’s overall revenues grew 0.9% during the past six months over the first half of 2012. Sales from international markets saw a 1% decline during the period, whereas U.S. sales showed signs of strength, posting a growth rate of 1.9%. This caused the percentage contribution of international sales to shrink from 44% to 42%.

From a geographical perspective, the acquisition brings business from international markets where Revlon has its footprint declining. The company reports that approximately 50% of TCG’s revenues come from EMEA and 40% from the U.S. Given TCG’s geographical mix, we expect to see an improvement in Revlon’s international revenue share in the long term.

We will be revising our $25 Trefis Price Estimate for Revlon once the company files its results with the SEC.

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Notes:
  1. Global Beauty Care Products Industry 2012-2017: Trend, Profit, and Forecast Analysis, Reportlinker.com, November 2012 []
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