Is Revlon On The Verge Of Some Major Strategic Restructuring?

Revlon is up against tough competition in the beauty industry. Both L’Oreal and Estee Lauder being much larger companies as compared to Revlon, also possess greater resources for research and marketing, which gives them the scope to explore newer products and expand into newer geographies and channels. For example, recently L’Oreal has introduced the first wearable to detect ultraviolet ray exposure on the user’s skin. L’Oreal has spent around $1 billion in research and development in 2014. Estee Lauder has recently introduced a wide portfolio of new products under its travel retail channel. To put things into perspective, L’Oreal’s revenues for 2014 was ~$30 billion and Estee Lauder’s was ~$10 billion. Revlon on the other hand registered revenues of around $2 billion.

Is Revlon Trying Hard Enough?

Revlon is definitely trying to do its bit to differentiate itself and stay in the competition, but very little seems to have worked out yet. Some of the steps taken by Revlon so far include:

• Till 2013, Revlon was focused on color cosmetics, and then it realized the potential for growth in the professional segment. Hence, it acquired The Colomer Group (TCG) in mid-2013.
• Also in 2013, the company exited China’s beauty market on account of losses faced in the region.
• Understanding the need to continuously shuffle its brands to suit the ever-changing beauty market, Revlon launched a Brand Renewal program in 2014, that is expected to help it in introducing, retaining, or eliminating brands from its basket as per their user appeal and profitability contribution.
• Revlon exited its unprofitable Venezuela business in Q2 2015 in order to concentrate on more profitable geographies.
• In April 2015, Revlon acquired a fragrance business in the U.K. and aims to carve up a significant position for itself in the (so-far) fragmented, but lucrative, European fragrance business.
• In October 2015, Revlon launched its first new fragrance label in over a decade (called Love Is On) in The Duty Free & Travel Retail Global Summit held in Cannes. Leveraging upon its fragrance acquisition, the company is trying to  expand its portfolio in this segment and it is also trying to target a new customer base in the travel retail segment, who are looking for affordable makeup products through this channel.

However, for the first nine months of 2015 the company hadn’t been able to show much improvement in its financial performance. For the first nine months of 2015, Revlon’s net sales stood at $1.39 billion reflecting a 3% year-on-year decline. Revlon’s net income declined by 18% during the same period, to $31.3 million. Other than the weak foreign currencies, the company had several expenses which also dampened its financial performance. During this period, Revlon spent almost $36 million more in brand support versus 2014. Though TCG boosted Revlon’s growth in the Professional segment and helped the company with its geographic and portfolio expansion, it has also made Revlon more prone to currency headwinds because more than 50% of TCG’s sales are contributed by the EMEA region. ^[1] Revlon’s share price has fallen by almost 13% over the last one year. However, it is worthwhile to note that post Perelman’s announcement of strategic considerations, the share price of Revlon rose by almost 12%. Prior to that, Revlon’s one year stock price was showing a decline of almost 24%. ((Revlon Soars After Billionaire Owner Vows to Explore Options, Bloomberg Business, Jan 15, 2016))

(Source: Google Finance)

What Next?

Established in 1932, Revlon was acquired by Perelman in 1985, for around $1.8 billion through a hostile takeover. Perelman tried making the company go private by buying the remaining 22% stake in 2009 but failed in the attempt. His companies MacAndrews & Forbes (M&F), which has a 78% stake in Revlon, currently didn’t reveal any specific growth plans for Revlon. During the takeover fight between Perelman and Revlon’s board, a legal requirement called the “Revlon Rule” had been established that states that Revlon’s board of directors have the overriding duty to search for the highest possible offers for shareholders in the event that Revlon was being sold. ^[2]

The recent filing stated that M&F wished to talk to third parties about strategic options for Revlon. According to an analyst who follows Revlon, this might be Perelman’s strategy to buy the rest of Revlon’s stake at an attractive price. According to Three Court–a hedge fund that trades in the company–Revlon is trading at around 7.6 times its expected 2015 EBITDA multiple and at 6.6 times its expected 2016 EBITDA. This multiple is low when compared to the 17 times EBITDA price that Coty had agreed to pay for Procter & Gamble’s personal care, beauty, cosmetics and hair businesses. ^[3]

Revlon still holds big promises for the future and the company might just be in need of a suitable makeover. Hence, the strategic changes, if implemented, might bode well for the future prospects of the company.

 

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