Revlon to Give Its Global Business a European Makeover


After a successful intervention in business processes and a restructuring of operations in Europe, Revlon (REV) now plans to implement similar changes across its operations globally. Revlon makes premium cosmetics, skin crèmes, deodorants and hair colors, and competes with the other leading players in beauty and personal care industry such as L'Oreal (LRLCY), Estee Lauder (EL) and Avon Products (AVP).

We value Revlon stock with a $17.66 price estimate, roughly a 5% premium to its current market price. Before we explore the possible implications on Revlon's stock of such changes to its worldwide business, let's take closer look at the results on European operations.

How did the restructuring impact the business in Europe?

1. Improvements in demand and supply forecasting: Integrating their processes closely enables better demand and supply forecasting. Not only did the company cut forecast errors in half, but Revlon can now also forecast eight quarters ahead. More accurate long-range forecasting has helped in sourcing supplies in optimal quantities and at appropriate times while scheduling production accordingly.

2. Improvements in inventory levels: The number of product SKUs was drastically reduced from 7,500 to 810. The percentage of stock which was slow moving or obsolete dropped from 35% to single digits, which has helped reduce inventory levels by almost 50%.

3. Improvements in service levels: Facilitated by better co-ordination between processes, Revlon could deliver the new products at the agreed-upon times and in the agreed-upon quantities to retailers, leading to its OTIF (On Time In Full) performance in Europe improving from 40% to 95% of orders. With that result, the service levels rose to 98.5%

The above measures have helped Revlon reduce its operating expenses and improve its EBITDA margins, which grew from just under 17% in 2007 to around 20% over 2009-10.

Potential Impact on Revlon's Stock

As Revlon gears up to make similar changes in its global operations, we can expect further improvements to its profit margin. We currently forecast Revlon's EBITDA margin to remain flat at current levels of close to 20%.

If, however, the EBITDA margins were to improve by another 2 percentage points over the course of our forecast horizon, we could expect more than 20% upside to our current $17.66 Trefis price estimate of Revlon's stock.

You can drag the trend-line in the chart above to see the impact on Revlon's stock price estimate.

View our detailed analysis for Revlon here.

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