By and  on September 26, 2006

NEW YORK — Another shoe has dropped at Revlon — with a mighty thud.

One week into the job, the struggling beauty firm's newly installed president and chief executive officer, David Kennedy, has lowered its 2006 earnings outlook and has taken swift action to cut costs, which includes jettisoning 250 employees and axing its newest brand, Vital Radiance.

The incisive actions will result in third-quarter charges approaching $94 million. As a result, Revlon projects a third-quarter loss of $135 million on net sales in the range of $280 million to $290 million. The news of the layoffs and departure of more top executives confirms a report that appeared in WWD last Tuesday.

During a conference call Monday morning, Kennedy acknowledged that some may find the news "unsettling," but declared, "I want to reassure you that I firmly believe in the company's future and our ability to unlock the value of our terrific brands."

The ceo added, "We will continue to innovate and be leaders in the beauty business, but we'll do so prudently and in a way that leverages our strong, established brand equities."

As a result of the layoffs, Revlon's second round this year, key positions have been dissolved, including the roles of executive vice president and chief marketing officer Stephanie Klein Peponis and executive vice president and chief creative officer Rochelle Udell. Revlon

no longer has an internal public relations team, and industry sources said its entire creative team has been dismantled, as well.

Under the new structure, Elizabeth Crystal, head of the color cosmetics brand group; Robin Wood, chief of personal care; Carolyn Holba, leader of category development, and media buyer Kiki Rees will report directly to Kennedy, the ceo explained to WWD.

"The organization is very much in place to deliver what we need to," Kennedy added.

Peponis and Udell were two of the most ardent proponents of Vital Radiance, Revlon's failed attempt to court older women with premium-priced cosmetics, according to several sources close to the situation.

Earlier this year, retailers also championed the concept until its hefty price tags — which are on par with Clinique, a department store brand — and advertising campaign featuring older women, wrinkles and all, failed to generate sales. The company expects to record a charge of approximately $63 million in the third quarter related to discontinuing the Vital Radiance brand.Revlon has also eliminated Tom McGuire's role of executive vice president and president of Revlon International Corp., one of Kennedy's former posts at Revlon. The executives leading Revlon's three international regions, which account for approximately 40 percent of company revenues, will now report to Kennedy. The new ceo noted that this was the same international division structure as when his predecessor Jack Stahl pulled him on board from Cola-Cola.

The company said the staff cuts, which represent 8 percent of the company's work force, will result in restructuring and related charges of $29 million and reap an annualized saving of approximately $34 million.

Kennedy now has the seven direct reports mentioned above, in addition to sales and the normal support functions, an amount he said was "very manageable…A ceo needs to be close in — it's my style," he said, adding that the new structure will speed decision-making and is similar to the way other consumer package companies operate.

Several of Revlon's competitors noted that with a number of direct reports to manage, Kennedy may find himself pulled in too many directions.

Kennedy, the company's former chief financial officer, is faced with a turnaround situation, said a research analyst, adding that while he brings good things to the table, the ceo "just eliminated a whole layer of people who could have helped him."

Revlon's ceo, who assumed the top post Sept. 18, is receiving a base salary of $1.3 million, according to documents filed by the company with the Securities and Exchange Commission.

Stahl will receive a compensation package totaling $6.7 million, which includes the forgiveness of approximately $4 million in loans, salary continuation of $2 million and benefits of $700,000, according to a company spokeswoman.

"I think it was a quick and decisive action by David Kennedy," said Credit Suisse analyst Filippe Goossens, referring to Revlon's decision to throw in the towel on Vital Radiance. He commented that courting women ages 50 and above was a good business concept, but given current retail dynamics — which allow new brands three months to hit their stride — and Revlon's limited resources, it may be more prudent for the company to focus on its core brands, Revlon and Almay.Goossens compared Revlon's staff cuts to Avon's efforts last year to de-layer its management structure and move closer to its customer, but said regardless of the company's "bench strength," the elimination of chief marketing officer and chief creative officer might be "easier for investors to understand if David Kennedy had a longer track record in the cosmetics industry."

The round of layoffs, which was announced to employees Monday morning, has eliminated Revlon's public relations department and severely reduced its marketing staff — two drivers of any beauty company. Sources close to the situation said that architects have visited the company's headquarters to draw up plans to downsize the space.

Some industry watchers said that with the right investment, Vital Radiance was still salvageable. One former Revlon employee described the company's decision to scrap Vital Radiance as "throwing the baby out with the bathwater."

Lisa Yarnell, president and ceo of Jane Cosmetics, said, "We want to see a healthy Revlon; it is good for the entire business. It doesn't seem they had to get rid of Vital Radiance."

Retailers were not as optimistic. A beauty buyer for a national drugstore said Revlon's decision "took some pressure off them," because the chain was planning on pulling the plug on Vital Radiance this spring.

For the full year, the operating loss is expected to be approximately $45 million to $55 million, reflecting the impact of restructuring actions and the costs of discontinuing the Vital Radiance brand.

For the year, the company expects net sales of approximately $1.3 billion, including the impact of Vital Radiance returns and allowances provisions in the second and third quarters of 2006.

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