Revlon’s Near Term Sales Growth Could Suffer With Strategic Focus On Fewer, Bigger Brands

by Trefis Team
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Revlon (NYSE:REV) reported third quarter earnings on October 29th. Quarterly sales exceeded analyst estimates, although they were lower on a proforma adjusted basis from Q3FY13. The company reported quarterly sales of $472 million in Q3FY14, supported by a 4% increase in sales in the U.S. However, international markets failed to add to overall sales growth for Revlon, generating a 0.2% growth in constant currencies. Including currency fluctuations, sales from international markets fell 4.5% in Q3FY14.

Revlon’s consumer product line generated sales of $348 million, marginally lower from $351 million in proforma sales in Q3FY13. Its professional products segment, which has lifted Revlon’s sales since the acquisition of The Colomer Group in December 2013, witnessed a marginal expansion in sales to $124 million this quarter. Excluding the impact of currency fluctuations, sales from both the consumer and professional product lines increased 2% in Q3FY14 in comparison to proforma Q3FY13.

The constant currency increase in sales from the consumer segment was primarily a result of favorable returns reserve adjustments in the U.S. during the quarter. Going forward, the company expects lower discontinued products in the future as part of its strategy to focus on fewer, bigger and better innovations, and a slump in demand for these products could decrease sales by the reserve amount. Professional products from American Crew, Revlon Professional and Creme of Nature increased year on year in Q3FY14, partly offset by a decline in CND nail products. [1]

On a constant currency basis, segment profits for the consumer product line increased 1.6% due to the returns reserve while profits from the professional product line remained flat on a year on year basis. Total operating profit declined to $160 million from $184 million for the quarter as a result of higher advertising expenses. Revlon’s pre-tax income from operations declined on a year on year basis to $23 million, resulting from foreign currency losses due to balance sheet devaluation in its Euro-denominated intercompany loans. [1]

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Near-term Sluggishness in Sales to Continue

During the conference call, Revlon Chief Executive Officer Mr. Lorenzo Delphani stated that the company intends to reach its desired new rate of innovation in terms of quantity and quality in the next 2-3 years depending on the speed and effectiveness of executing of its strategy. This time frame in its brand renewal program indicates that core organic sales for the company could remain under pressure going forward. For Q3FY14, Revlon had nearly $9 million in returns reserve added to sales.

The company’s new strategy to use individual performances of specific stock-keeping units (SKU) to either reset the SKU or keep it on retailer shelves is a good way to streamline its portfolio to market demands. [1] Revlon will review the returns from retailers quarter by quarter to assess SKU performance and replace underperforming brands and products with new and innovative products to accelerate sales growth. While this might play out in the long term, near term sales are likely to see some fluctuations due to the addition and removal of these reserve adjustments. Additionally, the weakening economic environment in Europe and the depreciation of the Euro against the Dollar would add pressure to the company’s bottom-line in the near term.

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Notes:
  1. Revlon’s (REV) CEO, Lorenzo Delpani on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 2014 [] [] []
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