Revlon’s Q4 2104 Earnings Preview: Marketing Spending And Currency Headwinds Might Mitigate Sales Growth

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Revlon (NYSE:REV), the mass market cosmetics manufacturer, is set to release its fourth quarter 2014 earnings on March 12th. The company performed above consensus expectations in the first nine months of 2014. Revlon’s net sales increased by 42% on a year-over-year basis to reach $1.4 billion. The primary contributing factor to this sales surge was the integration of The Colomer Group (TCG), acquired by Revlon in December 2013, into Revlon’s operations. With the TCG consolidation, Revlon has diversified its product portfolio with the addition of professional cosmetics products. The robust growth from the Professional segment (derived from TCG) had masked the weakness in Revlon’s own Consumer line of products.

However, Revlon’s performance was significantly thwarted due to the weak currencies in the European markets. The earnings are expected to remain under pressure due to the weak Euro in the fourth quarter, as well. This, coupled with marketing spending and internal inventory management  shifts, might adversely impact Revlon’s fourth quarter results. In this article, we discuss in detail, the various factors that might shape Revlon’s Q4 2014 earnings.

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Currency Headwinds And Marketing Spending Can Slowdown Revlon’s Growth For The Fourth Quarter

The depreciation of international currencies, especially the Euro, has dampened the performance of cosmetics players such as Estee Lauder (NYSE:EL) and Avon Products (NYSE:AVP) in their recent earnings, and we suspect  that Revlon too will be adversely impacted. A major chunk of Revlon’s growth came from its 2013 acquisition of The Colomer Group (TCG). However, TCG 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 witnessed significant currency headwinds is likely to weigh on reported revenues for Revlon.

On a separate note, the consumer sentiment in the domestic U.S. market has been upbeat, which could accelerate Revlon’s sales for its consumer product line. To further boost sales, the company is concentrating on its marketing efforts, with a stress on its consumer division. The brands in focus are Revlon Color Cosmetics, Almay, Mitchum, Color Silk, and Beauty Tools. Almay, which is a core-asset to Revlon’s product portfolio, has been under-performing for a while. However, the company remains focused on improving the struggling brand and is investing resources in its turnaround. Revlon’s marketing expenditure is primarily financed by net-sales growth and cost reductions. The integration of Colomer into its core structure  remains a priority for Revlon, the achievement of which will result in annual cost saving to the tune of $30 million to $35 million for 2015. [1]

However, the market for prestige and luxury cosmetics is cannibalizing sales from mass market cosmetics products in developed markets such as the U.S. Furthermore, the recovery in consumer spending, coupled with the holiday season in Q4 2014, could exacerbate the decline in the mass cosmetics market.

As a consequence of all the forces currently at play in the cosmetics market, we expect Revlon’s Consumer segment profit margins to be lower than its current levels for Q4 2014. Margins from its Professional segment could marginally decline during the quarter, impacted by the depreciating Euro.

Revlon’s Diversified Portfolio Might Boost Market Share Expansion And Grow Sales

Revlon has been primarily a specialty color cosmetics manufacturer in the past, deriving about 54% of revenues from color cosmetics between 2007 and 2010. Post 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 diversified Revlon’s portfolio of products by adding a mix of Professional Products. TCG also contributed to diversifying Revlon’s geographic base. For Q3 2013, the company derived approximately 56% of revenues from the U.S. and the remaining 44% from other geographies. This ratio changed to 52% for U.S. and 48% from international geographies in Q3 2014, owing to the fact that TCG generates more than 50% of its sales from the EMEA region. [2] 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.

Brand Renewal And Product Streamlining Strategies May Hinder Revlon’s Short Term Growth

During the third quarter 2014 conference call, Revlon Chief Executive Officer Mr. Lorenzo Delpani stated that the company intends to reach its desired new rate of innovation in terms of quantity and quality in the next 2-3 years depending on the speed and effectiveness of executing of its strategy. This time frame in its brand renewal program indicates that core organic sales for the company could remain under pressure in the near future.

The company also is implementing a new strategy to better manage retail inventory. I will monitor the individual performance  of specific stock-keeping units (SKU) to optimize its wide offering, resetting under-performing SKUs to streamline its portfolio to meet market demands. [1] Revlon will review the sales through retailers quarter by quarter to assess SKU performance and replace under-performing brands and products with new and innovative products to accelerate sales growth. While this might play out in the long term, near term sales are likely to see some fluctuations due to the addition and removal of these reserve adjustments. Additionally, the weakening economic environment in Europe and the depreciation of the euro against the U.S. dollar would add pressure to the company’s bottom-line in the near term.

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Notes:
  1. Revlon’s (REV) CEO, Lorenzo Delpani on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 2014 [] []
  2. Revlon’s Form 10-Q For The Quarter Ended September 30, 2014 []