Revlon Optimistic About Elizabeth Arden Merger

Cosmetic maker aims to appeal to younger generation and develop its digital strategy

Source: Revlon
Source: Revlon

Cosmetics giant Revlon Inc. (NYSE: REV) announced its Q2 FY16 financial results on July 29th, 2016. The New York-based company manufactures, markets, and sells beauty and personal care products worldwide under three segments: Consumer, Professional, and Other. The Consumer segment offers cosmetics, beauty tools, and skincare products under the Revlon, Almay, SinfulColors, Pure Ice, Revlon ColorSilk, Llongueras, Charlie, Jean Naté, Mitchum, Natural Honey, and Gatineau brands. Its Professional segment offers hair color, hair care, and hair treatment products under the Revlon Professional brand name; men’s grooming products under the American Crew and d:fi brands; nail enhancement systems, and nail color and treatment products under the CND brand; hair products under Orofluido, UniqOne, and Intercosmo brands; and multi-cultural hair products under the Creme of Nature brand name. The Other segment includes designer and celebrity fragrances, cosmetics and skincare products, such as Burberry and Rihanna branded products, as well as the CBB business. Read more about Revlon’s financial results below.

Q2 FY16 financial highlights

During Q2 FY16, Revlon’s net sales grew by 1.3% Y-o-Y to $488.9 million, and by 3.5% excluding the impact of foreign currency adjustments. Growth was driven by product innovation and strong performance by established brands in both the Consumer and Professional segments and in International territories. Among other growth drivers, sales were propelled by continued strength of Revlon’s flagship brand, which reported year-to-date consumption growth of 3.9%, outperforming the color cosmetic mass category.

Revlon’s total adjusted EBITDA fell by 1.1% to $89.1 million in Q2 FY16, and remained flat excluding the impact of foreign currency adjustments, versus the prior year quarter. Total as- reported net income fell 68% to $8.3 million in Q2 FY16, owing to the impact of $6.4 million of non-operating and unusual items, net of taxes, as well as acquisition and integration costs. Excluding non-operating and unusual items, adjusted net income was $14.7 million in Q2 FY16, a decrease of $14.3 million over the prior year quarter, entirely due to foreign currency losses on intercompany loans.

Segmental highlights

Consumer Segment: This segment’s Q2 FY16 net sales increased 3.9% Y-o-Y to $359.5 million, primarily driven by higher net sales of Revlon color cosmetics, SinfulColors color cosmetics, Mitchum antiperspirant deodorants, and Cutex nail products, partially offset by lower net sales of Almay color cosmetics. The segment’s profit in Q2 FY16 decreased 2.5% Y-o-Y mainly due to the unfavorable impact of product mix and the impact of foreign exchange transaction within cost of sales.

Professional Segment: This segment’s Q2 FY16 net sales were essentially flat compared to the prior year quarter, primarily due to higher net sales of Revlon Professional hair products and American Crew men’s grooming products, offset by lower net sales of CND nail products due to the timing of product launches in the prior year’s quarter. The segment’s profit in Q2 FY16 was essentially flat versus the prior year period.

Other Segment: The Other segment primarily includes the operating results of the CBB business, which generated $6.1 million in net sales in Q2 FY16, compared to $4.3 million in the year-ago period.

Acquisition of Elizabeth Arden

Revlon signed an agreement to buy iconic beauty products company Elizabeth Arden Inc. on June 16th, 2016, for $14.00 per share in an all cash deal for about $419 million. Revlon hopes to benefit from Elizabeth Arden’s forte in prestige skincare and fragrances, which would well complement Revlon’s strength in lipstick and nail varnish, hair care and men’s grooming. Elizabeth Arden has a strong presence in premium retail channels as well as in high-end department stores and airport stores, which would complement Revlon’s strength in channels such as mass merchant retailers and drugstores. Through the deal, Revlon is looking to expand its footprint in fragrances and skin care, and pursue growth opportunities in China and other Asian countries where Elizabeth Arden has a huge presence. The combined entity expects to achieve annual tax savings of about $140 million through the elimination of duplicate activities, leveraging purchasing scale, while optimizing manufacturing and distribution networks.

Source: Revlon
Source: Revlon

Revlon will hugely benefit from greater scale, an expanded global footprint, significant presence across major beauty channels and categories, and the addition of Elizabeth Arden’s prestige skin care, color cosmetics, and fragrances.

Source: Revlon
Source: Revlon

The merged entity will leverage Revlon’s scale across major vendors and manufacturing partners, thereby improving distribution and procurement.Cosmetics and fragrances are expected to be biggest sales contributors of Revlon-Elizabeth Arden. The deal has been unanimously approved by the board of both companies. However, the merger is still subject to approval by Elizabeth Arden’s shareholders and regulatory clearances, and is expected to close by the end of 2016.

Other highlights

After Revlon agreed to acquire Elizabeth Arden in June 2016, Scott Beattie, Chairman, President, and CEO of Elizabeth Arden, is expected to join Revlon’s Board of Directors as non-executive Vice Chairman. He will also serve as a senior advisor to Fabian Garcia, Revlon’s President and CEO, to ensure a successful integration and transition.

Revlon will use $2.6 billion of new financing commitments from BofA Merrill Lynch (NYSE: BAC) and Citigroup Inc. (NYSE: C) to fund the purchase and to refinance Arden’s existing debt, as well as much of Revlon’s $1.8 billion in long-term debt.

New launches

Revlon plans to introduce new products later in 2016 after its proposed merger with Elizabeth Arden. The Company will roll out lower-priced nail products under the professional CND brand to compete at nail salons and also plans innovation in its hair-color segment. Revlon aims to appeal to the younger generation and is focused on developing its digital strategy.

Guidance for full year FY16

For full year FY16, on a standalone constant currency basis, without taking into account the pending acquisition, Revlon expects to generate net sales of $2.0 billion to $2.1 billion, implying a high single-digit growth rate, and between $400 million and $420 million in adjusted EBITDA. For the year ending December 31, 2016, the combined company would be expected to have annualized net sales of approximately $3 billion.

Revlon's standalone net sales and EBITDA; Source: Revlon
Revlon’s standalone net sales and EBITDA; Source: Revlon


Stock Performance

R5Revlon’s stock ended the day at $35.28, gaining 0.51%, at the close on Wednesday, August 10th, 2016, having vacillated between an intraday high of $35.84 and a low of $34.96 during the session. The stock’s trading volume was at 65,192 for the day. The Company’s market cap was at $1.84 billion as of Wednesday’s close.

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