Revlon Drops Vital Radiance, Skims Top Management In Cost-Cutting Effort

Newly appointed Revlon President and CEO David Kennedy is overseeing a broad organizational streamlining initiative that includes discontinuing the Vital Radiance brand and cutting staff, including top management positions, the firm reported during an analyst presentation Sept. 25.

The strategy, which builds upon restructuring announced earlier this year, is intended to "meaningfully accelerate" Revlon's goal of reducing costs and improving profit margins to become net income and cash flow positive, the company said.

The announcement was made less than a week after Revlon revealed it was replacing former Revlon head Jack Stahl with Kennedy, who most recently served as exec VP, CFO and Treasurer (¹ (Also see "Revlon Appoints Kennedy President & CEO As Stahl Steps Down" - HBW Insight, 25 Sep, 2006.), p. 9). The presentation marked the first time Kennedy addressed analysts since assuming his new role.

The streamlining represents "important and necessary steps forward for Revlon," Kennedy said. "We are moving forward with a clear focus on leveraging the tremendous equity of our established brands - particularly Revlon - and without the burden of the operating loss we anticipated from Vital Radiance in 2007."

Revlon will discontinue Vital Radiance due to a disappointing performance since its debut earlier this year and the "questionable" likelihood of the brand maintaining its retail footprint in the future.

That decision comes just two months after the firm reported it would launch a strategy to revive the brand, which had experienced operating losses from a reduction in retail space within certain "large format retailers."

Those reductions, in addition to anticipated modifications to the brand offering related to 2007 launches, resulted in about $20 mil. worth of product returns (² (Also see "Vital Radiance Efforts Intended To Boost Brand Following Difficult Q2" - HBW Insight, 17 Jul, 2006.), p. 3).

"The bottom line is that [Vital Radiance] didn't work, it didn't perform, it didn't create awareness, it didn't build trial fast enough and it just didn't beat the consumption hurdles it needed to in order to retain space," Kennedy said.

"One could question a number of the elements of the marketing which didn't appear to work," the exec said, adding the presentation, imagery and pricing of the brand also were questionable.

As a result of the discontinuance, Revlon expects to incur charges of about $63 mil. in the third quarter. The charges will include a provision for estimated returns and allowances of approximately $40 mil., as well as about $13 mil. for the write-off of inventories and selling and promotional materials and $10 mil. for the acceleration of display amortization.

Including costs to discontinue the brand, Vital Radiance is anticipated to negatively impact Revlon's brand operating results by approximately $70 mil. in Q3. For the year, the negative impact is expected to be $110 mil.

As a result of charges related to discontinuing Vital Radiance and streamlining the organization, Revlon's wholly-owned subsidiary, Revlon Consumer Products Corporation, will seek an amendment to its bank credit agreement to add back these charges in the calculation of its financial covenants.

"Our focus going forward will be on leveraging the power of our brands, delivering on the significant margin improvement opportunity we see and driving efficient generalization of cash," Kennedy said.

Specifically, Revlon will focus on "continuing to build the excitement and glamour" of the Revlon brand and invest to appropriate competitive levels behind other brands, such as Almay cosmetics, which was recently restaged, and antiperspirant brand Mitchum . A "tremendous" pipeline of new products under its strongest brands will drive an average of mid-single digits revenue growth over time, Revlon said.

Under a new employee reduction plan, Revlon will eliminate the roles of exec VP and chief marketing officer, held by Stephanie Klein Peponis, and exec VP and chief creative officer, held by Rochelle Udell.

Brand marketing leadership will be responsible for all elements of "brand marketing, brand positioning and advertising, media and creative services, category development and other promotional activities," Kennedy said. "The new structure is designed to enable more effective innovation and creativity, while fostering more efficient decision making and appropriately aligning this decision-making with accountability."

Additionally, the position of exec VP and president of international, held by Tom McGuire, will be eliminated, with responsibility falling to executives leading Revlon's international geographies.

Overall, the organizational streamlining will reduce the company's U.S. workforce by approximately 250 positions, representing about 8% of its employee base. In February, Revlon announced it was eliminating 165 jobs in order to reduce costs.

The most recent cuts, combined with other restructuring costs, will result in charges of about $29 mil., with $15 mil. incurred in the third quarter and another $8 mil. anticipated to impact the fourth quarter, with the balance taken in 2007. The effort will result in "related ongoing annualized savings estimated at approximately $34 mil.," Revlon noted.

Net sales in the third quarter will be in the range of $280 mil.-$290 mil., "after giving effect to approximately $40 mil. in estimated Vital Radiance returns and allowances," Revlon said.

Adjusted EBITDA for the third quarter will be a loss of approximately $50 mil., with an operating loss of about $90 mil., "after giving effect to the costs related to the organizational streamlining," the total impact of Vital Radiance and executive severances. Net loss in the third quarter is projected at $135 mil.

For the full year, net sales will be approximately $1.3 bil. Accounting for restructuring actions taken during the year, adjusted EBITDA is expected to be approximately $75 mil.-$85 mil., and operating loss will be about $45 mil.-$55 mil. In July, the firm said EBITDA for the year would be flat or below 2005 earnings of $167 mil.

In 2007, the firm expects a "rebound" of its performance, with adjusted EBITDA of $210 mil., a figure that SunTrust Robinson Humphrey analyst William Chappell suggests is achievable. "We believe there is possible upside to these numbers if the forecasted cost savings are met and new products gain traction," he said.

As a general assessment of Revlon's announcement, Chappell notes "although it appears Revlon has taken another step back, we believe the company will learn from its Vital Radiance missteps and emerge from this as a much leaner organization."

- Eileen Francis