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Why a Recovery Could Be Ahead for Revlon

- By Robert Stephens, CFA

Cosmetics company Revlon Inc. (REV) has had a disappointing performance over the last year. The stock has declined by 17% versus a 5% rise for the S&P 500.

In order to improve its financial prospects, the company is implementing a revised strategy that will focus on digital growth as well as greater innovation. It is also seeking to increase its product range in the fast-growing travel retail segment, while expanding its presence in China. An efficiency program may enhance its margins, while simultaneously improving its competitive position.


Over the long run, this could enhance its stock performance, which could mean it offers turnaround potential.

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Upgraded strategy

An increasing focus on innovation could enhance Revlon's sales outlook. In the two most recent quarters, the company has benefited from new products like the Prevage Progressive Renewal Treatment and Retinol Ceramide Line Erasing Night Capsules, which drove significant sales growth.

In addition, a number of innovative new products are expected to be released in the second quarter of the current fiscal year. These include fragrances such as Oui by Juicy Couture and Revlon's Full Cover Foundation. The new products have the potential to resonate with customers and improve the company's competitive advantage, as well as the breadth of its offering.

In the most recent quarter, Revlon recorded 19% sales growth in its travel retail business. As a result, it will invest more in the segment as it seeks to develop its offerings. As part of this initiative, it plans to launch American Crew in key European airports, while also expanding the brand's exclusive products in the travel retail segment. Alongside other new products specific to this division, Revlon could further enhance customer demand across its portfolio.

Digital growth

Revlon is making sound progress in delivering its digital growth strategy. It is partnering with online retailers, while seeking to grow its direct-to-consumer websites, which provide it with a one-on-one relationship with customers and may deliver a wider economic moat in the long run. The company is building its internal capabilities in order to improve its content. These efforts include the creation and integration of Red House, which is an internal digital agency. This has allowed it to generate major savings across its brand support spend, as well as offering back-end infrastructure upgrades to support its digital growth.

The investments being made in Revlon's digital segment produced a 46% increase in e-commerce sales in the most recent quarter. Online sales now contribute 6% of total company sales. As this figure rises, digital growth is expected to have a larger impact on the group's overall financial performance, becoming a potential catalyst over the long run.

Risks

Revlon's recent financial performance has been disappointing. In the most recent quarter, net sales declined 5.7% versus the prior-year quarter. This was partly due to a drop in Revlon segment sales of 13%, with color cosmetics sales falling in North America. There was also a decline in fragrance sales due to weakness in the mass retail channel. The company also identified challenges within its internal controls regarding the implementation of a new systems, applications and products enterprise resource planning system. This could lead to further difficulties for the company's operational performance in the near term.

Although Revlon's past performance has disappointed investors, it is executing an efficiency strategy that is expected to streamline operations in 2019. The company will focus on improving its reporting structures and business processes, which could lead to improving margins. It is also investing heavily in China, where net sales growth was 56% in the most recent quarter. It is launching new products in stores and online in China, where customer demand has been high. This could help offset declines in the Revlon segment in North America over the medium term.

Outlook

Revlon's business is evolving. It is becoming increasingly focused on e-commerce sales as its digital strategy continues to experience a high rate of growth. This could offset the weakness it has seen in recent quarters in North America and in its Revlon segment.

An increasing focus on innovation and investments in its travel segment may also improve its financial outlook. Growth in China could become an increasingly important part of the business, boosting its competitive position as it releases more products in the country.

Having underperformed the S&P 500 in the last year, further challenges could be ahead for the stock in the near term. A refreshed strategy could lead to improving financial performance in the long run, which may lead to a successful stock price recovery.

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This article first appeared on GuruFocus.