Revlon (NYSE:REV) reported strong top line growth in its latest Q1FY14 earnings, with net sales standing at $470 million. The Colomer Group (TCG) added approximately $130 million to Revlon’s core consumer product business this quarter. The company also reported a 4% growth in sales from its consumer product division this quarter. Gross margins bounced back this quarter, reaching 65.2% against 64.8% in Q1FY13. Comparatively, Revlon’s gross margins declined to 62% in Q4FY13.
Operating margins, however, failed to rebound similarly. Q1FY14 operating margin stood at 9.1% compared to 6.8% in Q4FY13 and 14.3% in Q1FY13. Stripping out items such as restructuring and acquisition costs, operating margins for Revlon are still lower compared to the first quarter from the year prior period. This indicates that the acquisition of TCG created a downward pressure on operating margins, primarily due to higher SG&A expenses. Revlon posted a positive net income of $5.5 million this quarter.
In the earnings note, we take a look at key trends from the recent Q1FY14 earnings for Revlon.
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Focus On Improving Products And Organizational Management
Color cosmetics sales continue to account for more than 50% of Revlon’s overall revenues. In Q1FY14, the company generated close to $255 million in revenues from color cosmetic products, up from $219 million in Q1FY13. However, the inclusion of TCG into the parent Revlon company has diversified its product portfolio. The proportion of color cosmetics revenues declined to 54% this quarter, from 67% in Q1FY13. Given the higher growth rate from TCG in comparison to Revlon, share of color cosmetics should continue to decline further, thereby diversifying overall product portfolio.
Additionally, the company is focused on transforming its organizational structure. The company now has two operational divisions, Consumer Products and Professional Products, and plans to eliminate the regional management of these divisions. The new structure is expected to increase the efficiency of its organizational management through greater focus on local management rather than regional management. In the long term, this should lead to better product innovations and marketing campaigns that are more locally relevant to the consumer.
Higher Sales From TCG Should Lift Margins
Segmental profits for Revlon’s organic Consumer Products division and TCG’s Professional Products division were $71.5 million and $31.9 million respectively. This translates into a segmental profit margin of approximately 21% and 24% for each the divisions, respectively. Segment profit is a non-GAAP measure that excludes non-cash expenses such as depreciation and amortization as well as non-recurring expenses such as restructuring charges, acquisition costs and gain from insurance proceeds etc. Therefore, this metric provides a better gauge of the actual operational performance of the company.
Given that the Consumer Products business has a segmental profit margin of 21% while the Professional Products business has a 24% margin, higher sales from the Professional Products division should lead to an expansion in overall segment profit margin for the consolidated company.