Revlon Q2FY14 Pre-Earnings: Sales Could Cross $500 Million With TCG Push

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Revlon (NYSE:REV) is scheduled to report its Q2FY14 earnings on July 30, 2014. Last quarter, revenues were boosted by significant tailwinds from the complete consolidation of The Colomer Group (TCG) into Revlon. Overall revenues notched a 42% year-on-year increase in revenues to $470 million, with TCG adding $130 million in sales. Revlon’s core consumer product business also posted a 4% expansion last quarter. Similarly, gross margins bounced back during the quarter, reaching 65.2% in Q1FY14 against 64.8% in Q1FY13. Comparatively, Revlon’s gross margins declined to 62% in Q4FY13. However, operating margins were under pressure after consolidation due to higher expenditure on selling and marketing activities.

For FY14, year-on-year revenue growth is not very insightful due to the lack of a comparable consolidated sales metric for FY13. In this context, sequential revenue growth could show a much more meaningful trend. For the last two fiscal years, Q2 revenues were higher than Q1 revenues by 5% and 8% in FY13 and FY12 respectively. With the consolidation of TCG, we could see an acceleration in growth of Q2FY14 over Q1FY14. An 8% sequential growth places quarterly revenues above the $500 million mark while 5% places revenue estimates at $493 million.

We have a revenue forecast of $496 million for the quarter compared to a consensus estimate of $490 million. In this pre-earnings note, we take a look at various industry trends that could accelerate revenue growth to cross the $500 million mark this quarter.

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See Our Full Analysis for Revlon

Ongoing Product and Geographic Diversification Could Lift Top Line Performance

Historically, Revlon has been a specialty color cosmetics manufacturer, deriving about 54% of revenues between 2007 and 2010. Following the acquisition of Sinful Cosmetics and Pure Ice in 2011 and 2012, the share of color cosmetics revenues expanded to 63% and 65% respectively. The acquisition of TCG completed in Q4FY13 should temper down the burgeoning share of color cosmetics and diversify its portfolio. In Q1FY14, the share of color cosmetics declined to 54% from 67% in Q1FY13.

Moreover, TCG has contributed to diversifying Revlon’s geographic base. For fiscal 2013, the company derived approximately 56% of revenues from the U.S. and the remaining 44% from other geographies. This ratio changed to 53% for U.S. and 47% from international geographies in Q1FY14, owing to the fact that TCG generates more than 50% of its sales from the EMEA region. Going forward, this revenue distribution between the U.S. and International markets is expected to normalize close to the half-way point. This is because TCG’s revenues are growing at a much faster pace than Revlon’s core business.

In the long run, product and geographic diversification provides better top line acceleration prospects for Revlon. Through the acquisition, the company has gained significant manufacturing and distribution capability for professional cosmetics products both domestically in the U.S. and internationally. This robust manufacturing and distributional network could be used to assess market trends in specific geographies and subsequently market products accordingly. Although this puts a pressure on margins through higher marketing and research expenses, it could lead to further acceleration in revenues for the consolidated company.

Margin Performance in Focus

For the first quarter of 2014, segment profit margins and adjusted EBITDA margins stood at 22% and 19% respectively. On a proforma basis, these margins for Q1FY13 stood at 21% and 17% respectively. For the consumer and professional product segments individually, Q1FY14 profit margins stood at 21% and 24% respectively this quarter. Comparatively, profit margins for these segments in Q1FY13 were 23% and 16% respectively. This indicates rapid ramp up in margins for TCG’s professional products business, registering an 8% expansion between Q1FY14 and Q1FY13.

However, margins for Revlon’s core consumer products division slid down by 2% due to an increase in SG&A expenses. During the quarterly conference call in April 2014, the company’s management announced the implementation of an Integration Program to identify and reduce costs throughout the combined organization by generating synergies and operating efficiencies within the Company’s global supply chain and consolidating offices and back office support, and other actions designed to reduce selling, general and administrative expenses. This particular program is expected to result in annual cost savings of approximately $30 million – $35 million.

Together with the fast expanding TCG margin base, any progress with the cost savings program could result in significant margin expansion for the overall company in Q2FY14.

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