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NEW YORK — It pays to manage costs.
Just ask Revlon Inc., which found its way back to positive quarterly earnings territory for the first time in six years after reining in costs. The improvement in the quarter also helped Revlon narrow its loss for the full year.
“We did achieve strong earnings performance, we dramatically strengthened our balance sheet with excellent investor support, and we paved the way for what we believe will be an exciting 2005,” Jack Stahl, president and chief executive officer, told analysts and investors during the company conference call.And while controlling costs bolstered the bottom line, management is counting on the revitalization of several core product lines as well as an early advertising campaign for new products to energize sales.
In the meantime, the New York-based beauty giant delivered robust fourth-quarter earnings. For the quarter ended Dec. 31, net income came in at $46.2 million, or 12 cents a diluted share, which compared with a loss of $12.6 million, or 18 cents a share, in the year-ago period.
According to Stahl, the timing of Revlon’s new product shipments have historically made the fourth quarter “disproportionately large.” But last year, Revlon slowed the pace of product introductions, choosing instead to put its elbow grease into revamping several of its existing franchises and gearing up for the coming year.
The pullback came at a time when the color cosmetics category softened. According to ACNielsen data, sales in the overall market fell 2.5 percent for the year and 4.3 percent for the fourth quarter.
Revlon’s sales for the fourth quarter increased 2.7 percent to $378.3 million from $368.5 million. North American sales inched up 0.9 percent to $251 million from $248.8 million.
The company’s combined market share for Revlon and Almay fell to 20.8 percent in the fourth quarter from 21.2 percent in the year-ago period, according to the ACNielsen data.
Stahl said Revlon is working with retailers to address the sales slowdown. The ceo named Revlon’s carded eye merchandising program and Almay’s new Intense I-Color eye makeup collection as two initiatives intended to catalyze sales within the beauty department.
Meanwhile, international sales rose 6.3 percent in the quarter to $127.3 million from $119.7 million. However, excluding the positive impact of currency exchange rates, international sales increased 1 percent.
The company’s efforts to lower costs and eliminate other expenses ultimately fueled the return to the black. Cost of sales declined 240 basis points in the quarter to 34.9 percent of sales, or $131.9 million, compared with 37.3 percent of sales, or $137.3 million, in the year-ago period. Selling, general and administrative expenses were reduced by 700 basis points to 44.5 percent of sales, or $168.4 million, compared with 51.5 percent of sales, or $189.6 million, a year ago. Interest expense fell 38.3 percent to $28.4 million from $46 million.
For the year-end period, the loss narrowed to $142.5 million, or 47 cents, from a loss of $153.8 million, or $2.47 a share, in 2003 while sales declined 0.2 percent to $1.3 billion.
North American sales declined 3.9 percent to $855.7 million, compared with sales of $890.6 million in the previous year. For the year, Revlon and Almay’s combined market share fell to 21.5 percent from 22.3 percent in 2003, according to the ACNielsen data.
For the year, international sales rose 8 percent to $441.5 million. Excluding the positive effect of currency exchange rates, international sales rose 1 percent.
For the year, SG&A expenses fell 400 basis points to 55.3 percent of sales, or $717.6 million, from 59.3 percent of sales, or $770.9 million, in 2003. Interest expense declined 25 percent to $130.8 million from $174.5 million.
During the conference call, Stahl said the next phase in the company’s turnaround campaign will center on reinvesting in the company. Stahl explained that the firm spent the better part of 2003 overhauling its product development process and go-to-market strategy, which in turn caused 2004 to be a transition year. Products born out of the new “cross-functional system” — which melds research, development and marketing — began to hit the market in January. Stahl said new products, such as Fabulous Mascara and ColorStay 12-Hour Eye Shadow, are off to a good start.
Breathing new life into established brands is also a priority going forward. “We addressed a critical need to reposition several of our key franchises, which had been undermanaged and undersupported for a decade or more,” said Stahl, singling out Revlon Super Lustrous Lipstick, Revlon Nail Enamel and Revlon Age Defying in particular as products that had already received more attention.
For example, Revlon ditched Age Defying’s black packaging for red, updated its wrinkle-fighting formula with Botafirm and recruited actress Susan Sarandon to appear in TV and print ads.
Stahl said the company had initiated national advertising for its new products 45 days earlier in the first quarter. “That will not only help our consumption in the first quarter, but obviously it does shift our spending pattern somewhat,” said Stahl. “Now, we think that makes sense because as certain retailers move their resets up earlier, it gives us the ability to drive sales off of greater physical availability in the store.”
Last spring, the beauty company made a bold strategic shift on the advertising front. Walking away from ads that simply shout out product benefits, Revlon unveiled the cinematic Bellissimo campaign in April 2004.
Fittingly, the campaign was released in movie theaters and featured the company’s stronghold of spokeswomen, including Halle Berry, Julianne Moore and Eva Mendes. The effort, which industry sources estimate cost between $80 million and $100 million, was sought to build an emotional connection with women.
With a more aggressive launch program planned for this year, Revlon has tweaked this year’s campaign to tout product benefits. The ads, which broke in January, also feature its newest Hollywood recruit, Kate Bosworth.
Revlon will begin talking with retailers about new products for 2006 this summer.
Management is also looking to get more from the U.S. market by devoting resources to products outside of color cosmetics.
According to Stahl, the company has a 25 percent share of the $270 million beauty tools segment. In antiperspirant and deodorant, a market estimated to be more than $1 billion, the company has a 6 percent share. And in hair color, also a more than $1 billion market, the company holds a 7 percent share.
“We do believe that we are taking the right action to drive growth and create long-term profitability and value, and that we are making significant progress,” concluded Stahl during the call. “We have confidence that as we move forward we will unleash untapped value across our portfolio.”