Is Revlon a Safe Investment?

Why did Revlon post a fourth-quarter loss, and what does the future hold for the company?

Apr 10, 2014 at 2:12PM

Personal-care companies, just like the entire consumer-goods sector, have suffered amid global economic headwinds. Revlon (NYSE:REV) is no exception, as it reported a fourth-quarter loss. However, the company is trying its level best to achieve a turnaround despite competition from Avon Products (NYSE:AVP) and The Estee Lauder Companies (NYSE:EL). Let's see if Revlon is set to get back on track.

Fourth-quarter results
During its most recent quarter, Revlon registered a net loss of $0.63 a share in contrast to a profit of $0.89 per share in the year-ago quarter. The net loss was attributed to a host of factors: exchange rate fluctuations, acquisition costs related to The Colomer Group, and other costs associated with structural changes during 2013. However, net sales increased by a whopping 28% to $491 million.

For the full year, the company reported a loss of $0.11 per share compared to earnings of $0.98 per share in the prior year. Net sales for the year grew more than 7% to approximately $1.5 billion.

Segment analysis
After acquiring TCG, Revlon split its business into two segments -- consumer and professional. Net sales for the consumer segment fell 2.4%, while the profit declined by 8.9%. Excluding the impact of currency fluctuations, the segment's net sales grew 0.7%.

On a regional basis, performance in the consumer segment is given below. It is evident that foreign currency fluctuations played a major role in dampening sales during the quarter.

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The professional segment contributed $116.8 million in sales, while its profit stood at $5.2 million. Moreover, the segment generated a healthy profit margin of 4.5%.

What is Revlon up to?
In October, Revlon completed its acquisition of TCG, which was a part of Revlon until 2000 when it was spun off. TCG is a beauty-care company which sells professional products to salons and professional channels. It had annual sales of approximately $500 million last year and accounted for 24% of Revlon's revenue during the fourth quarter.

In January, Revlon began its integration program, which is designed to reduce operating costs of approximately $30 million to $35 million by year-end 2015. Almost $10 million to $15 million of these cost reductions will be achieved this year. The integration program will ensure that the company reduces its selling, general, and administrative expenses by identifying synergies and operating efficiencies across the global supply chain and offices.

Unfortunately, China hasn't proved to be a successful market for Revlon amid tough economic conditions in the country. As a result, the company has finally decided to exit the Chinese market. Quitting China means that Revlon will incur pre-tax restructuring and related charges of approximately $22 million. Overall, Revlon expects $8 million of the annual savings to be recorded in 2014.

Industry peers
Avon Products, the world's largest manufacturer and distributor of beauty products, reported a dismal performance in the fourth quarter. During the period, the company reported a loss of $0.16 per share, twice the loss per share from the year-ago period. Revenue dropped 10% to approximately $2.7 billion.

After the initial failure of Avon's SAP software in Canada, the company decided to cease using the product globally. The inability of the company to successfully roll out this software cost Avon somewhere in the ballpark of $100 million to $125 million. To make matters worse, a large majority of the company's employees left due to difficulty in using SAP.

Estee Lauder reported a slowdown in fiscal second-quarter earnings. Earnings came in at $1.09 per share, down 3.4% from the same quarter a year earlier. However, earnings surpassed analysts' expectations of $0.99 per share. Revenue grew 2.9% to approximately $3 billion.

The Chinese market is tough for Estee Lauder, as the company is still coping with slumping demand in the region. However, the company offset lost sales in that region somewhat by registering 6.5% sales growth in Asia Pacific and 6.8% growth in Europe, the Middle East, and Africa.

The company expects to earn $0.52 to $0.55 a share in the current quarter compared to analysts' expectations of $0.63 per share.

Final thoughts
Though Revlon posted a fourth-quarter loss, its revenue jumped by a huge margin, suggesting the company's products are still quite popular among customers. On the earnings front, Revlon should try to get back on track as soon as possible by efficiently managing the structural changes occurring. 

The integration program promises to be a good strategy, as it's expected to reduce operating expenses by a great deal. The acquisition of TCG is already proving to be a wise decision, as seen by the company's remarkable growth. Furthermore, exiting the Chinese market will cut the company's losses and give it an opportunity to invest this money in a more lucrative market.

Although Revlon is gradually progressing, I still believe it needs more time before it will start to earn significant profits amid ongoing economic challenges. Considering this, I remain neutral on the company right now.

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Zahid Waheed has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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