Revlon Q3FY14 Preview: Impact Of Euro Depreciation In Focus

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Mass market cosmetics manufacturer Revlon (NYSE:REV) is scheduled to report its third quarter fiscal year 2014 results on October 22. In the first two quarters, Revlon has outpaced consensus estimate figures, notching up nearly $968 million in sales. Comparatively, standalone sales for Revlon stood at $677 million in H1FY13. Including sales from The Colomer Group (TCG) on a proforma basis, Revlon’s total H1FY13 sales stood at $934 million. This represents a growth rate of 3.6% year-on-year.

Much of this growth in sales is a result of the integration of TCG into Revlon’s operations. Year-on-year growth rate for the Consumer and Professional segments were 0.5% and 12.9% respectively. The robust growth from the Professional segment (acquired from TCG) has masked the weakness in Revlon’s own Consumer line of products. For the upcoming Q3FY14, consensus estimates for Q3FY14 stand at $470 million, compared to our estimate of $439 million.

Below, we discuss key trends that could influence quarterly results for Revlon.

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Euro Depreciation Could Impact Sales and Margin Performance

The Colomer Group derives more than 50% of sales from the Europe, the Middle East and Africa (EMEA) region. This high proportion of sales from a region that has witnesses significant currency headwinds is likely to weigh on reported revenues for Revlon. In the July – September quarter, the Euro has depreciated nearly 8% against the U.S. Dollar. This could slowdown reported revenue growth, leading to substantial deceleration in overall sales for Revlon.

On the flipside, consumer sentiment in the domestic U.S. market has been upbeat, which would accelerate sales for Revlon’s consumer product line. The company increased its advertising budget by $12 million last quarter to spur demand in a slowing mass cosmetics market, which dragged down operating profit margins from 18% to 12.5% on a year-on-year basis. Consequently, segment profit from the Consumer Products division, which mainly includes mass market cosmetics, 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. For the upcoming quarter, we expect the downward pressure exerted by the depreciating Euro in the European Union to be greater than any increase in sales from the advertising campaigns through higher volumes in the U.S.

In addition, the market for prestige and luxury cosmetics is cannibalizing sales from mass market cosmetics products in developed markets. Furthermore, the recovery in consumer spending coupled with the holiday season in Q4FY14 should only attenuate the decline in the mass cosmetics market. We expect Consumer segment profit margins to be lower than current levels of about 22% in Q3FY14. Margins from its Professional segment could marginally decline during the quarter, impacted by the depreciating Euro. For the six months into 2014, margins from the TCG business grew to 24% from 17% in H1FY13, facilitated by strong revenue growth rate in the segment.

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