Revlon’s (NYSE:REV) stock has increased approximately 83% in value since the start of the year, outperforming other players within the cosmetics industry by quite a margin. During the same period, competitor stocks of L’Oréal (PINK:LRLCY), Estée Lauder (NYSE:EL) and Avon Products (NYSE:AVP) gained between 20% – 25%. This increase in stock price comes despite the fact that the company has been posting rather disappointing results quarter-on-quarter.
In this note, we highlight various factors that impact Revlon’s business performance and explain why we think the stock is presently overvalued.
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Weak U.S. Performance Weighs On Top Line Growth For Retailers
Sales from the domestic U.S. market, which accounts for more than 50% of the company’s overall revenues, have been weak for the past many quarters for Revlon. Cummulative U.S. sales for the past three quarters in fiscal 2013 amounted to $582 million, compared to $583 million five years ago. Weak consumer spending on discretionary products post the financial crisis of 2008 – 2009 has negatively impacted top line numbers for many retail players. Beauty market leader, L’Oréal, witnessed a slight contraction in revenues during the second quarter, due to sharp slowdown in the U.S. cosmetics market. During its half year results presentation, L’Oréal reported that the domestic U.S. market grew at 2.8% during the first six months of 2013, compared to 4.4% during 2012.
Going forward, we expect weak consumer spending to continue impacting revenues from the U.S. for Revlon. The recent standoff between the Democrats and the Republicans resulting in a partial Government shutdown delayed hiring activities, in addition to the implementation of employee furloughs. Although the situation looks to be resolved now, weakened consumer sentiment should impact top line growth for retailers this holiday season in the U.S. as a result of an increase in consumer savings.
Shift In Demand From Mass-market To Prestige Products Could Hurt Revlon’s Top Line
In addition to the above stated macroeconomic factors, Revlon’s mass-market business model presents a few issues of its own. Revlon sells color cosmetic products through retail touch points to consumers, as opposed to boutique touch point channels for companies such as L’Oréal and Estée Lauder. Although Revlon’s large mass-retailer business model helps the company in expanding its footprint rapidly across emerging and frontier markets, due to limited upfront capital expenditures, demand for such mass-market cosmetics is being eroded by an increasing appetite for affordable luxury cosmetics in developed markets. 
The 6% growth in U.S. prestige beauty product sales in 2013, compared to 2.8% for the overall U.S. cosmetics market, supports the fact that prestige products are experiencing a faster growth trajectory.  We believe that the shift in demand from mass-market cosmetics to luxury cosmetics has contributed to the weak top line growth for the company in recent times. Moreover, a similar shift in demand in developing economies could result in top line declines for Revlon going forward.
On the flipside, the company’s recent acquisition of The Colomer Group (TCG) should provide the company with the much needed impetus to its top line. Our $24 Trefis price estimate for Revlon is at a discount of approximately 9% to its current market price of $27 and does not factor in the potential upside of the $660 million acquisition of TCG. We will be revising our price estimate once the company reports complete integration of TCG into the parent Revlon Group.Notes:
- Redefining the “Lipstick Effect”– Examples of Recession-Proof Categories, Euromonitor Blog, November 2013 [↩]
- Euromonitor Defines “New Beauty Power” at 2013 in-cosmetics, GCI Magazine, April 2013 [↩]