Revlon’s Q2FY14 Sales Growth Momentum Fails To Percolate Into Earnings

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Revlon (NYSE:REV) delivered a robust growth in the second quarter revenues, reaching $498 million against the consensus estimate of $490 million. Sales from the Consumer Products division stood at $367 million compared to pro-forma adjusted revenue figure of $363 million in Q2FY13. Adjusting for currency fluctuations, sales from the Consumer Products division increased 2.5% on a year-on-year basis. This represents a currency headwind of approximately 1.4% for the division.

The Professional Products division, which was acquired from The Colomer Group, generated revenues of $131 million compared to $121 million from a similar period a year ago. Excluding the effects of volatile currencies, sales from this division increased 6.7% on a year-on-year basis. Surprisingly, currency fluctuations for the division contributed approximately 1.6% in growth benefits this quarter. The EMEA region accounts for a majority of Professional Products’ revenues, and the domestic U.S. market comes second with a 40% contribution.

However, the modest top line growth of approximately 2.8% from Revlon did not translate into higher earnings for the company. Operating income for the quarter stood 1.2% higher, at $67.4 million compared to a pro-forma adjusted operating income of $66.6 million in Q2FY13. Similarly, income from continuing operations before taxes increased 1.9% to reach $43.8 million against $43 million in Q2FY13. Quarterly earnings were depressed by an increase in investments into operating expenses, particularly advertising expenses.

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Softening Demand for Mass Color Cosmetics in U.S. Expands Advertising Budgets

As a percentage of quarterly revenues, Revlon’s investments into selling, general and administrative activities increased from 43% in Q2FY13 to 52% in Q2FY14. In absolute terms, Revlon’s cost of sales and other operating expenses have increased from $377 million in the second quarter last year to $384 million this year. Advertising budgets have contributed almost exclusively to the increase in expenses for the quarter, increasing by approximately $12 million in Q2FY14 versus last year.

The reason for the increased advertising budgets is to spur demand for mass color cosmetics products in the U.S., which Revlon notes to be slowing. Hence, most of these advertising budgets should have been focused on the Consumer Products division rather than the Professional Products division. Consequently, segment profit from the Consumer Products division decreased to $82 million in Q2FY14 from $85 million in Q2FY13 on a pro-forma basis. Segment profit for the Professional Products division increased 42% on a year-on-year basis, from $22 million in Q2FY13 to $31 million in Q2FY14.

Revlon’s consumer brands in the color cosmetics space such as SinfulColors and Almay are expected to benefit from the increase in advertising budgets. Almay, which is a core-asset to Revlon’s product portfolio, has been under-performing other mass color cosmetics brands for a while. However, the company remains focused on turning around the struggling brand into profitability and is investing resources into its turnaround. On the other hand, SinfulColors has been a strong performer within the Consumer Products division, and investments into the brand should deliver greater returns going forward.

We are in the process of revising our $30 Trefis Price Estimate for Revlon to incorporate quarterly results.

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