By  on July 11, 2006

NEW YORK — Vital Radiance, Revlon's boldest product launch during Jack Stahl's four-year tenure, has taken a hit, as several major retailers cut distribution of the brand from a number of their doors.

The setback is expected to contribute significantly to a projected $55 million operating loss, $40 million of that anticipated from Vital Radiance, in the second quarter.

Revlon's woes are set within a wider industry debate that pits increasingly impatient mass market retailers against vendors, who argue that their ambitious product launches should be given more time to take root. Mass manufacturers are used to being given a year for their launches to hit their stride. Retailers, armed with sophisticated point-of-sale scanner data, argue that the verdict should be known in a few months. Revlon began rolling out Vital Radiance in January.

Revlon's loss of planogram shelf space comes after Vital Radiance, which is aimed at women age 50-plus, failed to yield robust sales, according to Stahl, Revlon's president and chief executive officer. The setback soured the strong start the beauty firm had enjoyed this year.

Revlon would not comment on which retailers cut the brand's space or how the lost doors would affect the company's 2006 overall space gains this year. When the firm announced its new product initiatives for both the Revlon and Almay divisions, the company predicted it would pick up 22 percent additional shelf space.

"Vital Radiance is a great product line that works effectively with its target demographic," Stahl told analysts during a Monday morning conference call. "Given that it's a new brand focused on a demographic almost completely ignored in the mass channel until our launch, its success requires building awareness and trials with women that we have either dropped out of the category completely, or who have become disappointed with traditional products," Stahl said.

"It also requires the partnership of all retailers to provide the space and in-store support to enable success, and we gained that significant support going into 2006."

The concept, noted Stahl, seems to resonate better in the food and drugstore channels — venues visited more frequently by Baby Boomers — than in mass retailers. However, he confirmed that retailers now expect new entries to pay off sooner than in the past. "There is no question that retailers have increasingly short windows in which they are evaluating the performance of the new brand, and there were some decisions made to reduce the number of stores in certain of our large-format retailers," said Stahl, who later referred to Revlon's shrinking space as an "optimized retail footprint."But Revlon's competition apparently is already circling like wolves. Several are vying for the lost space, and a number of them, speaking not for attribution, said the list of retailers trimming Vital Radiance from some of their doors includes Wal-Mart, Target and CVS. According to industry sources, Wal-Mart will cut Vital Radiance's presence from 2,500 doors to 500; Target plans to shrink the new brand from 1,600 doors to 500 this August, and CVS will remove it from the 700 stores it recently acquired from Albertson's Inc. A Revlon spokesman would not comment on the details of the space changes. In the doors where Vital has real estate, the cosmetics brand occupies 4 feet of display space.

"The broader issue is that Revlon doesn't have the capability to move up the food chain," said industry consultant Allan Mottus, adding that the brand's premium mass market price points of $13 to $15 were not reflected in its advertising or brand imagery. "It's a real blow to the beauty industry because it signifies that trading up in the mass market isn't necessarily going to happen," said Mottus.

Despite the setbacks, the company indicated Vital Radiance is on track to become a $50 million brand, and has achieved market share of 2 percent to 3 percent in several key retailers since its January introduction.

Still, Revlon is forecasting a steep loss for the second quarter. Revlon reiterated a prior statement that it plans on issuing $75 million of equity in late 2006 or early 2007 and intends to use the proceeds to reduce its debt. The firm said in a statement that "adjusted EBITDA for the [second] quarter is estimated to be a loss of approximately $30 million versus adjusted EBITDA of $24 million in the second quarter last year," due in large part to Vital Radiance, which is expected to generate an operating loss in the quarter of $40 million, including $20 million in product returns, according to a Revlon statement. Total operating loss in the quarter is expected to be $55 million, compared with breakeven operating results in the year-ago period, with a net loss of $95 million in the recent quarter, compared with a net loss of $36 million in the same period last year.The beauty firm now expects second-quarter net sales to be flat over the year-ago period, stating that a projected sales gain of 8 percent was wiped out the $20 million in Vital Radiance product returns. It also noted that approximately half of the product returns, or $10 million, was due to lost retail doors.

In line with its previous disclosure, Revlon said its expects "adjusted EBITDA in 2006 to be even or somewhat below the $167 million achieved in 2005, after taking into account a significant negative impact to operating income in 2006 related to Vital Radiance, and the $10 million restructuring charge announced earlier in the year."

Companywide net sales for 2006 are expected to be up in the mid-single digit range.

The company expects a strong second half, and noted that 2007 will benefit from significant "revenue builders," including enhancements to Vital Radiance, margin improvement actions, and cost reductions from overhead and cost of goods. Revlon would not detail upcoming changes to the new line, but industry sources said Revlon plans to expand Vital Radiance in early 2007 with a skin care line.

Referring to plans for the coming year, Stahl said, "We are going to be focusing our marketing resources on those things that are working most productively. We obviously now have the benefit of six months of experience; we know those things that are driving the business most," adding that the Vital beauty call centers (or 800 advice hotline) are one of those key drivers.

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