NEW YORK -- Revlon owner Ronald O. Perelman has shown he's willing to invest in Revlon's future. But what about the retailers? Can they afford to wait for the brand's return to glory?
Most think they don't have a choice. "We need Revlon to do well, because when they do, everyone does," said Jay Lawrence, a spokesman for Wal-Mart Stores in Bentonville, Ark.
But, several buyers said they are sweating it out waiting for Revlon to get back on track.
Perelman, however, doesn't appear to be blinking. Last week, he bought back $630 million worth of zero-coupon junk bonds that are secured in part by his stake in the company. According to reports, he paid as much as $250 million, or less than 50 cents on the dollar, for the bonds he bought back. By doing so, it proves he's betting shares of the cosmetics company will rebound.
It's a crucial time for Revlon since January is traditionally when merchants start reallocating manufacturer's real estate on peg walls for the new year. With eight consecutive quarters of loss and new trade terms that are still being digested, some accounts, such as Eckerd Corp., Happy Harry's and Duane Reade, are snipping at Revlon's footage.
For the 52-week period ended Nov. 5, Revlon's sales slipped almost 5 percent in food, drug and mass stores to $864.8 million, according to sales tracking firm Information Resources Inc. Its share declined from 24.9 percent of total sales in 1999 to 23.2 percent. Jeffrey Nugent, president and chief executive officer said that he knew Revlon's share would "compress" as his plan to transform Revlon from a "push" to a "pull" vendor unfurls. He added in an interview that in some cases where Revlon space is being slashed, his firm has actually made a suggestion to some accounts to trim space in order to rationalize Revlon's footage. In the end, Nugent said, the consumer will decide who deserves more selling space. "Our goal is to ship to consumption," he said.
Even those editing some Revlon space, however, are rooting for Revlon for a simple reason -- when Revlon prospers, so does the entire industry.Some competitors are even cheering. "The industry needs Revlon to be healthy," said Arnold Zimmerman, chairman of AM Cosmetics in Kearny, N.J.
Industry consultant Allan Mottus echoed those thoughts, "Drugstores in particular don't have a choice [about waiting for Revlon's improvement]. They need Revlon and when Revlon returned to health in 1995, it ushered in growth across the entire category." Revlon, indeed, did ignite double-digit sales growth in the industry in 1995 with breakthrough products such as ColorStay lipstick and Age-Defying foundation.
Nick Colosimo, director of marketing in beauty for Phar-Mor, Inc. thinks products in the pipeline are promising. "I like what they are doing with Skinlights and tying it to color launches," Colosimo said, referring to the radiance enhancing skin care product that recently hit stores.
Valerie Cheyney, cosmetics buyer for Happy Harry's in Newark, Del., said a fragrance stockkeeping unit under the Skinlights banner has started selling well in her stores. Colosimo also applauded Revlon's extension of its franchise into makeup brushes.
Wal-Mart, too, is bullish on Revlon's launches. "We are pleased with the quality of new products. They should do well," said Lawrence. "We're encouraged with Revlon's changes and getting back to basics." Lawrence added that the nation's largest retailer would not tamper with Revlon's real estate.
However, several other retailers are taking a wait-and-see attitude concerning the new launches Revlon has on tap for the first quarter of 2001. "I haven't seen a product that can do what ColorStay did for the industry in their plans. They are just changing Top Speed, but I'm not sure that will be major," said Cheyney. He was referring to Revlon's quick-drying nail enamel.
Instead, Cheyney noted that archrival Procter & Gamble should provide the industry with a shot in the arm with Max Factor LipFinity. Revlon, which clings to the leadership position in lip with a 27.9 percent share, is feeling pressure from L'Oreal, Maybelline and P&G. Revlon's business in lip declined 10.4 percent, according to IRI, for the period ended Nov. 5. P&G's sales jumped 10.6 percent.
In regard to other Revlon initiatives such as skin care, retailers knocked Revlon for trying to sell skin care off the peg wall (rather than in a health and beauty care section) and for being late to the scene with vitamin C and milk-based products.Nugent isn't ruffled by the criticism. "It is not important what I think of these products. The performance is what matters. Skinlights is phenomenal," he said of early sell-through statistics. As far as skin care on the wall, he also encourages buyers to let the results speak for the validity of the approach.
Buyers said the holiday season hasn't been robust for Revlon. Kathy Steirly, vice president of beauty at Eckerd, said one thing that impacted Revlon's performance was a lack of promotional support. Others agreed that Revlon did not spend against the holiday season. Nugent said the company's earmarked budget would kick in during the second week of January.
Added Mottus, "Spending wouldn't make a difference this Christmas. It isn't a good one." Nugent agreed that the holiday season was a disappointment. "But that's good news for cosmetics, which isn't tied to one season," he said.
While Revlon continues to seek a new supermodel, some buyers question the removal of Cindy Crawford. "I'm not sure if the decision about Cindy Crawford was a good idea because she really represented Revlon," said Cheyney.
The worries also come on the heels of Revlon's newly announced trade terms. "I don't like the return policy," noted one source that said she's afraid her stores will be loaded with merchandise. Another buyer, who pointed that weak stores would get extra help, lamented, "The new trade terms are actually rewarding stores that don't perform well."
A buyer for a regional chain said she's reevaluating her prepack purchases because of the new terms and will probably buy fewer.
Nugent stood by the new terms. "Most of the retailers are reacting positively. The terms were to weed out inefficiencies and benefit the consumer. They were meant to reduce overshipping, overstocking and an awful lot of excess work," said Nugent.
Cheyney concluded, "I hope for the industry's sake he can keep his promises."
Wall Street appeared unimpressed by Perelman's acquisition since the junk bonds are tied to the holding company, Rev Holdings, and have no direct impact on the operating company, Revlon Inc.
The only connection is that if the bonds default in May, holders of junk bond notes receive 20 million shares of Revlon stock. But shares and bonds in the operating company still rose slightly on the news of the buy back, primarily because it signals a bullish sentiment on the part of Perelman, Revlon's largest shareholder. By some estimates, Perelman paid at least five times the value the bond's underlying collateral -- Revlon's stock -- in acquiring the bonds.The key, though, appears to be whether Revlon's ongoing negotiations with its banks gives them enough breathing room to comfortably pursue its slow turnaround strategy in 2001. Given recession worries, banks are tightening credit and have already made several amendments to Revlon's loan agreements since 1998, with the last major rewrite in November 1999.
"The banks may be suffering a degree of deal fatigue with Revlon," said Al Alaimo, high-yield debt analyst at Banc of America Securities. "If they ask the bank for covenant amendments, I think they'll get them. If they ask for additional funding, I doubt it."
If the banks balk, Revlon may look to sell more assets or seek additional capital, possibly from Perelman. According to its recent 10-Q, one of Perelman's firms was prepared to provide up to $40 million through Dec. 31 to shore up any cash shortages at Revlon. But many see the banks striking a reasonable deal.
"The banks are not going to want a default and are going to work with management to come up with a plan," said George Chalhoub, junk bond analyst at Merrill Lynch. "I think Nugent has set the company on the right path, but the execution is going to have to go slower because you need a lot of cash to fund that turnaround."
Meanwhile, the jury is clearly still out on Nugent's turnaround efforts. All four analysts who cover Revlon have 'hold' ratings on the stock. Many seem pleased with Revlon's 'pull' marketing strategy, its re-emphasis on new products for 2001, and cost-cutting initiatives. At the same time, they are concerned about how retailers accept the new trade terms, Revlon's market share losses and restructuring efforts, and the inventory corrections resulting from consolidations in the drug store channel.
"We believe 2001 will be another transition year with minimal earnings visibility," said Andrew Shore, an analyst at Deutsche Banc. Alex. Brown.
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