Revlon’s Earnings Will Provide Much Needed Update On U.S. Sales

REV: Revlon logo

Revlon (NYSE:REV) is due to announce its Q2 results Tuesday, July 31. The beauty company posted weak results last quarter, particularly in its biggest U.S. market. Sales declined by 1% in the U.S. despite the acquisition of Sinful Colors in March 2011 and the sales outside the U.S. were flat due to unfavorable currency fluctuations.

The company has a highly leveraged balance sheet and much lower annual turnover compared to its competitors, and this constrains it from spending more on R&D and marketing, leading to an adverse impact on its market share. Revlon competes with other beauty product companies such as L’Oreal (NYSE:PG), Avon Products (NYSE:AVP) and Estee Lauder (NYSE:EL).

See Our Full Analysis for Revlon Stock

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Last quarter, Revlon’s sales in the U.S. declined in contrast to a 4% sales growth in fiscal 2011. The decline was led by a reversal of the previous improvement in sales performance of its brand Almay color cosmetics and flat sales for Revlon color cosmetics and hair color. The fact that sales declined despite the acquisition of Sinful Colors in March-mid last year did not reflect a healthy trend. Revlon’s beauty tools sales have already been sliding down over the past few quarters. The U.S. accounts for more than half of Revlon’s sales.

Outside the U.S., sales volume was almost flat with unfavorable currency fluctuations leading to a decline in net sales in Europe, Middle East & Africa, offset by some improvements in Latin America and Asia-Pacific. European sales suffered with lower fragrance sales while Latin American sales were depressed due to incomplete business resumption in Venezuela since the June 2011 fire.

With headwinds like weak consumer spending in the U.S. over the last quarter and the European debt crisis, the earnings will provide an update on the impact on Revlon’s sales. The beauty company also suffers with weak cash flows and high debt burden (Revlon has debt in excess of $1.1 billion with just $1.4 billion in annual sales) which puts it in a highly unenviable position while competing against giants such as L’Oreal and Estee Lauder that have stronger marketing and R&D budgets to expand market share.

We have a $17 price estimate for the Revlon stock.