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Investment Overview for Revlon (NYSE:REV)
The year 2016 was an extremely significant year for Revlon and it could safely be said that Revlon made a turnaround in its performance in 2016. Revlon's largest shareholder, Ron Perelman, was looking for strategic alternatives for the company towards the beginning of 2016 due to its continued weak performance. However, things started changing after Revlon's former CEO stepped down in March and Fabian T. Garcia became the company's new President and CEO. Soon afterwards, Juan R. Figuereo was announced as Revlon's new Executive Vice President and Chief Financial Officer. Along with these major management shuffles, Revlon's strategic focus seemed to change. The company acquired Cutex International business, operating in the U.K. and Australia, from Coty in June. Revlon already owned a part of Cutex and with this acquisition, Revlon completed the global consolidation of Cutex's worldwide operations under its own brand portfolio. Shortly after that came Revlon's biggest highlight of the year, the decision to acquire premium beauty company, Elizabeth Arden, which put Revlon among the top 20 beauty companies in the world.
Revlon has started benefiting from its Elizabeth Arden acquisition months after its integration into the company. The greater scale and the expanded business is benefiting Revlon resulting in the growth of its profitability. Revlon is emphasizing on an organic growth plan for the near future. It is focusing on the revival of its existing brands so that those appeal more to today's young beauty consumers. The company has put a new organizational structure in place and is trying to capitalize on the strengths of its expanded brand portfolio. However, towards the end of last year, Revlon faced challenges when a lot of consumers switched loyalties from mass cosmetic retailers to specialty beauty and online channels. However, with its recent market share gain on account of the Elizabeth Arden acquisition, Revlon is confident that it will be able to positively influence the retail channels and pull back consumers once again.
For 2016, Revlon recorded net sales of $2.3 billion reflecting around 21% y-o-y growth. However, the growth was mainly due to its acquisition of Arden. On a consolidated pro forma basis net sales grew by 1.4% after being adjusted for foreign currency. The fourth quarter net sales for the combined entity declined by 2.7% (on a constant currency basis) due to a weak demand for consumer beauty products and fragrances in North America. The only growing segments were its Professional segment that grew by 1.8% (on a constant currency basis) in Q4 and Elizabeth Arden which maintained its eight consecutive quarters of net sales growth.
- Revlon's acquisitions in 2016
- Revlon acquired the nail brand, Cutex International business from Coty in June 2016. The Cutex International business mainly operates in the U.K. and in Australia. Revlon already owned a part of Cutex and with this acquisition, Revlon completed the global consolidation of Cutex's worldwide operations under its own brand portfolio.
- Revlon's acquisition of Arden is probably an attempt to revive both the beauty companies whose popularity had been waning, lately. Revlon didn't have a major presence in the luxury beauty segment prior to this acquisition and Arden's array of luxury skincare, makeup, and perfumes definitely expands Revlon's scope to grow its business portfolio, and, in turn, result in its sales growth. Revlon's diversification of its portfolio to prestige beauty comes at a good time as the global prestige beauty segment has started regaining its popularity in 2015 after several years of lackluster demand.
- Additionally, Arden will help in expanding Revlon's distribution network and geographic expansions, too. Arden has a strong presence in travel retail and a good geographic presence in regions such as Asia Pacific. Revlon, which has so far earned over 50% of its revenues from North America, a matured market in terms of beauty demand, will surely benefit with a greater presence in regions with rising demand for beauty.
- An important change that might occur due to this acquisition is that the role of fragrance might increase significantly in Revlon's portfolio. This, in turn, can increase Revlon's market share in the global antiperspirants, deodorants, and fragrance market, which, in turn, might lead to a significant increase in Revlon's stock price valuation.
- Revlon expanded its fragrance portfolio in 2015
- In April 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.
- In October 2015, Revlon launched its new perfume, Love Is On, in the TFWA show in Cannes (also known as, The Duty Free & Travel Retail Global Summit). This had been Revlon's first fragrance launch in over a decade.
- After its acquisitions in the fragrance segment, Revlon is steadily building a stronger fragrance portfolio. Also, Revlon is targeting a new customer base in the travel retail segment for achieving significant growth. Travel retail, which is mostly dominated by premium cosmetics, will help Revlon find a new set of customers who are looking for affordable makeup products through this channel.
- In its Q2 2015 earnings call, Revlon's management spoke about the potential for growth in the fragrance business, which is currently in a fragmented state and lacks fierce competition. This provides Revlon with the opportunity for licensing smaller brands and developing those into bigger brands.
- Revlon's Market Share of Global Color Cosmetic Market: Revlon's market share expanded from 2.9% in 2012 to 3.4% in 2014, driven by a bounce back in retail gross margins. However the share declined to 2.8% in 2015. We currently forecast Revlon's share in the global color cosmetics market to increase to 4% over our review period. There could be a 15% upside to the Trefis price estimate if the market share reaches 4.5% by the end of our review period.
- Revlon's Color Cosmetics EBITDA Margin: EBITDA margin for Revlon declined from 21.6% in 2012 to 19.2% in 2013, weighed down by the acquisition of TCG in the fourth quarter. The EBITDA margin increased slightly to 19.5% by 2014. However, given Revlon's weak performance in 2015, the margin declined to 19%. Going forward, we expect margins to remain under pressure as sales from the lower margin TCG business gain traction and outpace Revlon's core business growth. We currently forecast Revlon's Color Cosmetics EBITDA Margin to increase marginally to reach 20% by the end of our forecast period, below historical margin levels of over 22%. There could be 40% upside to the Trefis price estimate if the margins were to expand back to historical levels of around 26% by the end of our forecast period.
- Revlon's Market Share of Global Hair Care Market: Revlon's hair care market share expanded from 0.44% in 2012 to 0.66% in 2013, boosted by an increase in revenues as well as an expansion in retail gross margins. The share increased to 1.3% in 2014, resulting from the full year addition of TCG's hair care product sales. The share slightly declined to around 1% in 2015. We expect Revlon's hair care market share to increase marginally and reach close to 1.5% by the end of our forecast period. There could be around 30% upside to the Trefis price estimate if the market share for Revlon's hair care were to rise to 2% over our forecast horizon.
Revlon manufactures color cosmetics, women’s hair color, skin care, fragrances, antiperspirants and deodorants, and beauty tools. Revlon sells predominantly through large mass retailers and chain drug stores such as Wal-Mart, Target, Sears, Walgreens, Rite Aid, CVS, and Longs Drug Stores in the US; A.S. Watson & Co. in Europe and Asia-Pacific, and Boots in the UK. These few but larger retailers constitute a significant portion of Revlon's sales, with Wal-Mart making up approximately 20% of Revlon's net sales.
The major brands include: Revlon (for color cosmetics, women’s hair color, and beauty tools), Almay (for hypo-allergenic, fragrance free cosmetics), Charlie and Jean Nate (for Fragrances), Mitchum (for antiperspirants /deodorants) and Ultima II and Gatineau (for skin care).
Despite a global presence, about 55% of Revlon's net sales come from the U.S., with the rest coming from international regions including Europe, Asia-Pacific, and Latin America.
Revlon has significant outstanding debt, with about 50% of the debt being tied to floating interest rates. Revlon competes with bigger players such as L’Oreal, Avon, and Estee Lauder, among others.
Second largest market share in color cosmetic in US
The US is a major market for color cosmetics, amounting to over 18% of the global market size and Revlon commands over 20% share of the US market in color cosmetics.
Colomer acquisition adds weight to product diversification
TCG adds close to $530 million in revenues to Revlon's core business, taking the total revenues to $1.9 billion in 2014, reflecting a 1.7% year on year growth as compared to pro forma revenues of 2013. For 2014, the constant currency growth rate was 4.7% on a year-on-year basis. With a product portfolio that is heavy on hair care products, TCG should be able to create product diversification. Additionally, the acquisition also adds value to its skin care business which is witnessing the strongest growth across all segments globally. TCG also adds geographic diversity to Revlon's business, with the company deriving close to 50% of its revenues from the EMEA market.
Revlon’s business is characterized by its heavy indebtedness of over $1.84 billion with just $1.9 billion in annual sales in 2015. Such high levels of indebtedness, make the earnings highly volatile and vulnerable to market fluctuations and interest rates. Apart from high interest expenses, this leaves it with much less money to spend on marketing and advertising.
Revlon progressively reduced its debt burden from $1.4 billion over 2007-2009, which led to limited investments in advertising, R&D, and capacity expansion, thereby hitting its market share. However, Revlon has increased its advertising spend over the past few quarters hoping that if margins and pricing hold up, the company can use these additional resources to pay down debt.
Taking advantage of the favorable fund-raising environment, Revlon has also refinanced its outstanding $792 million loan in May 2011 with an $800 million loan, while reducing its effective interest rate and extending its maturity (to Nov 2017 from Mar 2015). In June 2011, it also refinanced its existing revolving credit facility that was set to expire in March 2014, pushing its new $140 million revolving credit facility to June 2016 while securing better financing terms from the banks underwriting these loans.
Its recent acquisition of The Colomer Group added about $700 million in debt onto Revlon's balance sheet and inflated its total outstanding debt to $1.9 billion. We expect the company's debt levels to pare down to $500 million by the end of our forecast period, in accordance with its debt payment schedule. There would be a considerable downside risk to the company's stock if the company takes on additional debt, or is not able to pay its debt on time.
Relatively low marketing & R&D budget
On the basis of revenue, Revlon ($1.9 billion revenues) is much smaller than L'Oreal (over $30 billion), Avon (~$9 billion) and Estee Lauder (~$11 billion), therefore Revlon has less money to spend on marketing, an extremely important factor for success in the cosmetics industry.
A heavy debt burden with moderately growing sales also constricts Revlon's ability to invest in R&D, which is crucial for an industry thriving on innovation. In 2015, 2014 and 2013, the Company spent $31.2 million, $31.6 million and $26.9 million, respectively, on research and development activities, which is low compared to that of its competitors like L'Oreal and Estee Lauder. L'Oreal's R&D budget is currently over $1 billion and Estee Lauder's research and development costs over $150 million.
Booming skin care segment on account of anti-aging creams
Anti-aging creams and anti-cellulite skin care products are in high demand among an aging population in the developed countries notably Japan (with the oldest demographic), the US, and Western Europe.
Introduction of men specific product range
"Beauty care products for men" is the latest niche targeted by beauty and personal care companies globally. In evolved markets like the US and Western Europe, the introduction and extension of men’s product lines is a major source of revenue growth.
Increasing focus on natural products
There is a growing demand for natural / organic products in most developed countries, a trend led by the evolved markets of the US and Western Europe. There is an increased preference for less synthetic, eco-friendly, and natural products and packaging.
Rise of the 'masstige' product segment
There is a growing trend towards the so-called 'masstige' products which are premium brands sold at lower prices through mass distribution.
- To reach greater distribution, prestige and premium brands are taking the route of mass distribution.
- The mass products and smaller players are catching up in terms of innovation and product quality, which prevents the big brands from charging a significant premium.
- The recessionary macroeconomic outlook over 2008-2009 has led to consumers shifting to the upper price band of mass products from the prestige segments. The ‘masstige’ products are priced in this price range.
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- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
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See more on: DCF Methodology
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