Colomer Acquisition Should Offset Declining Organic Revenues For Revlon

by Trefis Team
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Revlon (NYSE:REV) reported fourth quarter and fiscal 2013 results on Wednesday, March 5th. Revenues for the company increased 5.8% to $1,477 million in fiscal 2013 compared to $1,396 million in fiscal 2012.  Included in the top line were $117 million in revenues from The Colomer Group (TCG), which was recently acquired in a transaction that closed in the fourth quarter. Revenues from the company’s organic business line, the consumer segment, stood at $1,378 million, 1.3% lower than sales from a year prior period. Currency fluctuations resulted in a $36 million reduction in consumer segmental sales. Excluding these FX effects, constant currency revenues for Revlon’s consumer segment increased $18 million, or 1.3%, compared to fiscal 2012.

Gross profit margins for the company declined 110 basis points on a year-on-year basis to stand at 63.5%, weighed down by acquisitive effects such as additional inventory costs pertaining to TCG. Operating income for FY13 decreased by $10.5 million from 2012 levels of $199 million due to a $49 million increase in SG&A expenses, arising primarily from the integration of TCG into Revlon. The company reported a net loss of $6 million in FY13 compared to a $51 million profit in FY12 due to a $30 million loss from the discontinuing of operations in China and a $30 million loss from prepayment of debt during Q1FY13.  Adjusted income from continuing operations was $50.4 million, or $0.96 per share.

In this earnings note, we present key takeaways from the FY13 earnings conference call that have significant impact of the stock’s price. We are in the process of updating our $24 Trefis Price Estimate for Revlon to incorporate the latest fiscal results.

See Our Full Analysis for Revlon

TCG Should Deliver Higher Value For Revlon On A Longer Term

On a proforma basis, revenues from the consolidated Revlon – TCG entity stand at $1,909 million. Subtracting revenues Revlon’s organic business from the overall proforma revenues, TCG’s standalone revenues stood at approximately $531 million in 2013 compared to approximately $515 million in 2012. [1] This indicates that revenues for TCG grew 3.1% inclusive of currency volatility effects. In 2013, the parent company Revlon indicated currency headwinds of approximately 2.6%.

TCG derives close to 50% of its sales from the EMEA region and 40% from the U.S. as opposed to 13% and 58% from these two geographies for Revlon’s organic segment. [2] With a higher proportion of sales from International geographies compared to Revlon’s organic business, TCG is more prone to currency volatility in dollar terms. Assuming a 3% currency headwind for TCG in 2013 compared to Revlon’s 2.6%, constant currency revenues for the standalone TCG entity outpace Revlon’s constant currency top line growth by a healthy 4.5%. This strong top line growth from TCG should offset the decline in Revlon’s organic business and provide strong support to overall revenues in the next 1-2 years.

However, margins for TCG seem to be a little lower than Revlon’s organic business line. The company reported that TCG added close to $71 million in gross profits in fiscal 2013. Considering that the TCG business was incorporated in the fourth quarter, gross margins for the TCG business come in close to 60.7% compared to 64.4% for Revlon’s consumer product segment in FY13, according to our calculations. Revlon did not disclose a breakdown between its consumer segment and TCG’s professional segment on the operational profit front. However, the company reported that individual segment profits for both consumer and professional segments on a proforma basis stand at $347 million and $73 million respectively.

The segment profit metric for Revlon is defined as the income from continuing operations before interest, tax, D&A, gains/losses on foreign currency fluctuations, gains/losses on early debt extinguishment and other miscellaneous charges. The segment profit metric also excludes unallocated corporate expenses and other charges resulting from the integration of TCG and Revlon and hence, is a close indicator of EBITDA for Revlon’s consumer business and TCG as independent entities. As a percentage of net segment sales, segment profit margins on a proforma basis for Revlon and TCG stand at 25% and 14% respectively for fiscal 2013.

With the limited information provided in the Q4 press release on TCG’s profitability, it is hard to ascertain the exact value addition resulting from TCG to Revlon’s bottom line at this point. However, we believe the management will extract maximum value through synergistic cost reductions in cost of goods sold and SG&A expense, once the integration of TCG and Revlon is complete.  In addition we expect enhanced revenue growth going forward, which should improve overall margins in the future.

Cost Reductions To Boost Bottom Line In The Future

Revlon has been aggressive in reducing its operating costs and has recently exited the Chinese market. The company estimates it will save close to $11 million annually from the discontinued Chinese operations. Additionally, Revlon expects to save close to $35 million in overlapping costs through the integration of TCG and Revlon indicated above. Recently, the company also re-priced the weighted average borrowing rates on its $675 million term loan tranche. The spread has been decreased by 50 basis points and the LIBOR floor has been decreased by 25 basis points.

This lowering in its weighted average borrowing rate should translate into a $5 million savings in interest expense annually which should boost profitability for Revlon. Revlon’s interest coverage stands at approximately 2.40x and a $5 million reduction in interest expense increases Revlon’s interest coverage ratio marginally to 2.56x. Additionally, TCG’s larger footprint in the EMEA markets, coupled with a higher revenue growth rate, should lead to a decrease in effective tax rate over the longer term for Revlon. The EMEA region has a corporate tax rate lower than the U.S. corporate tax rate.  A higher share in revenues and operational profits from regions outside the U.S. should result in lower tax rate for Revlon.

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Notes:
  1. Revlon’s CEO Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, March 2014 []
  2. Revlon Completes Acquisition of The Colomer Group, Revlon Press Release, October 2013 []
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