Revlon (NYSE:REV) reported decent fourth quarter and fiscal 2013 results Wednesday, March 5. Quarterly revenues jumped 31% in constant currency terms, bolstered by approximately $117 million from the acquisition of The Colomer Group. Revlon’s core product portfolio continued to perform weakly with a constant dollar revenue growth of 0.7% in the three months ended December 2013. For full fiscal 2013, revenues from Revlon’s core business segment grew close to 1.3%.
We have updated our Trefis price estimate for Revlon to $26 to incorporate various trends from the recently concluded FY13 earnings. The change should be reflected on the company page soon. In this note, we present key updates made to our Revlon model and their individual contribution to the price revision.
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Boost To Hair Care Segment Should Push Sales Higher
Revlon’s recent fiscal earnings indicate that hair care sales grew 38% over 2012, primarily supported by TCG. In the year prior to 2013, hair care revenues expanded 6.6% on a year-on-year basis. Given the fact that TCG only contributed to a quarter’s sales of hair care products for Revlon, we expect strong revenue run-rate from hair care products in 2014 when TCG contributes to an entire year’s sales. We have updated our revenue forecast for hair care sales to $595 million for FY14, to account for full integration of TCG’s revenues into Revlon. We expect hair care sales in FY14 to increase 126% on a year-on-year basis compared to our previous estimate of 2.6% for Revlon’s organic hair care business. This increase in revenues contributed to a 57% increase in our price estimate. You can see the impact of TCG’s acquisition on Revlon’s hair care market share on our Trefis widget provided below.
Working Capital Should Improve Going Forward
Revlon’s working capital has decreased consistently from $78 million to -$1.8 million between 2007 and 2012, adjusting for our modelling process (which excludes cash, current debt, and tax assets and liabilities). This resulted in a sharp slowdown in business performance for the company, with declining inventory levels and increasing accrued expenses. The acquisition of TCG lent a crucial support in expanding overall working capital. Inventory levels retraced back to $175 million in 2013 from $115 million in 2012. By the end of December 2013, Revlon’s cash conversion cycle witnessed significant deterioration and stood at 64 days compared to 60 days in 2012.
For 2014, we expect Revlon’s cash conversion cycle to increase further to reach 67 days. However, this increase should be manageable for the company, given the additional revenue source arising from TCG. For full fiscal 2014, we expect to see an improvement in working capital to $41 million compared to our previous estimate of $13 million, driven by an increase in receivables and inventory levels.
Higher Taxes From Acquisition Should Strain Cash Flows
Revlon’s provisions for income taxes stood at $72 million in FY13 against our earlier estimate of $82 million. A lower than expected growth in EBIT resulted in softening of tax payables for the fiscal. However, going into 2014, Revlon’s tax burden should be impacted by the $664 million cash acquisition of TCG. Property, plant and equipment levels for Revlon expanded from $103 million as of September 2013 to $196 million at the end of FY13. This increase in PP&E is a result of an expansion in manufacturing footprint from TCG’s facilities, and should lead to higher depreciation expense and consequently, tax deductions going forward.
Additionally, an increase in EBIT going forward, resulting from higher net sales of the Revlon-TCG integrated unit should lead to an increase in tax payables. We expect an effective tax rate of 30% for FY14, with absolute tax provisions of approximately $85 million compared to our previous estimate of $81 million. Changes made to tax forecast for 2014 and beyond have contributed to a 25% reduction in our Trefis price estimate.
Lower Margin Products From TCG Should Weigh On Overall Margins
In its annual report, Revlon stated that segment margins for its consumer and professional line of businesses stood at 25% and 14% respectively in FY13, on a proforma basis. Revlon had revenues of $1,378 million while TCG added $531 million on a proforma basis, leading to a revenue ratio of 2.6 between the consumer line and the professional line. Using this ratio, we can calculate a weighted margin for the integrated Revlon-TCG unit which comes to be approximately 22%. However, accounting for the higher growth in revenues from the lower margin TCG business in comparison to Revlon’s core business presents a considerable downside to this margin estimate.
Including this margin risk, we revised our margins forecasts to remain between 19%-20% till the end of our review period. This downward revision resulted in a 7% reduction in our price estimate. However, there can be a decent upside to our price estimate resulting from cost synergies of the integrated unit. Revlon announced its ‘Integration Program’ in January 2014, to achieve annualized cost reductions of approximately $30 million – $35 million through an integration of Revlon and TCG. The integration process is expected to cost approximately $45 million – $50 million in restructuring, capital expenditures and other related non-restructuring costs through 2015. For 2014, Revlon expects to achieve total cost reductions between $10 million – $15 million. On sales touching $2 billion for FY14, successful integration and realization of cost synergies should translate into a margin expansion of 50 – 75 basis points.