After delivering an inspiring 2010 and an equally promising Q1 2011, Revlon (NYSE:REV) has the street’s hopes high on the growth momentum continuing well into the future. Revlon, the debt-ridden cosmetics giant with around $1.3 billion in sales in 2010, competes with other much bigger personal and beauty care companies across the globe such as L’Oreal (PINK:LRLCY) and Estee Lauder (NYSE:EL). We value Revlon with a $17.70 Trefis price estimate of its stock at almost a 10% discount to its current market price.
The story so far…
Revlon closed 2010 with sales rising 2% arresting the 4% annual drop in sales between 2007-09. Margins also held up in spite of tough market conditions. See Revlon Sustains Margins In Another Tough Year.
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In Q1, Revlon posted an over 9% increase in sales at $333 million compared to the same period in the last fiscal year. Even eliminating the favorable foreign exchange impact of a depreciating dollar, this yielded 7% organic growth. While most beauty and personal care players experienced shrinking gross margins on account of rising commodity prices, Revlon’s gross margins expanded from 64.4% in Q1 2010 to 66% in Q1 2011.
but here’s our concern…
Revlon’s balance sheet carries a net debt of over $1.1 billion. Compare this to Revlon’s total sales of $1.3 billion in 2010 and the magnitude of its indebtedness becomes clear. We had previously expressed our concern over Revlon’s gradual reduction in leverage that had restricted the funds allocated to R&D and advertising. See Despite Debt, Revlon Should Spend On Branding Color Cosmetics.
Also as the macroeconomic conditions improve gradually interest rates should rise from their current historically low levels. This could eat into profits since a significant portion of the debt is variable rate. Revlon Needs Debt Makeover as Bills Come Before Beauty.
What else can we expect to see?
Revlon restructured its business processes and operations in Europe recently and met with much success. See Revlon Gives its European Business a Make Over. Revlon now plans to implement similar changes across all regions globally, which hints at noticeable but gradual improvements in EBITDA margins in the future.