Revlon (REV)

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Revlon (NYSE:REV) makes color cosmetics, fragrances, and anti-perspirants. The company sells its products to consumers through drug stores and mass market retailers such as Wal-Mart Stores (WMT). Sales to Wal-Mart accounted for 24% of Revlon's total revenues in 2007.^[1] .

Revlon's color cosmetics market share has been dropping since 1998,^[2] and the company has had only a single profitable quarter in the last 8 years. ^[3] The company's profitability began to suffer in the late 90s when overall industry growth in color cosmetics sales to mass retailers began to decline and increasing competition and drugstore consolidation resulted in reduced shelf space for Revlon's products. ^[4] Since then, Revlon has struggled to keep up with major competitors as its slowing sales and large debt burden have constricted its ability to spend on either R&D or an effective turnaround strategy. Revlon spent $24.4M on R&D in 2007, compared to $666M for L'oreal (LRLCY) in 2007.^[5] Revlon had revenues of $1.4B and long term debt of $1.4B in 2007. ^[6]

[edit] Business Overview

Revlon Market Share^[7]

Primary Brands

• Revlon: The Revlon brand is used in the cosmetics, beauty tools, and hair categories. The brand's market share in color cosmetics dropped form 14% to 13% in 2007. The brand's market share in beauty tools also dropped from 26.1% to 23.6% in 2007.^[8]

• Almay: The Almay brand is used in the cosmetics and anti-perspirant categories. The brand's market share in color cosmetics dropped from 6.2% to 6% in 2007.^[9]

Other Brands

• Bozzano: hair
• Charlie: fragrance
• Jean Nate: fragrance
• Mitchum: anti-perspirants
• Gatineau: skincare
• Ultima II: skincare

Revlon Revenue and Net Income^[10]

Revlon Revenue by Geography^[11]

[edit] Trends and Forces

[edit] L'Oreal Dwarfs Revlon's R&D Spending

Revlon competes with several larger competitors that are able to invest much larger amounts in research and development. Over the last decade, Revelon's history of losses have left it with insufficient cash flow to invest sufficiently in R&D. In 2007, Revlon had R&D spending of $24.4M (1.7% of revenue) while L'oreal spent $666M (3.7% of revenue).

[edit] Revlon is Dependent Upon Wal-Mart for a Large Portion of Sales

Revlon's principal customers include large mass volume retailers and chain drug stores, including retailers like Wal-Mart Stores (WMT), Target (TGT), Sears Holdings (SHLD), Walgreen Company (WAG), Rite Aid (RAD), CVS (CVS), and Longs Drug Stores (LDG) in the U.S., Shoppers DrugMart in Canada, A.S. Watson & Co. retail chains in Asia Pacific and Europe, and Boots in the United Kingdom. In 2007, Wal-Mart accounted for approximately 24% of Revlon’s worldwide sales. ^[12] In addition, WalMart's mass purchases give it significant negotiating power with regards to shelf placement, shelf space, and purchase price.

[edit] Slow Growth in Mass Merchant Color Cosmetics Sales

Revlon gets a lot of their business from mass retailers - WalMart made up 24% of 2007 revenues. Compounded annual growth of mass merchant color cosmetic sales in the US was 3.1% from 2000 to 2005. Between 2002 and 2004 there was no growth at all in this market. The color cosmetics industry as a whole was slow between 2001 and 2006, but according to Euromonitor, sales in India, China, and Latin America are expected to grow at high rates between 2006 and 2011.^[13]

^[14]

[edit] Interest Rate Hikes from the Credit Crisis Make Funding Its Debt Difficult

About 50% of Revlon's debt is tied to floating interest rates.^[15] If interest rates increase, Revlon will face problems on two

• Revlon has a substantial amount of outstanding indebtedness. As of December 31, 2007, the Company’s total indebtedness was $1,4B.^[16] Revlon has a history of net losses limiting the amount of cashflow available to pay its debt. In 2007, Revlon paid $136.3 M to service its debt. This was larger than the operating income, which was $121.0 M.^[17]

[edit] Competition

Revlon's primary competitors are Procter & Gamble Company (PG), L'oreal (LRLCY), Avon Products (AVP), and Estee Lauder Companies (EL). Revlon is smaller than both L'oreal and PG in terms of revenues and resources. However, Revlon has a more focused product offering than these companies and when one considers only color cosmetics sales they are much more comparable. Revlon was the second largest color cosmetics company in the US in 2006. Competitors Estee Lauder and Avon get the majority of their revenue outside the US.

Color Cosmetics / Makeup Market Share^[21]

[edit] References

1. ↑ REV 2007 10-K pg.10
2. ↑ Credit Suisse Initiating Coverage, Perelman Put pg.13
3. ↑ Wikipedia:Revlon
4. ↑ Funding Universe, Revlon
5. ↑ Wrinkles Under the Surface at Revlon
6. ↑ REV 2007 10-K, Item 15, pg. F-4
7. ↑ REV 2007 10-K pg.29
8. ↑ REV 2007 10-K pg.29
9. ↑ REV 2007 10-K pg.29
10. ↑ REV Income Statement
11. ↑ REV 2007 10-K pg.31
12. ↑ REV 2007 10-K, Item 2, pg. 19
13. ↑ Colour cosmetics firms seek out latest trends
14. ↑ Credit Suisse Estimate, July 18, 2006, pg. 15
15. ↑ Credit Suisse Initiating Coverage, Perelman Put pg.7
16. ↑ REV 2007 10-K, Item 15, pg. F-4
17. ↑ REV 2007 10-K, Item 15, pg. F-5
18. ↑ REV 2007 10-K, Item 15, pg. F-5
19. ↑ PG 2007 10-K, pg. 49
20. ↑ LRLCY 2007 10-K, pg. 23
21. ↑ Credit Suisee Estimate, July 18, 2006, pg. 67