Revlon, the mass market cosmetics manufacturer, is set to release its fourth quarter 2014 earnings on March 12th. The company performed above consensus expectations in the first nine months of 2014. Revlon’s net sales increased by 42% on a year-over-year basis to reach $1.4 billion. The primary contributing factor to this sales surge was the integration of The Colomer Group, acquired by Revlon in December 2013, into Revlon’s operations. With the TCG consolidation, Revlon has diversified its product portfolio with the addition of professional cosmetics products. The robust growth from the Professional segment (derived from TCG) had masked the weakness in Revlon’s own Consumer line of products.

However, Revlon’s performance was significantly thwarted due to the weak currencies in the European markets. The earnings are expected to remain under pressure due to the weak Euro in the fourth quarter, as well. This, coupled with marketing spending and internal inventory management shifts, might adversely impact Revlon’s fourth quarter results. In this article, we discuss in detail, the various factors that might shape Revlon’s Q4 2014 earnings.

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Currency Headwinds And Marketing Spending Can Slowdown Revlon’s Growth For The Fourth Quarter

The depreciation of international currencies, especially the Euro, has dampened the performance of cosmetics players such as Estee Lauder andAvon Products in their recent earnings, and we suspect that Revlon too will be adversely impacted. A major chunk of Revlon’s growth came from its 2013 acquisition of The Colomer Group. However, TCG derives more than 50% of sales from the Europe, the Middle East and Africa region. This high proportion of sales from a region that has witnessed significant currency headwinds is likely to weigh on reported revenues for Revlon.

On a separate note, the consumer sentiment in the domestic U.S. market has been upbeat, which could accelerate Revlon’s sales for its consumer product line. To further boost sales, the company is concentrating on its marketing efforts, with a stress on its consumer division. The brands in focus are Revlon Color Cosmetics, Almay, Mitchum, Color Silk, and Beauty Tools. Almay, which is a core-asset to Revlon’s product portfolio, has been under-performing for a while. However, the company remains focused on improving the struggling brand and is investing resources in its turnaround. Revlon’s marketing expenditure is primarily financed by net-sales growth and cost reductions. The integration of Colomer into its core structure remains a priority for Revlon, the achievement of which will result in annual cost saving to the tune of $30 million to $35 million for 2015.

However, the market for prestige and luxury cosmetics is cannibalizing sales from mass market cosmetics products in developed markets such as the U.S. Furthermore, the recovery in consumer spending, coupled with the holiday season in Q4 2014, could exacerbate the decline in the mass cosmetics market.

As a consequence of all the forces currently at play in the cosmetics market, we expect Revlon’s Consumer segment profit margins to be lower than its current levels for Q4 2014. Margins from its Professional segment could marginally decline during the quarter, impacted by the depreciating Euro.