Professional Segment Might Boost Revlon’s Q1 ’15 Earnings, Though Currency Headwinds Expected

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Revlon (NYSE:REV), the mass market cosmetics manufacturer, is set to release its first quarter 2015 earnings on March 7th. The company delivered a healthy 2014 primarily after integrating  The Colomer Group (TCG), into its 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 international markets, such as South Africa, Australia, Canada, and Argentina. [1]

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 will be updating our $31 price estimate for Revlon post the Q1 2015 earnings release.

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Currency Headwinds Might Dampen International Sales

Currency headwinds have been a major roadblock to the performance of cosmetics companies in the recent times. Estee Lauder (NYSE:EL) and Avon (NYSE:AVP) witnessed dampened financial results due to weak exchange rates and we believe Revlon’s growth might also have been stunted in the first quarter due to this. In 2014, Revlon’s net sales for international operations declined by 2.2% to $919.1 million, mainly due to the international currency depreciation with respect to the U.S. dollar. International net sales increased by 4% in an XFX (constant currency) basis.

In Line With 2014, Professional Segment Expected To Boost Q1 2015 Sales

Revlon’s Professional segment witnessed an 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.

Prior to its TCG acquisition, Revlon has been primarily a specialty color cosmetics manufacturer, deriving more than 50% of revenues from Color Cosmetics. The acquisition of TCG diversified Revlon’s product portfolio by adding a mix of Professional Products. Through the acquisition, the company has gained significant manufacturing and distribution capability for professional cosmetics products both domestically in the U.S. and internationally.

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. [2]

The Professional segment is expected to boost Revlon’s earnings in Q1 2015. However, we are uncertain whether 2014 rate of growth level of the Professional segment would be sustainable in the long term, unless Revlon gears up to challenge its competition. Revlon’s professional products compete with similar products sold from more renowned players such as L’Oreal (OTC:LRLCY) and Estee Lauder. These competitors with their stronger research and innovation capabilities, solid financial resources, and wider distribution channels will provide a formidable competition to Revlon in the Professional Segment.

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  • 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.
Notes:
  1. Revlon’s Q4 2014 Earnings Call Webcast, Seeking Alpha, March 12, 2015 []
  2. Revlon Reports 2014 Results [] []