Revlon Q2 2015 Earnings Preview: Currency Headwinds Expected to Thwart International Sales

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Revlon (NASDAQ:REV) is slated to release its Q2 2015 earnings on July 29. Post the delivery of a healthy 2014 (mainly after integrating The Colomer Group (TCG), into its operations), Revlon’s Q1 2015 was relatively weak. Revlon’s reported sales in Q1 2015 declined by around 7% on a year-on-year basis to $438.5 million. The losses were a consequence of the differences in initiatives taken in Q1 2014 versus those in Q1 2015. Revlon’s acquisition of  TCG (in Q4 2013) added approximately $130 million to Revlon’s core consumer product business in Q1 2014, reflecting 4% growth. In Q1 2015, Revlon incurred an additional $16.6 million expense to re-launch some of its key brands, and the company also suffered currency headwinds. In Q2 2015, we expect Revlon’s international growth to be adversely impacted by weak international currencies. Additionally, after its fragrance related acquisitions, we expect Revlon to look out for more acquisition targets.

We will update our current price estimate of $31 for Revlon’s stock shortly after the Q2 2015 earnings release.

See Our Complete Analysis For Revlon Here

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Revlon’s Strategic Investments In 2015 

On April 30, Revlon acquired U.K. based fragrance company CBBeauty (CBB) and its U.K. distributor, SAS & Company. CBB products are available in over 80 countries, and the company provides sales and strategic services to select celebrity and fashion fragrance brands. SAS & Company distributes and markets perfumes and beauty products from leading brands such as Burberry, Carven, One Direction, and Rihanna. [1]

Revlon’s management believes that this acquisition will help in the diversification of its product portfolio. Currently, Revlon operates mainly in the consumer segment and the professional segment. The consumer segment is dominated by color cosmetics. Revlon’s current fragrance segment had so far reflected fragmented growth. CBB would provide more exposure to Revlon’s fragrance business and boost its growth. Additionally, by acquiring U.K.-based distributor SAS, Revlon aims to enter into the fragrance licensing business in the U.K. Post the achievement of the licensing capability, Revlon plans to pursue the acquisitions of select fragrance companies and expand its fragrance selection, even further. [2]

According to industry sources, Revlon had been bidding for parts of Procter & Gamble’s (NYSE:PG) beauty business. Leading consumer processed goods company Procter & Gamble has commenced the process to sell some of its beauty brands. [3] However, Revlon opted out of the process later on. [4] Hence, we think there might be a possibility that Revlon is looking around for more takeover targets in 2015.

Currency Headwinds Might Thwart Sales Growth In Q2 2015

Currency headwinds have been a major roadblock to the performance of cosmetics companies in recent times. 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. Revlon’s growth might be dampened again in the second quarter due to this.

Revlon’s TCG acquisition has made it even more vulnerable to international currency fluctuations. 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. [5] 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. Though the  geographic diversification provides better top line acceleration prospects in the future (given that the beauty markets are growing in the emerging economies, as opposed to the saturated demands in developed economies), however, largely due to TCG, the company will continue to suffer the pitfalls of exposures to currency fluctuations.

 

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Notes:
  1. Revlon Completes Acquisition of CBBeauty and SAS & Company, Revlon Press Release, April 30, 2015 []
  2. Revlon’s (REV) CEO Lorenzo Delpani on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, May 7, 2015 []
  3. P&G Said to Kick Off Sale of Beauty Brands Including Wella, Bloomberg, April 8, 2015 []
  4. Henkel, Coty, KKR battle for P&G beauty assets, Financial Times, May 2015 []
  5. Revlon Reports 2014 Results []