Revlon Fourth Quarter Earnings: Professional Segment Soars As Currency Headwinds Dampen Growth

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Revlon (NYSE:REV) announced its fourth quarter 2014 earnings on March 12th. The company displayed unprecedented growth in its Professional Segment, primarily due to The Colomar Group (TCG) acquisition (in October 2013). However, the overall performance of the company was significantly dampened due to weak foreign currencies in its international markets, such as, South Africa, Australia, Canada, and Argentina. [1]

For Q4 2014, Revlon reported revenues of $501 million which was almost in line with its Q4 2013 pro forma adjusted revenues of $500.8 million. Revlon’s full year 2014 revenues were $1.94 billion reflecting a 1.7% year on year growth as compared to pro forma revenues of 2013.  For 2014, the XFX growth rate (which excludes the impact of foreign currency fluctuation) was 4.7% on a year-on-year basis. [2]

We are in the process of updating our  $33 price estimate for Revlon.

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Professional Segment Displayed Exceptional Growth

Revlon’s Professional segment witnessed impressive growth in 2014, primarily due to the acquisition of TCG. Professional segment net sales in 2014 were $502.7 million, compared to Pro Forma net sales of $464.0 million in 2013. Professional segment profit in 2014 was $104.8 million and it grew by 49.5% on an XFX basis. This was driven by higher net sales and lower general and administrative expenses due to synergies and organizational cost reductions driven by Revlon’s Integration Program (to consolidate TCG’s operations into its business).

How Is TCG Boosting Revlon’s Growth?

  • Favorable Product Mix: Revlon has been primarily a specialty color cosmetics manufacturer in the past, deriving more than 50% of revenues from Color Cosmetics. The acquisition of Sinful Cosmetics and Pure Ice in 2011 and 2012, further expanded color cosmetics revenues to over 60%. The acquisition of TCG diversified Revlon’s portfolio of products by adding a mix of Professional Products.
  • Expansion Of Geographic Markets: TCG also contributed to diversifying Revlon’s geographic base. For 2013, the company derived approximately 56% of revenues from the U.S. and the remaining 44% from other geographies (reported revenues). This ratio changed to 53% for U.S. and 47% from international geographies in 2014, owing to the fact that TCG generates more than 50% of its sales from the EMEA region. [3] 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.
  • Higher Bargaining Power To Revlon: Products from TCG are sold to professional salon chains rather than large retail chains. This difference in customer mix provides more bargaining power to TCG, because big retail chains tend to have a greater bargaining strength.
  • Robust Manufacturing And Distribution Capabilities: Through the acquisition, the company has gained significant manufacturing and distribution capability for professional cosmetics products both domestically in the U.S. and internationally.

However, the 2014 level growth rate in the Professional Segment might not be sustainable in the coming quarters.

  • Revlon’s professional products compete with similar products sold from more renowned players such as L’Oreal (OTC:LRLCY) and Estee Lauder (NYSE:EL). These competitors with their stronger research and innovation capabilities, solid financial resources, and wider distribution channels will provide formidable competition to Revlon in the Professional Segment.
  • Additionally, Revlon’s innovation pipeline for the professional segment is inconsistent and irregular. Hence, it is difficult to predict the impact of innovation spending in the coming quarters. In our opinion, Revlon witnessed exceptional growth in the Professional segment in 2014, due to the TCG acquisition. However, year-over-year growth will slow down from Q1 2015. [1]
  • Revlon’s principal customers for Professional segment include Beauty Systems Group, Salon Centric and TNG Worldwide, as well as individual hair and nail salons and other distributors. The industry norm is such that none of these customers are obligated to continue purchasing products from Revlon. In the event that these buyers find more favorable products or favorable terms of doing business with other sellers, they can probably switch loyalties. [4]

Revlon’s International Sales Growth Were Partially Offset By Currency Headwinds

In 2014, Revlon’s net sales for international operations declined by 2.2% to $919.1 million, which was mainly due to the international currency depreciation with respect to the U.S. dollar. International net sales increased by 4% in an XFX basis. The company experienced higher net sales in Venezuela and Japan for Revlon color cosmetics. Venezuela’s positive results were a result of increased availability of U.S. Dollars to import finished goods for sale in Venezuela in 2014, as against 2013. Revlon’s Mitchum products did well in the U.K. Within professional products there was a surge in sales for CND nail products, American Crew and Revlon Professional products through most of the International countries where it operates. [2]

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Notes:
  1. Revlon’s Earnings Call Webcast, Seeking Alpha, March 12, 2015 [] []
  2. Revlon Reports 2014 Results [] []
  3. Revlon Reports 2014 Results []
  4. Revlon Form 10-K for the year ended December 31, 2014 []