Revlon Q2 2015 Earnings: Currency Headwinds Dampen An Otherwise Healthy Quarter

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Revlon (NYSE:REV) announced its second quarter 2015 earnings on July 29th. On an XFX basis (excluding the impact of foreign currency fluctuation), the company witnessed a 4.7% year-on-year growth in sales and a 6.5% year-on-year growth in adjusted EBITDA. The adjusted EBITDA growth was primarily because of Revlon’s previous brand support investments which seemed to be generating positive returns on investment. However, Revlon’s reported sales continued being dampened by currency headwinds. Revlon’s reported sales declined by ~3% on a year-on-year basis to $482.4 million. Revlon’s adjusted EBITDA grew by 5.1% on a reported basis to $90.1 million. The EBITDA growth was due to the fact that Revlon gains lower profits from countries where there were significantly weak foreign exchange rates. [1] Revlon suffered most of its currency headwinds from Venezuela in this quarter.

We are in the process of updating our current price estimate of $31 for Revlon’s stock.

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Revlon’s Professional Segment Growth Rate Surpasses That Of The Consumer Segment

On an XFX basis, Revlon’s Consumer segment grew by 1.4% to $354.7 million. However, excluding Venezuela, the growth rate was 3.7% on an XFX basis. The growth was mainly due to Almay and Revlon’s color cosmetics. [2]

Revlon grew by 4.1% on an XFX basis to $24.3 million in its Professional segment. The growth was driven by brands such as American Crew and Revlon Professional products. The main growth drivers were Revlon’s increase in brand support investment by $7 million in this segment and increased sales in the Professional division. The major part of the brand support investments for 2015 has been undertaken in the first two quarters of 2015. [2] Hence we can expect an increase in profitability over the next quarters.

The company has been supporting and boosting profitability for its brands, American Crew and Revlon Professional, in two ways.  One is by increasing their presence in the existing countries through distributors, and by expanding to newer territories. Secondly, Revlon is launching brand support initiatives, such as campaigns to spread the brand awareness for these products.

 

Revlon’s Professional segment has been witnessing significant growth over the last few quarters, primarily due to the acquisition of  The Colomer Group (TCG). Prior to its TCG acquisition, Revlon had mainly been 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. [3]

Post CBB And SAS Acquisition, Revlon Is On The Lookout For Licensing Fragrance Brands 

In Q2 2015, 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. [4]

Prior to the acquisition, Revlon’s consumer segment was 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. [5]

In its second quarter earnings call, Revlon’s management stated that the fragrance industry is largely fragmented and therefore not intensely competitive.  Revlon has a good scope for  licensing smaller brands and hence, acquire and develop those brands. [1] The licensing capability can, in turn, help Revlon earn a significant market share of the fragrance industry.

 

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Notes:
  1. Revlon Reports Second Quarter 2015 Results, Revlon, July 29, 2015 [] []
  2. Revlon’s (REV) CEO Lorenzo Delpani on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, July 29, 2015 [] []
  3. Revlon Reports 2014 Results []
  4. Revlon Completes Acquisition of CBBeauty and SAS & Company, Revlon Press Release, April 30, 2015 []
  5. Revlon’s (REV) CEO Lorenzo Delpani on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, May 7, 2015 []