After delivering an inspiring 2010 and an equally promising Q1
2011, Revlon (NYSE:REV) has the street's hopes high on the growth
momentum continuing well into the future. Revlon, the
debt-ridden cosmetics giant with around $1.3 billion in sales in
2010, competes with other much bigger personal and beauty care
companies across the globe such as
(PINK:LRLCY) and Estee Lauder (NYSE:EL). We value Revlon with a
$17.70 Trefis price estimate of its stock
at almost a 10% discount to its current market price.
The story so far…
Revlon closed 2010 with sales rising 2% arresting the 4% annual
drop in sales between 2007-09. Margins also held up in spite of
tough market conditions. See
Revlon Sustains Margins In Another Tough Year
In Q1, Revlon posted an over 9% increase in sales at $333
million compared to the same period in the last fiscal year. Even
eliminating the favorable foreign exchange impact of a depreciating
dollar, this yielded 7% organic growth. While most beauty and
personal care players experienced shrinking gross margins on
account of rising commodity prices, Revlon's gross margins expanded
from 64.4% in Q1 2010 to 66% in Q1 2011.
but here's our concern…
Revlon's balance sheet carries a net debt of over $1.1 billion.
Compare this to Revlon's total sales of $1.3 billion in 2010 and
the magnitude of its indebtedness becomes clear. We had previously
expressed our concern over Revlon's gradual reduction in leverage
that had restricted the funds allocated to R&D and advertising.
See Despite Debt, Revlon Should Spend On Branding Color
Also as the macroeconomic conditions improve gradually interest
rates should rise from their current historically low levels. This
could eat into profits since a significant portion of the debt is
variable rate. Revlon Needs Debt Makeover as Bills Come Before
What else can we expect to see?
Revlon restructured its business processes and operations in
Europe recently and met with much success. See Revlon Gives its
European Business a Make Over. Revlon now plans to implement
similar changes across all regions globally, which hints at
noticeable but gradual improvements in EBITDA margins in the
View our detailed analysis for Revlon here