) is expected to release Q1 2011 earnings on April 28. We value
Revlon stock with a
$14.88 price estimate
, roughly 5% below market price. Revlon competes with other
consumer goods and beauty product companies like Procter &
), Colgate-Palmolive (
), and Estee Lauder (EL).
We were pleasantly surprised with Revlon's 2010 performance,
with sales rising 2%, a moderate turnaround from the 4%
year-on-year drop in sales over 2007-09. The company also sustained
margins despite tough market conditions. Given Revlon's heavy
indebtedness, we're still very cautious with regards to its course
of action - we're paying particular attention to its EBIDTA
margins, overhead corporate expenses and operating working capital.
Here we highlight why these are crucial for Revlon.
What About Revlon's Heavy Debt Burden?
Revlon's balance sheet carries net debt of $1.14 billion.
Compare this to Revlon's total sales of $1.32 billion in 2010 and
the magnitude of its indebtedness is evident. We've previously
discussed our concern regarding Revlon's gradual reduction in
leverage that has restricted funds allocated to R&D and
advertising in our note titled "Despite Debt, Revlon Should Spend
On Branding Color Cosmetics".
While we do expect Revlon to reduce leverage in the future,
doing so at the expense of its advertising budget could have an
adverse impact on market share.
What About Revlon's EBITDA Margins and Overhead Corporate
Revlon increased its advertising expense by $34 million in 2010.
The added expense was partly offset by roughly $19 billion worth of
savings in cost of goods sold, leading to improvements in gross
margins. As a result, Revlon's EBITDA margin remained relatively
flat at around 19.7% over 2009-10.
But here's our biggest concern
. With rising commodity prices in the current inflationary
environment, we expect gross margins to be strained further. Hence,
Revlon must realize savings in operating expenses to maintain
EBITDA margins going forward.
Revlon's corporate expenses primarily include restructuring
costs and amortization of debt issuance costs (the expense incurred
while raising its mammoth debt load). While these can't be entirely
kicked aside, we would certainly expect Revlon to tighten its purse
strings a little - particularly when it comes to restructuring
See our complete analysis of Revlon's stock