Mass market cosmetics manufacturer Revlon (NYSE:REV) is expected to report its Q1FY14 earnings on April 21. In the current quarter, we expect an acceleration in sales growth from the consolidation of Revlon with the recently acquired The Colomer Group (TCG). Sales during Q1FY13 and Q1FY12 have shown no growth on a reported basis, at $332 million and $331 million respectively. For the present Q1FY14, we expect organic revenues from Revlon to remain subdued. However, overall sales are expected to be buoyed by the addition of sales from The Colomer Group (TCG).
On the other hand, the consolidation of Revlon and TCG has not been margin accretive so far. In the first quarter post acquisition (Q4FY13), gross profit margins declined to 62% from 65% in Q4FY12. In addition to a decrease in gross profit margins from an increase in cost of sales, Selling, General and Administrative (SG&A) expenses also increased during the previous quarter. SG&A expenses as a percentage of revenue increased from 43% to 51% post consolidation in Q4FY13.
In this pre-earnings note, we take a look at key focus areas in the upcoming Q1FY14 earnings from Revlon.
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Weak Performance From Color Cosmetics Expected To Continue
Revlon derives a majority of its revenues from its organic and inorganic color cosmetics brands such as Revlon, Almay, SinfulColors and Pure Ice cosmetics. Last fiscal, color cosmetics sales accounted for approximately 62% of overall revenues. However, sales for the division have been under pressure due to weak performance from the Almay brand. On a reported basis, revenues from the sale of color cosmetics products stood at $850 million, $913 million and $926 million in FY11, FY12 and FY13 respectively.
The sharp increase in FY12 revenues was a result of the addition of Pure Ice cosmetics products in June 2012. Excluding the impact of acquisitions, we see that the growth in Revlon’s color cosmetics division has been marginal. In the short term, revenues from the color cosmetics division are expected to have marginal growth on a year-on-year basis. Issues such as low marketing and research spending have plagued Revlon’s product line, as has competition in the cosmetics industry intensifying rapidly in recent times. This has resulted in a reduction in display space from retailers, with Revlon products being replaced with competitor products from L’Oréal (OTC: LRLCY) and Estèe Lauder (NYSE:EL).
For Q1FY14, we expect the performance of the color cosmetics division to be particularly weak, impacted by the cold weather witnessed in the North American region in the January-March 2014 period. However, on a longer term, increased revenues from the consolidation of TCG into the Revlon Group should definitely percolate into higher marketing and research spending, thereby lending support to a revival in performance for the division.
Hair Care Segment Performance In Focus
Through the acquisition of The Colomer Group, Revlon has gained a stronger footing in the hair care market. Prior to the TCG acquisition, Revlon had only the Revlon ColorSilk brand in its hair care segment. This limited presence in the hair care segment resulted in weak growth in year-on-year sales for Revlon, from $181 million in FY08 to $191 million in FY12. However, hair care revenues for FY13 expanded 38% over FY12 to reach $264 million, primarily due to the addition of TCG sales in Q4FY13.
We believe the addition of new brands such as Revlon Professional, Intercosmo, Orofluido and UniqOne from TCG has created a diverse hair care portfolio for Revlon. In addition to a diversified product portfolio, TCG also provides an additional sales channel apart form the retail, mass-market channel that Revlon operates in. For example, Revlon Professional products are exclusively distributed in the professional channel to salons, salon professionals and salon distributors in more than 80 countries. This broadened product base and new sales channel should bode well for Revlon’s business performance going forward. We currently estimate Revlon’s hair care segment to contribute 31% to its overall business value. However, top line acceleration from the complete integration of TCG should expand the contribution share of the hair care segment for Revlon.