Revlon’s Growth Story: Can The Small Not Only Survive, But Also Thrive?

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“It is not the strongest or the most intelligent who will survive but those who can best manage change.”
Leon C. Megginson

These words seem to be the driving force for the prominent beauty and cosmetics player, Revlon (NYSE:REV). Revlon, with its $2 billion in revenues (in 2014) is like the David to the Goliaths in the beauty industry such as L’Oreal (over $30 billion revenues) and Estee Lauder (over $10 billion revenues). However, the company seems to know how to survive in the cut-throat beauty industry, that recently forced a behemoth like P&G to sell-off a part of its beauty business. The business of beauty is currently about understanding the consumers’ psyche, adapting to the changing consumer demands, and continuous innovation and strategic moves. Revlon clearly understands these rules. A couple of years ago Revlon was focused on color cosmetics and then it realized the potential for growth in the professional segment, and hence acquired The Colomer Group (TCG) in mid-2013. Understanding the need to continuously shuffle its brands to suit the ever-changing beauty market, Revlon launched a Brand Renewal program in 2014, that will help it in introducing, retaining, or eliminating brands from its basket as per their user appeal and profitability contribution. On a similar note, Revlon recently exited its unprofitable Venezuela business in order to concentrate on more profitable geographies. Finally, Revlon acquired a fragrance business in the U.K. in 2015 and aims to carve up a significant position for itself in the (so-far) fragmented but lucrative European fragrance business.

These moves suggest that Revlon is a dynamic shape-shifter that is ready to alter its portfolio of products, market focus, and strategic investments according to suitable market opportunities. Therefore, even though it is small compared to some of its well-known peers, we believe Revlon has what it takes to fight back and survive. Revlon’s focus on the power of change and adaptability is what makes it a strong contender in the beauty business.

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Our current price estimate of $34 for Revlon’s stock is slightly over the current market price.

See Our Complete Analysis For Revlon Here

TCG Acquisition: Portfolio and Geographic Diversification 

In 2013, Revlon acquired The Colomer Group (TCG), a privately held beauty group that is focused on the professional beauty channel. The acquisition successfully diversified not only Revlon’s product portfolio but also its geographical spread.

Prior to its TCG acquisition, Revlon was a specialty color cosmetics manufacturer deriving over half of its revenues from color cosmetics. Revlon’s 2011 and 2012 acquisitions of Sinful Cosmetics and Pure Ice expanded the color cosmetics revenue contribution to over 60%. Post its TCG acquisition, the proportion of color cosmetics revenues declined to 54% in Q1 2014, from 67% in Q1 2013. Given TCG’s higher growth rate as compared to Revlon’s core products, the share of color cosmetics should continue to decline further, thereby diversifying its overall product portfolio.

TCG helped expand Revlon’s geographic spread, as well. While, in 2013, 56% of its revenues came from the U.S., the contribution declined to 53% in 2014. This is because over half of TCG’s revenues come from the EMEA region [1] 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.

The acquisition provided greater bargaining power to Revlon as TCG products are sold through professional salon channels with niche buyers, rather than large retail chains that tend to have a higher bargaining strength.

As a result of the acquisition, Revlon’s professional segment witnessed impressive growth in 2014 by clocking in over $500 million in net sales, thereby reflecting an 8% year-on-year growth in the proforma basis. Professional segment profit in 2014 was $104.8 million with a 49.5% year-on-year (constant currency) growth rate.

Below, we show Revlon’s revenue growth in the color cosmetics and hair color segments (since TCG has a major presence in hair color).

rev

Brand Renewal Program: Creating A Tailormade Portfolio To Suit Changing Beauty Needs

In its Q3 2014 earnings call, Revlon’s management stated that the company wishes to reach its desired rate of innovation in terms of quality and quantity over the next two to three years. The company’s new strategy is to use individual performances of specific stock-keeping units (SKU) to either reset the SKU or keep it on retailer shelves. This, in turn, will streamline its portfolio to suit market needs.

Hence, Revlon will review the returns from retailers quarter by quarter to assess SKU performance and replace underperforming brands and products with new and innovative products to accelerate sales growth. Though its near-term sales can be adversely impacted due to these alterations, Revlon might be able to achieve higher growth in the long run with a portfolio that is customized to fulfill market requirements.

CBB And SAS Acquisition: Growing Its Market Share In The Fragrance Business

Revlon acquired U.K. based fragrance company CBBeauty (CBB) and its U.K. distributor, SAS & Company in the second quarter of 2015. With a presence in over 80 countries, CBB also 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. [2]

This acquisition, like TCG, will help the company further diversify its portfolio. Revlon chiefly operates in the professional and consumer beauty segments. Prior to the acquisition, its consumer segment was dominated by color cosmetics with its fragrance segment displaying fragmented growth; hence, CBB will provide it with newer opportunities for business growth.

Additionally, by acquiring SAS & Company, Revlon aims to enter into the fragrance licensing business in the U.K. After receiving the licensing capability, Revlon plans to pursue further acquisitions in this segment and hence expand its fragrance selection, even further. [3]

In its Q2 2015 earnings call, Revlon’s management stated that the fragrance industry is largely fragmented and therefore not intensely competitive. This provides Revlon with the golden opportunity for licensing smaller brands and developing those into bigger brands. Revlon’s fragrance business is poised for significant growth with the successful implementation of these strategies.

Revlon’s Exit From Venezuela

Revlon exited its Venezuela business in Q2 2015 and will henceforth operate only under a distributor model in the region. Revlon had been incurring losses due to the slowdown of the Venezuelan economy. In Q2 2015, Revlon’s international net sales in the consumer division were $215.4 million reflecting a year-on-year growth of 1.2% growth on an XFX basis. However, excluding Venezuela the growth figure was 4.8% on an XFX basis. [4] The volatility of the Venezuelan economy, coupled with the Bolivar’s devaluation, had severely impacted a number of international businesses. The latest devaluation in February 2015, caused losses to the tune of $7 billion for the top ten U.S. companies operating in the region. [5]

In conclusion, we believe Revlon’s adaptable nature will help it sustain in the long run. Instead of getting into a headlong war with its bigger competitors, Revlon is searching for niche opportunities and building a presence for itself. This constant urge to innovate and grow makes Revlon a valued contender that, with time, will be a formidable force to reckon with.

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