Revlon Results Support $16 Value Led by US Growth

by Trefis Team
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Revlon
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Revlon (NYSE:REV) recently released its 3Q earnings. After the declining sales between 2007-09, Revlon has achieved a positive sales growth over the past few quarters. While it is performing relatively better in the U.S, its market share continued to decline in international markets. Also, given Revlon’s heavy indebtedness, we’re still very cautious with regards to its course of action. Revlon competes with other consumer goods and beauty product companies like Procter & Gamble (NYSE:PG), Unilever (NYSE:UL), Colgate-Palmolive (NYSE:CL) and Estee Lauder (NYSE:EL).

See Our Full Analysis for Revlon Stock

Revenue Outlook

In 3Q, Revlon’s sales grew by 4% primarily driven by 11% growth in the U.S. where Revlon color cosmetics, Revlon ColorSilk, and the March’11 acquired Sinful Colors brands performed well. However, Revlon’s market share declined outside the U.S.

In Asia-Pacific, Revlon’s performance reversed from the previous quarter and net sales declined 2%, in contrast to the 9% revenue growth last quarter. The sales decline was higher in Japan and Australia, partially offset by growing China and the distributor markets.

Revenue decline slowed down in Europe, Middle East and Africa where sales dipped 3% in the quarter, compared to 7% decline last quarter. This was primarily due to lower net sales of fragrances throughout most of the region which showed weakening performance due to aggressive promotional environment, reversing an year-on-year growth of fragrance sales until the first half of 2011.

Yet, net sales in the first nine months of 2011 have grown by 5% compared to the first nine months of 2010. This continued the positive trend given the 4% year-on-year revenue decline between 2007-09 that turned around in 2010 with a 2% sales growth. Still in an unfavorable trend, Revlon’s gross margin continued to decline to 63.5% versus 65.4% in the 3Q 2010, unfavorably impacted by product mix and higher promotional allowances and advertising.

Venezuela’s June fire leads to sales loss

In Latin America, net sales decreased 10%, primarily due to lower sales in Venezuela, where Revlon has not fully resumed business since the June 2011 fire in its local production facility. Venezuela represented approximately 3% of Revlon’s sales in 2010 with almost half of the Venezuela sales being sourced from the local production facility, while the rest was imported from the U.S. While the shipments of product imported from the U.S. resumed in August, the local facility is still under review.

Heavy Indebtedness Still a Concern

Revlon’s business is characterized by its heavy indebtedness of over $1.1 billion with just $1.3 billion in annual sales. This leaves it with much less money to spend of marketing and advertising compared to L’Oreal and Estee Lauder, a reason why project a declining market share for Revlon going forward.

We value Revlon stock with a $16 price estimate, 5% ahead of  market price.

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