Value Line recently initiated coverage of Revlon, Inc. (REV), in its flagship product, The Value Line Investment Survey. The company is one of the leading cosmetics companies in the world. Revlon, through its subsidiaries, manufactures, markets, and sells cosmetics, women’s hair color, beauty tools, anti-perspirant deodorants, fragrance, skincare, and other beauty care products. Its products are sold around the globe, with well-known brands including the Revlon ColorStay, Super Lustrous, Age Defying, PhotoReady and ColorBurst franchises. Some of its other top brands include Mitchum deodorants, ColorSilk hair coloring, and Sinful Colors and Pure Ice cosmetics. The company was founded by Charles Revson in 1932 and is based in New York City. It had roughly 5,100 employees as of December 31, 2012.
Revlon’s primary customers are mass volume retailers and chain drug and food stores in the U.S. Some of its biggest customers include Wal-Mart (WMT - Free Wal-Mart Stock Report) , Walgreen (WAG), CVS (CVS), and Target (TGT). It also sells its products to department stores and specialty stores internationally. The company also has a licensing business in which it licenses certain brands to third parties for complementary beauty-related goods in exchange for royalties. Revlon has leading market positions in several product categories in a number of foreign countries, including Canada, Australia, and South Africa.
Revlon’s cosmetics and personal care products are produced in the United States and South Africa, as well as third-party facilities around the world. They are sold in more than 100 countries by the company’s sales force, as well as by independent distributors. The U.S. represented 56% of 2012 sales.
The consumer products business in which Revlon operates is highly competitive. It competes not only against other large multi-national manufacturers, including L’Oreal, Avon Products (AVP), and Estee Lauder (EL), but also against smaller specialty stores, perfumeries, and prestige stores.
Revlon faces several risk factors which could challenge its business. The company has a significant amount of debt on its balance sheet. As of December 31, 2012, it had over $1.1 billion in long-term debt, with only $116 million of cash on hand. This level of indebtedness can make earnings highly volatile, owing to fluctuating interest payments associated with variable-rate loans. It also leaves less money to spend on marketing and advertising. Plus, the high leverage also constricts the company’s ability to invest in research and development, which is crucial in the consumer products industry.
Another concern is that the company produces a substantial portion of its offerings at its Oxford, North Carolina facility, and any disruptions at this location, including natural disasters, equipment breakdowns, or any other significant disturbance, would severely hurt its ability to provide its products to customers. Revlon also depends on a relatively small number of customers for a large portion of its sales. Walmart accounted for 22% of sales in 2012, and the loss of this business would clearly impact results.
Business prospects at Revlon remain mixed. Sales of some of the company’s primary beauty products have been sliding in recent quarters, which has been discouraging. In addition, the company has also not fully taken advantage of emerging markets as of yet, with the majority of its sales still coming from the United States However, it has slowly reduced its debt levels, which should allow for higher marketing and R&D spend. We think that as global macroeconomic conditions improve, particularly in Europe and Asia, customers will have more discretionary spending, and this ought to boost demand for some of its premium products. All told, we look for 2013 sales to come in relatively flat with the prior year’s tally of just over $1.4 billion. Still, share net should rise nicely, thanks to ongoing cost-reduction initiatives and the company’s focus on improving margins.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.