By  on November 8, 2006

Revlon Inc. dealt with the aftershocks of its defunct Vital Radiance brand and management shake-up this fall, reporting a steep decline in quarterly profits.

The beauty firm said Tues­day that net losses for the third quarter ended Sept. 30 ballooned to $100.5 million, or 24 cents a share, from $65.4 million, or 17 cents, in the year-ago period. The tumultuous period resulted in an operating loss in the quarter of about $57 million. Sales gained nearly 11 percent to $305.9 million from $275.3 million.

The quarter included a $49 million charge tied to its decision to discontinue Vital Radiance — a colors cosmetics brand for older women — and a $14 million charge related to restructuring and severance costs as the firm shrunk its management team, ousting, among others, former president and chief executive officer Jack Stahl. Following Stahl's abrupt departure, Revlon tapped its chief financial officer David Kennedy to fill the top post.

Kennedy's first order of business included a cost-cutting initiative that reduced the company's workforce by 250 positions, a move that is expected to result in ongoing annualized savings of approximately $34 million. He also announced plans to ax Vital Radiance, which had failed to gain traction with mass retailers. With Vital Radiance out of the way, Kennedy said the company will refocus its efforts on its $1 billion Revlon brand.

Industry sources expect Revlon to lean more heavily on celebrities, and say the firm may look to add fresh faces to its star stable.

"We initiated an organizational streamlining and we are transitioning to a flatter, leaner structure that enhances collaboration, communication and decision making, while improving empowerment and accountability," Kennedy told analysts during a Tuesday morning conference call, referring to the company's layoffs during the quarter. He noted that within the new structure, "capable people are now playing broader roles and having a greater impact on the direction of the business than they did before."

Quarterly revenue was driven by strong international sales and offset by the $49 million in costs from Vital Radiance. Sales in the year-earlier quarter were pulled down by $32 million in returns and allowances related to the Almay restaging. Excluding the impact of Vital Radiance and Almay, sales increased 4 percent in the most recent quarter, according to the company.U.S. sales for the quarter gained 13 percent to $160 million from $142 million, and were essentially even excluding the impact of Vital Radiance and Almay. International sales, which now include Canada, increased 9 percent to $146 million from $134 million in the year-ago period.

"It's good to have this quarter behind them," said William Chappell, an analyst with SunTrust Robinson Humphrey Capital Mar­kets, adding that he expected Revlon's charges in the quarter to be higher by $25 million. Chappell noted that he expects Revlon might not disclose upcoming launches until they roll out the products, adding that, in the past, the beauty firm may have revealed its plans too early, tipping off competition.

Goldman Sachs analyst Lori Scherwin wrote in a research note Tuesday, "Although new ceo Kennedy is focused on the Revlon brand next year, there is still lack of hard detail on the initiatives, leaving us questioning whether or not a true brand recovery can actually materialize."

Kennedy said he will focus on innovation and portfolio management, Scherwin said, but added that she is "not quite sure how this differs from the past and what new launches will allow the Revlon brand to reverse recent share declines."

For the nine months ended Sept. 30, Revlon's net loss swelled to $245.8 million, or 61 cents a share, from $148 million, or 40 cents, in the prior year as sales gained approximately 6 percent to $952.5 million from $894.5 million in the year-ago period. U.S. sales for the nine-month period rose 7 percent to $538 million from $502 million.

At the start of 2006, the launch of Vital Radiance and the restaged Almay brand fueled space gains for the company by 22 percent, but retailers quickly trimmed space from Vital Radiance when its premium prices and wrinkled spokeswomen failed to woo consumers. With the product out of the mix, Kennedy said he expects to retain space gains of 7 to 8 percent in 2007.

The Vital Radiance fallout is expected to result in a full-year impact of $100 million, according to the company. Revlon said it will work with retailers to phase out the line's remaining merchandise through promotions and discounting into the first quarter of 2007, and will take back all unsold products."We are very optimistic that the restructuring has been implemented smoothly," said Kennedy. "We believe our organization is in a good position to propel profitable growth as we go forward."

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