By and  on August 5, 2005

NEW YORK — As Revlon Inc. narrowed its loss in the second quarter on a 1 percent sales gain, management said it would continue to spend money to make money, with plans to introduce two major initiatives in 2006 designed to spark long-term growth across its flagship and Almay brands.

During the company's quarterly conference call Thursday, the cosmetics giant told analysts the initiatives include repositioning the Almay brand to make it easier to shop for time-pressed women, and adding a cosmetics line for aging women under the Revlon moniker.

Jack Stahl, Revlon president and chief executive officer, said the firm will focus the Almay business on consumer needs such as simplicity, healthy beauty and personalization. The company preceded its strategy in early 2005 with the launch of Intense I-Color, an eye makeup collection that tailors shades of mascara, shadow and liner by eye color. Overall, Almay's consumption was up 18 percent in the quarter, versus one year ago, compared with Revlon's 1 percent increase in the same period.

"Intense I-Color was a wonderful test case of the strategy that we are pursuing in 2006," said Revlon's executive vice president and chief marketing officer Stephanie Klein Peponis, during a phone interview following the call.

Stahl noted that the new Revlon collection will usher an underserved consumer group, women over 50, back to the category. The company declined to elaborate further, citing competitive concerns, but retailers have reported Revlon intends to call the line Vital Radiance. Revlon began unveiling its plans for the mature-targeted cosmetics line to retailers in the spring, reportedly asking for 6 feet of additional display space.

Stahl said the company invested $3 million in up-front expenses for the two initiatives, but the costs will be offset by increased sales and productivity. He added that the two launches would yield a positive net sales impact of $50 million in 2005, and more than double that in 2006.

Revlon expects to swallow $40 million to $50 million in product returns from retailers to make room for the new Almay initiative. The company would not comment on how much space the new Revlon cosmetics collection would require, nor on whether they would ask retailers for additional display space.Costs for new display fixtures across both initiatives are estimated at between $10 million and $15 million for the second half of 2005. For the year, the company expects permanent display spending for existing business and new initiatives to total $85 million to $95 million, up from Revlon's previous estimate of $50 million to $60 million.

Revlon crept closer to positive numbers this quarter, but just barely. Net loss in the quarter ended June 30 was $35.8 million, or 10 cents per diluted share, an improvement from the net loss of $38.9 million, or 11 cents per diluted share, a year ago.

Net sales were up 1 percent, to $318.3 million from $316.1 million a year prior, mainly due to a 10 percent growth in international sales to $120 million from $109.3 million and a favorable currency translation. North American sales did not fare as well. Net sales here declined 4 percent to $198.3 million, compared with $206.8 million a year prior. Overall, excluding the benefits of currency exchange, net sales were down 1 percent for the quarter.

The company's six-month results were considerably better. Net loss for the first six months of 2005 was $82.6 million, or 22 cents per diluted share, compared with $97.1 million, or 42 cents per diluted share, in the first six months of 2004.

The company reported that its restaged franchises, namely Age Defying with Botafirm and SuperLustrous, garnered sales gains, achieving consumption growth of 34 percent and 11 percent, respectively.

The second half of 2005, however, should prove to be more interesting. With the new initiatives for the Almay and Revlon brands, which are expected to begin shipping in the fourth quarter of 2004, Stahl predicted an increase in sales in 2005 and solid earnings growth for 2006, though he would not provide a specific guidance on a conference call with investors.

To support the two launches, Revlon is tweaking its financial plan for the coming year. The company, which was previously committed to issue $110 million in equity by March 31, 2006, will issue at least $185 million, with the balance of the equity going to general corporate purposes. It will also conduct a debt financing to raise roughly $75 million in the third quarter of this year to help cover the costs of the launches.Stahl said he was very pleased by retailers' responses to the line and added, "You can be sure we will significantly support these initiatives."

Bill Chappell, an analyst with SunTrust Robinson Humphrey Capital Markets, is confident the initiatives will serve the company well.

"At this stage, this is a 'faith in management' move, because they aren't giving us any details until they roll it out later this year. But I believe that it will have a positive impact when it does come out. They do things pretty methodically at Revlon, and it wouldn't be announced until after the product has been focus-grouped to death."

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