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A Deeper Shade of Red: Revlon Losses Extend To 20 Straight Quarters

The financial crisis at Revlon Inc. continued as it posted a net loss of $54.7 million in the third quarter, bringing its losing streak to 20 straight quarters.

NEW YORK — The ongoing financial crisis at Revlon Inc. continued as the beauty giant again languished in the red during the third quarter.

In the three months ended Sept. 30, Revlon experienced a net loss of $54.7 million, or 78 cents a diluted share, extending its losing streak to 20 quarters in a row. This compares with a loss of $22.1 million, or 41 cents, in the same period last year.

Overall revenues in the quarter declined 2.1 percent to $316.5 million from $323.2 million in last year’s quarter, reflecting lower sales in North America that were only partially offset by favorable foreign currency translation. Excluding the positive exchange impact, sales declined about 5 percent.

The quarter’s results were hit by charges of $5 million associated with its growth plan, bringing the total anticipated charges for the year to $31 million. Last year, charges for the plan hit $104 million. An additional $25 million next year and after will lift the plan’s total bill to $160 million.

In addition, the company said it incurred charges totaling $600,000 for restructuring and additional consolidation costs, while the third quarter of 2002 included charges of $4.2 million.

At the same time, Revlon is burning cash even faster than anticipated and is expected to seek amendments or waivers from lenders to keep it from falling out of compliance with current credit agreements.

It’s already spent $248 million of a $250 million credit agreement, all of a $100 million term loan from its principal owner, Ronald Perelman’s MacAndrews & Forbes Holdings Inc., and $20 million of another $65 million M&F line of credit. At the end of the quarter, long-term debt stood at $1.86 billion, up from $1.75 billion at the end of December 2002.

Still, despite the declines in its liquidity, Jack Stahl, president and chief executive officer of Revlon, continued to express confidence about the brand and optimism about the future and its ability to attract more funding.

“We have a lot of work to do as we go forward and continue to transform our business model,” Stahl said on a morning conference call. “We are making good progress on building growth for the most important part of our business.”

Anticipating questions over its liquidity, the ceo reminded investors that the progress Revlon is making now requires significant investment, much of it one-time in nature. “We are confident that this investment behind our brands will absolutely drive value over time,” he said.

Revlon planned for 2003 to set the stage for improvements in productivity and efficiencies in 2004 and beyond, but its critics and much of the financial community remained skeptical after Thursday’s poor results.

The firm’s shares dropped 22 cents, or 7.7 percent, to end Thursday’s session at $2.65 in New York Stock Exchange trading. That’s just 57.6 percent of the 52-week high of $4.60 reached last Nov. 15.

One analyst, who did not want to be identified, said, “Things haven’t gotten better, they have gotten worse, and the liquidity shows it. It is not a sustainable situation. There is no chance for the business to support itself from a cash-flow standpoint.”

George Chalhoub, an analyst with Deutsche Bank, wrote in an August research report, “We calculate that by year-end 2003, Revlon will have exhausted its new funds it should receive in 2003, posted $111.5 million in EBITDA and be left with $27 million in total liquidity from all sources.”

On the other hand, Amy Low Chasen, an analyst with Goldman Sachs, wrote in a research report that while the financial results are still weak and that near-term results are likely to remain under pressure, fourth-quarter pressures could ease a bit as charges related to the company’s growth initiatives begin to slow. In addition, she credited the company for securing incremental shelf space and distribution in 2004 and its more active stance at cost-saving initiatives.

Stahl said one indicator of its progress is the consumption growth relative to that of the color cosmetics area. According to ACNielsen, the category is down 2.5 percent in the first nine months of the year and flat to up slightly when mass retail is included. On the other hand, the Revlon and Almay brands combined grew at a 5 percent clip through September, a dramatic shift compared with the past four to five years of share declines.

Stahl said these trends and the firm’s success “restoring the confidence of our retail partners” are “key indicators we are beginning to get traction.”

Declining to offer specific projections for next year, Stahl said while he expects Revlon to continue to benefit from growth initiatives, he expects to see benefits from productivity and efficiency initiatives that should accelerate in 2005 and beyond.

Revlon registered a 20 basis-point share improvement for its Revlon and Almay brands, significant because it came in a soft color category environment. The Revlon brand, in terms of absolute dollar growth, continues to lead the category, as it registered its fifth consecutive quarterly share gains versus a year ago. Offsetting Revlon, Almay was down in the quarter after posting share gains over the two previous quarters. Revlon is about three times the size of Almay in absolute terms, and Almay’s decline does reflect the timing of marketing and new product introductions made last year, the company said.

Stahl also could point to progress made with key retail customers. “Over the past several months, we have been successful at securing incremental space at retail for the Revlon and Almay brands for 2004 and incremental distribution next year for not only color cosmetics but hair color and beauty tools,” he said. “This is a significant shift from the trend the company experienced over the years leading up to 2002.”

Thomas McGuire, chief financial officer, said on the call that Revlon will soon undertake additional cost-saving measures, including strategic sourcing and packaging rationalization. “The opportunities are real and we are going after them,” he said. “We believe there is a lot of opportunity on the productivity and efficiencies front to drive down our overall cost of doing business and improve margins.”

For the nine months, Revlon’s loss amounted to $141.2 million, or $2.36 a diluted share, compared with a net loss of $107.1 million, or $2, in the like period last year. Sales for the period advanced 1 percent to $930.8 million compared with $906.8 million. Excluding the favorable impact of foreign currency, sales were flat.

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