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Revlon Revival Gets Midterm Report Card

NEW YORK — Three years into Revlon’s turnaround strategy, the company has begun to prove naysayers — particularly those on Wall Street — wrong about the health of the beauty giant.

On a recent Friday afternoon, Revlon...

NEW YORK — Three years into Revlon’s turnaround strategy, the company has begun to prove naysayers — particularly those on Wall Street — wrong about the health of the beauty giant.

On a recent Friday afternoon, Revlon president and chief executive officer Jack Stahl grabbed a 16-month-old issue of WWD Beauty Biz, opened it to a four-page article on Revlon and read out loud a highlighted section. The passage was a gloomy prediction from Deutsche Bank analyst George Chalhoub, who stated Revlon would likely run out of cash by mid- to late 2004.

Stahl eagerly pointed out that, rather than go belly up, Revlon ended 2004 with $379 million in liquidity. In fairness to the analyst, Chalhoub had made that forecast based on the company’s fundamentals prior to a cash infusion by billionaire financier Ronald Perelman. Chalhoub now believes the company, given its liquidity, is in a much stronger position.

Revlon’s progress has not gone unnoticed. Analysts still point to aggressive margins and a heavy debt load as critical issues, but many industry observers have begun to ease up on the company. During an earnings call in March, several went so far as to congratulate Revlon on its fourth-quarter results — the company’s first profitable quarter in six years.

Now, more than halfway into its five-year turnaround plan, Stahl deems Revlon ready for aggressive growth. The company has set the stage for a comeback by fixing its most glaring setbacks. Strained relationships with retailers have been mended; outdated packaging, formulas and colors have been replaced, and a newly minted product development process is now in place. Add to that Revlon’s strengthened balance sheet and the company seems poised for better days ahead.

“They have demonstrated tremendous improvement in terms of cost savings and buying practices,” noted Karen Miller, managing director of Bear Stearns. She added, “We expect this year to be more profitable because the company is introducing new products, as opposed to the lackluster last year.”

Indeed, Revlon has started to move past the point of diminishing returns. In 2003, Stahl and Revlon’s executive vice president and chief financial officer, Thomas McGuire, engineered a major capital restructuring of the company, taking its debt from $1.9 billion at the end of 2003 to $1.3 billion at the end of last year. As Wall Street had hoped, Revlon converted $800 million worth of debt into equity in March last year, which promptly reduced its debt by a third. It then refinanced its remaining debt. Currently, it has roughly $327 million in debts due in 2008, $310 million due in 2011 and $700 million in a long-term loan. The company is also expected to use $110 million from an equity offering to pay down debt.

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The challenge now is managing that debt while cranking out new products. “We are investing and de-leveraging at the same time,” noted Stahl. Paying down debt may be paramount, but when it comes to innovation, Stahl emphasized, “We’re not missing any investment opportunities.”

“Looking at the past few quarters, they’ve made great progress,” said Bill Chappell, an analyst with SunTrust Robinson Humphrey Capital Markets.  “The recapitalization of their balance sheet gives them flexibility to reinvest in the brands and eventually generate enough free cash flow to be profitable. What really remains is to rebuild the brand name and rebuild trust with the retailers. And that’s not something that will happen overnight,” he added.

But retailers always have been among Revlon’s biggest cheerleaders. A healthy Revlon translates into buoyant mass market beauty sales. While most buyers think Revlon still has many obstacles to overcome, they also report Revlon is the strongest it has been in years.

“Revlon is becoming one of the success stories in the industry,” said Mark Griffin, president and ceo of Lewis Drugs. “Jack [Stahl] and his team have done a good job to jump-start the resurgence of Revlon.” He singled out Revlon’s efforts to tie together advertising with in-store support materials — the 360-degree marketing — with bolstering sales.

While retailers nod to Revlon’s steely determination to stabilize the company, some have grown antsy waiting for the beauty giant to bring out the heavy artillery: new products. Besides revamped core products, Revlon had nothing new to show at the recent interview, although Stahl indicated that an aggressive rollout is in the offing.

The beauty firm slowed the pace of product introductions last year as it worked to establish a cross-functional product development system. The overhauled R&D process, which took 18 months to correct, is led by the marketing department and includes key members of the management team, such as cfo McGuire.

In the absence of blockbuster introductions, Revlon’s market share slipped from 16.4 percent in 2003 to 15.8 percent in 2004, according to data from ACNielsen. Almay’s share followed suit, dipping from 5.8 percent in 2003 to 5.6 percent in 2004.

Several retailers reacted to the pullback by trimming Revlon’s display space; however, the company expects to earn back that space with an accelerated launch schedule this year, said Stephanie Klein Peponis, Revlon’s executive vice president, chief marketing officer. New products still require 24-month lead time, but the company said it is more nimble in executing within the confines of that cycle. More ideas are getting absorbed into the process, noted Stahl.

“It took Revlon longer than I would expect to streamline the R&D process, but the results so far are encouraging,” said Lehman Brothers analyst Ilias Papazachariou.

The company already has mapped out 2006 launches, earmarked concepts for 2007 and begun hashing out ideas for 2008.

Products born out of the overhauled system began to hit the market in January. To create the bulk of this year’s lineup, Revlon revamped existing franchises such as SuperLustrous Lipstick and Age Defying With Botafirm.

For instance, Revlon used its 10-year-old face makeup franchise Age Defying as a springboard to create a broader antiage makeup collection. That said, Revlon reformulated existing Age Defying products with the wrinkle-fighting ingredient Botafirm; added new additions, such as a Light Makeup formula, and retired its black packaging in favor of red. Revlon then trumpeted those efforts by hiring actress Susan Sarandon to be the face of Age Defying With Botafirm, along with Julianne Moore. Since its launch in January, industry sources estimate Age Defying With Botafirm has generated more than $44 million in retail sales. “This was a breakout introduction,” declared Stahl.

Other 2005 introductions, such as ColorStay 12-Hour Eye Shadow and Fabulash Mascara, also are delivering impressive results. According to Information Resources Inc., which excludes Wal-Mart, ColorStay eye shadow rang up nearly $3 million in retail sales, while Fabulash did more than $1 million since hitting the market in January.

With its new products — albeit a limited assortment — gaining ground, and a more robust launch cycle next year, Revlon’s advertising campaign will begin to call out product benefits, which were virtually unheralded in last year’s “Bellisimo” campaign. To reinforce its “confident, sexy” positioning, the ads continue to magnify the glamour of celebrity spokesmodels. And with a marketing team-driven R&D system, Revlon’s TV, print, online and in-store ads now reflect the same images concurrently.

“This year will be a rebound year,” said Papazachariou of Lehman Brothers, adding: “They gained some traction in lipsticks and in eye care, but we need to see whether they will be able to sustain the share gains they made.”

Retail buyers are pleased with the strides they’ve seen thus far. A buyer for a top drugstore chain said her Revlon sales are up, in many cases beyond competitors. A major discount store retailer praised Revlon for getting back to its core competencies. “Revlon is doing things that are healthier in the long run. So many manufacturers are running after what is new. But, if what is new doesn’t take off, you are stuck,” she said.

A handful of retailers noted that one challenge for Revlon is offsetting a rash of buy-one-get-one-free deals from 2004. “While I know they need to buy market share, it is very difficult to justify year-to-year results against BOGOs,” said one mass merchant.

Sales of mass market color cosmetics have been down across the board.

Small chains still feel a little left out  as Revlon tries to solidify its position from the top chains down to smaller operators. Sally Yanke at Medic Drug — a regional player — said her chain still must wait for big launches to trickle down to their stores. “Revlon is still Revlon,” she said, referring to the fact that she often hears of new initiatives well after the megachains. Buyers said only a handful of retailers have been privy to two major launches that Revlon has in the works.

Revlon has been pleased with initial efforts to make Almay easier to shop. “This should be a fun category to shop; it isn’t medical devices,” said Peponis. The company plans to relaunch Almay, retailers report, with some new categories designed to make it a one-stop shop for thirtysomething women. Almay Intense I-Color, a three-piece eye makeup collection that bowed last fall, kicked off the easy-to-buy strategy that buyers said will be carried forward in a revamp of Almay. “We are finding the women are buying all three items,” said Peponis. The three-piece collection illustrates Revlon’s ability to build sales in the cosmetics category, noted Stahl.

At the other end of the spectrum, buyers said Revlon also is working on an additional line targeting mature women — 50 plus. This line would be more sophisticated and require a more educated consumer. It could fit nicely with retailer plans to add beauty advisers back into stores. While new items would merely replace the existing Almay, industry experts question where space will come from to accommodate the line for mature women. “Retailers are looking to cut space given to cosmetics, not add to it,” said industry consultant Allan Mottus. “Cosmetics right now is not healthy. Most lines just cannibalize sales from another. What Revlon needs to do is more advertising to get the business going again,” he added. Drugstore chain sources expect the new initiatives will be in place for 2006, along with the launch of a new fragrance. “A key part of the Revlon story is that the company doesn’t need to steal market share from Procter & Gamble or L’Oréal for its turnaround to work,” said Chappell of SunTrust, adding: “It just needs to compete at the same level of productivity. If they expand their market share, that’s gravy.”

—  by Molly Prior, Faye Brookman and Amy S. Choi