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A Glint in Revlon’s Gray Skies

Revlon’s retail sales have been looking sunnier, but its horizon remains clouded by its persisting debt load and four-year string of financial losses.

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NEW YORK — Revlon’s retail sales have been looking sunnier, but the brand’s horizon remains clouded by its persisting debt load and four-year string of financial losses.

Revlon’s latest growth strategies, including improvements to store displays and a James Bond movie tie-in, resulted in a significant uptick in fourth-quarter retail sales, led by growth in color cosmetics, particularly ColorStay lipstick and ColorStay eye shadow and, surprisingly, Revlon Colorsilk and High Dimension hair coloring kits. According to Information Resources Inc., retail sales for the Revlon brand during the 13 weeks ended Dec. 29, 2002 reached $149.8 million, up 8 percent, while unit sales for the period increased 8.3 percent. Those numbers do not include Wal-Mart, which accounted for 20 percent of Revlon’s sales in 2001.

For the year, Revlon brand retail sales rose 2.7 percent to $562.6 million with unit sales up 1.7 percent, according IRI, minus Wal-Mart.

Retailers credited Revlon’s aggressive fall promotion with the James Bond movie “Die Another Day” for helping draw more shoppers to the franchise. And they also believe a new price reduction in key Revlon items like its top-selling Super Lustrous lipstick and Top Speed nail enamel, which went into effect in February will make the brand more competitive.

Yet these new programs came with a mighty price tag in Revlon’s fourth quarter, which recorded a loss of $179.4 million and extended the company’s string of dismal quarterly reports to four years straight. Deutsche Bank analyst Andrew Shore, who has been covering consumer products companies for 16 years, doesn’t know of another firm that has had negative results for such a long period. “I can’t recall any,” he said last week.

Revlon’s finances have been on a slippery slope since Oct. 2, 1998 when it caught Wall Street by surprise with an announcement that its second half and yearend earnings would be lower than expected. Revlon stock was slashed that day, closing at $15.43, down from $27.81. A glut of retail inventory, industry consolidation and delays in product introductions were among the reasons cited. Revlon ended the year with net losses of $27.3 million. Then-chief executive officer George Fellows expected the problems to be short-lived and called the events “an aberration.”

But even with the powerful Revlon brand, the company hasn’t been able to find its footing. Since 1997 — its last profitable year — Revlon Inc.’s net sales have been cut in half from $2.16 billion to $1.12 billion last year. And its hefty long-term debt has been on the rise since 1999 and is now $1.75 billion. It’s stock is hovering between $2 and $3.

Among its wide-ranging cost-cutting measures over the years, Revlon has sold off its professional businesses and Latin American brands, closed three international plants and reduced staff of its New York headquarters.

In a research note, equity analysts at Salomon Smith Barney said they believe that Revlon still maintains a strong brand equity among consumers and were pleased by improvements in gross sales. Yet, “the intense competitive environment in the cosmetics and hair coloring categories coupled with the recent structural and organizational changes at the company leaves us wary of Revlon’s future.” While a recent cash infusion from MacAndrews and Forbes, “has successfully delayed any potential bankruptcy of the company, Revlon’s continued weak operating results suggest that the company will not materially reduce its debt in the near term,” wrote analysts Wendy Nicholson and Catherine Imm.

A debt analyst, who asked to remain anonymous, said Revlon’s hurdle is to reap sufficient results from its growth plan going forward to support its capital structure and service the debt. While characterizing the situation as “precarious,” the analyst was optimistic about Revlon’s long-term potential.

Revlon is on its third management team in five years. Its current ceo Jack Stahl, formerly of Coca-Cola, acknowledged that there is still a significant amount of work to do. Stahl said that Revlon is a “wonderful brand that is proving to be very responsive to marketing.” To spark its brands in 2003, Revlon has unveiled new advertising this year for both Revlon and Almay and intends to make a stronger in-store presence. According to sources, Revlon spent $66 million to improve its permanent displays in 2002 and will drop another $75 million to $85 million this year.

Although acknowledging the burden of debt, many retailers and industry experts believe the gears are in place to get Revlon firing on all cylinders.

“I think Revlon is certainly more visible and the marketing efforts seem to be working,” said Wendy Liebmann, president of WSL Strategic Retail in New York. “Their share is up, but it is the same old story about how to survive with such huge debt. Still there’s much life in the brand.”

The equity in the Revlon brand name is the most compelling reason for retailers to stick with the company. “They just can’t kill the brand. Retailers can’t afford not to have Revlon,” added Allan Mottus, an industry consultant.

He added that some of Revlon’s declines are attributable to efforts to clean up some past ills, such as taking back inventory, especially Ultima. “It appears they are doing the right things,” he said. What started Revlon’s snowball into the red was shipping too much merchandise into retail doors merely to anniversary sales gains, according to sources. When business slowed, retailers were stuck with a glut of inventory.

A buyer with one of the largest drugstore chains agreed with Mottus that things are starting to click. “I think they have a lot of good things going on. The move they made on pricing puts lines like Maybelline in the hot seat.” She thinks the new price points will spur product movement.

And another major drugstore retailer said that marketing efforts are even starting to rub off on Almay, a brand in Revlon’s portfolio that had been lost in the shuffle. “They are doing absolutely the right things for our business. Even Almay is showing healthy increases now. The industry is incredibly competitive and funds are being made available for hot promotions across the board.” She also voiced a vote of approval for Stahl and Paul Murphy, who recently took on the task of shoring up the sales effort.

Liebmann said that Almay has suffered while the company nurtured its signature brand. “But that’s exactly what they should do,” she said. According to IRI, Almay sales remained flat for 2002 at about $170 million, minus Wal-Mart.

Revlon, like many vendors, is closely knit to its relationships with Wal-Mart. “What is important is how Revlon does in Wal-Mart, since more people are making Wal-Mart their destination,” said Cynthia Cohen, founder of Strategic MindShare in Miami. She thinks Revlon’s key to revival is to focus on the overlooked, aging Baby Boomers. “They need to get more involved in treatment and color with treatment.”

But even behemoth Wal-Mart isn’t the only retailer on Revlon’s agenda. Mark Griffin, president of Lewis Drugs Inc., also said Revlon has been showing more interest in working on specific programs for regional chains. A few years ago, Revlon hadn’t put much stock in its smaller accounts and put many on telemarketing. “Now, they are one vendor working harder to grow our sales,” he said.

Sally Yanke, cosmetics director for Medic Drug, was surprised to read that Revlon had another bad quarter because business has been steady at her stores. “I haven’t noticed anything that is blowing out, but the industry needs them. I wouldn’t want to see a cosmetics department without Revlon.”

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