Revlon Pre-Earnings: Weak Growth Will Put Pressure On Margins

Revlon ( REV ) is scheduled to report its Q2 2013 results on July 31. The company is a leading player in the beauty and personal products' space, competing with L'Oreal ( LRLCY ), Estee Lauder ( EL ) and Avon Products ( AVP ), and has a leading market position in the U.S. mass retail channel for color cosmetics, women's hair color and beauty tools.

Revlon's net sales grew 1.7% to $357.1 million in Q2 2012, from $351.2 million in Q2 2011. Excluding currency fluctuations, net sales for Q2 2012 grew by $14.9 million (or 4.2%) over Q2 2011. Volume sales improved in the U.S., Latin America & Canada, but were offset by weaker sales in Europe, the Middle East & Africa and Asia Pacific. Sales from emerging markets as well as Europe continued to be weak in Q1 2013. Sales were at $332 million and were flat in comparison to previous Q1s.

For Q1 2013, Revlon posted a loss of $6.9 million primarily due to loss from early retirement of part of its sizable debt load. Although the company doesn't have any contractual obligations to clear out debt in the remaining quarters of 2013, margins for Revlon have very limited upside due to high cost of sales and SG&A expenses. Operating income margins for Q2 2012 and Q2 2011 have been 11.98% and 13.61% respectively while net income margins have been 3.11% and 1.85% respectively. The huge debt burden for Revlon is continuing to weigh down on margins.

See Our Full Analysis for Revlon Stock

Cost-cuttings And Debt Servicing To Lead Margin Revival In Long Term

Revlon's management is focused on addressing the fundamental problems plaguing performance. The company has undertaken a $24 million restructuring program by exiting from its owned and leased manufacturing facilities in France and Maryland, resizing operations in Europe, and combining operations in Latin America and Canada into one entity to save on costs by 2013 end. The company has incurred $8.3 million in employee severance costs and other charges between September 2012 and March 2013, with the rest of $15.7 million to be paid out during the remaining quarters in 2013.

The company also completed prepayments on $330 million of its 9¾% Senior Secured Noted due November 2015, by issuing $500 million aggregate principal amount of 5¾% Senior Notes maturing in 2021. A portion of the remaining proceeds from the issuance, along with existing cash, has also been used to pay approximately $113 million of principal of the 2011 Term Loan Facility. We believe these initiatives taken by the company would help reduce costs and interest expenses, leading to a marginal improvement on profit after tax margins.

Additionally, lower expenses would give enough room for future advertisement & marketing and R&D investments to fuel growth. A higher allocation of revenues to advertising and R&D could help improve sales growth which has been tempered as a whole.

US Economy And Color Cosmetics' Sales To Drive Revenues

Revlon reported about 68% of the net sales from color cosmetics and the U.S. contributed to 58% of the net sales in Q1 2013. Contributions from Latin America and Canada, Revlon's smallest market by size, amounted to 14% of the net sales in Q1 2013. In 2012, the revenue growth from the U.S. was primarily driven by higher net sales of Revlon color cosmetics, SinfulColors color cosmetics and Pure Ice color cosmetics.

Although sales declined in Europe, the Middle East and Africa by 11.6%, they were offset by ballooning sales from Latin America and Canada and a 5.6% growth from the US in 2012. This improved sales pattern in color cosmetics leads to a much faster recovery in the company's performance, bolstered by the strong growth in the U.S. economy and strong color cosmetics sales. We expect higher consumer discretionary spending from the U.S. and Latin America & Canada, increasing the global color cosmetics' market size.

We will update our $15.72 price estimate for Revlon after the company files its financials with the SEC.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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