By  on August 4, 2006

NEW YORK — Revlon Inc. significantly boosted its display space this year, but the increase failed to stem the troubled beauty firm's mounting losses.

Revlon said Thursday that net losses for the second quarter ended June 30 swelled to $87.1 million, or 21 cents a share, from a loss of $35.8 million, or 10 cents, in the year-ago period.

Sales were up less than 1 percent, to $321.1 million from $318.3 million, but were pulled down by a $17 million returns-and-allowances provision for Vital Radiance as big-box retailers cut the new line from a number of their doors.

Revlon would not comment on which retailers scaled back space for the lines, but industry sources said Wal-Mart and Target were two of them.

Revlon's 2006 initiatives — Vital Radiance, a cosmetics brand aimed at women age 50-plus, and the restaged Almay brand — were designed to spark long-term growth and accelerate the company's five-year turnaround plan, slated to be completed in 2008. But Vital Radiance had a lukewarm reception in the fiercely competitive cosmetics market.

"In launching the initiatives, we received broad retail support as our customers recognized the strategic relevance of the actions we're taking," said Jack Stahl, president and chief executive officer, during a conference call Thursday, adding that both Vital Radiance and Almay cater to two underserved segments in the mass market color cosmetics category.

"Both initiatives, Vital Radiance and Almay, are generating growth, although the growth is below what we expected," he added.

The company faced several hurdles during the quarter, such as the lost distribution space for Vital Radiance, which contributed $40 million to a total $45.9 million operating loss in the quarter.

U.S. sales for the quarter dipped to $180 million, down from $181 million, and international sales, which now include Canada, increased 3 percent, to $141 million from $137 million in the year-ago period.

For the first half of the year, Revlon's net loss widened to $145.3 million, or 37 cents a share, from $82.6 million, or 22 cents a share, in the prior year as sales increased 4 percent, to $646.6 million from $619.2 million. U.S. sales for the first half rose 5 percent, to $378 million from $361 million.At the time of their launch, Vital Radiance and Almay resulted in a 22 percent retail space gain for Revlon.

William B. Chappell, an analyst with SunTrust Robinson Humphrey Capital Markets, cautioned that space gains do not neccessarily correlate to sales gains. "The benefits of the company's space gain have been negated by the success of Neutrogena and Physicians Formula," said Chappell, adding that both competing beauty firms launched blockbuster mineral makeup products this year.

Revlon would not comment on how Vital Radiance's loss of shelf space would affect the company's overall space gain for the year, except to say it "expects to maintain most of the increase." But industry sources estimate that the new brand could lose real estate in 3,800 doors.

Industry sources also said several retailers, including Wal-Mart and Brooks-Eckerd Pharmacy, plan to scale back several feet of display space for Revlon's Almay brand, which, like Neutrogena and Physicians Formula, is positioned as healthy makeup. Almay's consumption — which increased 12 percent in 2005, prior to its relaunch and retail space gain — has slowed to a growth rate of 3 percent year-to-date.

Focusing on Vital Radiance's impact on the quarter, Stahl noted, "We have responded quickly to modify our go-forward plans for the brand, and we believe that our optimized approach will result in a substantially improved financial performance for the brand in 2007."

But Revlon was short on details about how it would fix the brand. Stephanie Klein Peponis, executive vice president and chief marketing officer for Revlon, said Vital Radiance's range of face makeup and primers was strong, and, accordingly, would drive the brand. Retailers said Revlon plans to expand Vital Radiance with a skin care offering this spring.

Peponis noted the company will continue to support Vital Radiance with TV and print ads, as well as the brand's dedicated beauty call center, and through efforts that tap into retailers' customer databases.

As for its core brand, Stahl said the company will continue to restage Revlon franchises in 2007, beginning with the relaunch of ColorStay lip products. He said the reintroduction of the ColorStay face makeup range earlier this year fueled consumption growth of 50 percent in the quarter.Despite the company's concerted effort to refresh these franchises, Revlon's market share in the quarter dipped to 14.2 percent from 15.7 percent in the year-ago period.

Goldman Sachs analyst Lori Scherwin wrote in a research note Thursday, "Management is focusing on the Revlon brand next year, which is encouraging, but, as always, high levels of competition remain a risk and we believe other brand-building plans — including the recent restages of Colorstay, Age Defying — have not been enough in aggregate to build market share for the brand."

Stahl said the company continued to work to pay down debt during the quarter. Revlon trimmed its long-term debt to $1.4 billion, from $1.9 billion at the end of 2003.

Stahl said he expects 2007 to benefit from "revenue-generating actions" planned for next year, reduced operating costs and an aggressive cost-cutting effort to improve profit margins.

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