Revlon (NYSE:REV) is expected to report is fiscal 2013 results on February 03, 2014. The company is a leading player in the beauty and personal products’ space, competing with L’Oreal (OTC:LRLCY), Estee Lauder (NYSE:EL) and Avon Products (NYSE:AVP), and has a leading market position in the U.S. mass retail channel for color cosmetics, women’s hair color and beauty tools.
For the nine months reported so far in 2013, Revlon revenues stand at $1.02 billion compared to $1.03 billion from a similar period last year. We expect revenues of approximately $1.47 billion for fiscal 2013 from Revlon’s organic business compared to $1.43 billion last year, indicating a 3.6% year-over-year growth. However, this figure could be inflated considerably with the inclusion of its latest acquisition, The Colomer Group (TCG), into Revlon’s business.
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Strong Holiday Season Demand Could Boost Q4 Revenues
Although Revlon’s products are more inclined towards the mass-market, the company registers a notable increase sequentially in the holiday season quarter, where consumers tend to spend on more luxurious discretionary products. Revenues in Q4FY12 and Q4FY11 stood at $391 million and $360 million, respectively, compared to $347 million and $337 million in Q3FY12 and Q3FY11. This indicates a quarter-on-quarter growth rate of 13% and 7% into the fourth quarters in 2012 and 2011.
For Q4FY13, we expect quarterly revenues to be boosted by the accelerating growth in total retail holiday season sales this year. According to Shopper Trak, holiday season sales (for November and December) grew 2.7% this year and touched $267 billion.  Comparatively, the growth rate during the same period in 2012 and 2011 was 2.5% and 2.3% respectively.  Strengthening U.S. consumer confidence contributed majorly to this acceleration in retail sales, which should translate into fourth quarter revenues for Revlon.
Moreover, Revlon announced completing the acquisition of The Colomer Group (TCG) on October 09, 2013 which falls into the fourth quarter.  Revlon reported that TCG had annual sales of approximately $500 million in 2012, of which 50% is from the EMEA region. EMEA markets account for only 13% of Revlon’s organic business and the TCG acquisition bodes well in balancing Revlon’s presence geographically.
Balance Sheet Should Strengthen Further From TCG Consolidation
In addition to boosting revenue, the acquisition of TCG leverages Revlon’s balance sheet. Revlon raised $700 million in additional debt from its bank-term loan facility to fund the acquisition of The Colomer Group. The company carries a total debt of $1.5 billion compared to its present market capitalization of $1.2 billion and fiscal 2012 revenues of $1.4 billion. Debt covenants pertaining to the $700 million term loan include an interest rate spread of 1.5%-2% above the LIBOR (London Interbank Offered Rate) maturing June 2016 and extendable up to August 2018. 
Without considering the additional debt from TCG, we currently forecast Revlon to increase its Interest Coverage ratio from 2.2x in 2012 to 2.6x in 2013, benefiting from lower interest expenses as a result of debt refinancing conducted in February 2013. The refinancing resulted in prepayment of 9.75% Senior Secured Notes maturing in 2017 through the issue of 5.75% Senior Notes due in 2021. Even with the inclusion of the $700 million debt incurred with the TCG acquisition, Revlon’s Interest Coverage ratio remains close to 2.6x due to the increase in operational profit from revenue accretion from the TCG acquisition. Additionally, any cost synergies as a result of the consolidation of this acquisition with Revlon could further increase the company’s Interest Coverage ratio, which is a sign of strengthening financial health for the company.
Skin Care Segment Key For Long Term Top Line Growth
Revlon’s business heavily relies on the performance of its color cosmetics portfolio, which makes up 66% of overall revenues. Skin care products on the other hand generate only 18% of revenues for the company. Globally, the skin care product market was estimated to have generated $100 billion approximately in sales in 2012  while the global color cosmetics market generated$55 billion.  Revlon’s small presence in the largest market is resulting in a potential loss in revenues for the company. Furthermore, color cosmetics products generally have a lower price point and lower margins compared to skin care products. Hence, we believe revenue from the color cosmetics segment has lower growth potential compared to the larger, higher-priced skin care product market.Notes:
- Discounts drive U.S. holiday retail growth: ShopperTrak, Reuters, January 2014 [↩]
- Holiday season sales rose 2.5 percent: ShopperTrak, Reuters, January 2013 [↩]
- Revlon Completes Acquisition of The Colomer Group, Revlon IR, October 2013 [↩] [↩]
- Skin Care Market Radiant for Foreseeable Future, GCI Magazine, September 2012 [↩]
- Colour cosmetics – The colour of money, cosmeticsbusiness.com, January 2013 [↩]