Factors Behind Our $15 Valuation For Revlon

Revlon (NYSE:REV) is a U.S. based beauty products company. It manufactures, markets and sells an extensive array of cosmetics, women’s hair color, beauty tools, deodorants, fragrances, skincare and other beauty care products. About 55% of its global sales come from the United States, with Asia Pacific, Europe, Middle East and Asia being the other major contributors. The products are marketed under various brand names such as Revlon, Almay and Sinful Colors in cosmetics, Revlon Colorsilk in women’s hair color, Revlon in beauty tools, Mitchum in deodorants, Charlie and Jean Naté in fragrances and Ultima II and Gatineau in skincare.

Revlon sells its products through large mass volume retailers, chain drug and food stores in the U.S. and specialty stores such as perfumeries to primarily women customers. Its products are priced below the prestige segment and targets middle-high end of the mass market retail. The company had an operating margin of ~13% on $1.4 billion in revenues in 2011. The fiscal year 2012 has seen its operating margins shrink to ~10% with revenues growing only by 1%.

Here we provide an overview of how Revlon’s important product segments contribute to its business, and the key trends that impact its current valuation.

See Our Full Analysis for Revlon Stock

What Are The Important Segments That Contribute To Revlon’s Growth?

(a) Color Cosmetics

This segment contributed ~$860 million in revenues last year. The company has ~3% global share in the cosmetic market which is dominated by L’Oréal and Estee Lauder. Revenue growth from the segment (~5%) has outpaced the overall revenue growth (~1%) this year. Products under this segment are branded according to the target age group or the product characteristics. For example, Revlon Age Defying cream and Revlon ColorStay long wear cosmetic range, target women in the over-35 age bracket.

The relatively lower price point for Revlon’s products will make them attractive to the growing middle class across countries, and could spur demand to help the company grow its market share. But we expect the company to be less aggressive with its marketing campaigns and new product innovation, owing to its huge debt levels. Hence, we expect a marginal drop in its market share over the forecast period.

(b) Skin Care, Fragrance and Beauty Tools

This product segment accounts for about 20% of global revenues with the company commanding a very small market share. This segment includes products like daily care moisturizers, skin protection creams and cleansers that are marketed under the Revlon, Almay, Gatineau and Ultima II brands. Revlon has beauty salons as customers for its products like grooming tools and makeup brushes. It also sells a selection of moderately-priced fragrances under brand names of Charlie and Jean Naté.

There is growth opportunity; skin Care products have been gaining popularity, and market leaders L’Oréal and Estee Lauder count them among their fastest growing product lines. Growing adoption of these products by men and in developing markets, leads us to believe that the sales from the segment can see substantial growth, if the company launches new products over the next few years.

Which Are Revlon’s Fastest Growing Markets?

United States accounts for about 55%of Revlon’s global sales. Asia Pacific is the next biggest contributor, accounting for ~18% of the sales. However, the majority of revenue growth comes from Latin America and Canada. The company has restarted operations in its factory in Venezuela after a fire there, and can now successfully address demand in Latin America. We expect sales from the Latin America and Asia Pacific region to define growth for Revlon over the forecast period.

How Will It Fund Its Expansion Plans?

Revlon has positive cash flows, enabling it to make interest payments. It has also managed to reduce interest rates and extend maturities on its substantial debt through refinancing of the 2010 Term Loan Facility and the 2010 Revolving Credit Facility. This led to an improvement in the company’s credit ratings, ^[1] and should help it secure loans to fund growth while navigating through debt payments.

Improving Margins To Fuel Future Growth

Revlon is working on improving its operating income margins. Its plans include exiting certain manufacturing facilities and streamlining operations in under performing markets of France, Italy and Latin America. It expects to save $10 million annually through these cost reductions, which would then be reinvested in other cost reduction strategies. Revlon also plans to develop its brand and invest in advertising and promotion with the help of its retail partners. We expect these initiatives to help company-wide operating margins to return to their higher levels, after being under pressure this year.

We have a $15 Trefis price estimate for Revlon, which is on par with the market price.

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1. Moody’s upgrades Revlon’s ratings, including CFR to B1, Moody, April 2011 [↩]