iionline.com
Judith Graham (7/29/99)
When preparing a company to be sold, it helps to make it
look desirable.
Cosmetics titan Revlon (NYSE: REV - Quotes, News,
Boards) should know a thing or two about getting
spruced up for a meeting with a possible suitor. But in light
of its just announced quarterly earnings, attracting a
potential buyer may now prove a trickier task than
previously anticipated.
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Tuesday night the company reported second-quarter
earnings of $0.11 per share, missing analysts' estimates by
a landslide. It was expected to earn $0.31 per share,
based on the average analyst estimate. A slew of
restructuring charges put the actual profits take well into
the red.
Adding insult, the outlook for the second half of the year
doesn't look much better. That's because Revlon will have
to spend more on marketing to keep up with new
competition from brands such as Johnson & Johnson's
(NYSE: JNJ - Quotes, News, Boards) Neutrogena
and Procter & Gamble's (NYSE: PG - Quotes, News,
Boards) Oil of Olay.
Revlon's sales were disappointing across the board, due in
part to the impact of its new competition, sluggish
category growth and economic uncertainty overseas.
Sales slid 3.8%, with international sales falling 12.3% on
weakness in Latin America and Russia and the translation
of foreign sales into the stronger U.S. dollar.
Bullish comments regarding the sales outlook for the
second half were the only reasons shares didn't crater.
The shares fell $1.50, or 6.7%, to $20.75.
However, the company's tale of declining profits and sales
shortfalls is nothing new. After having recorded four
consecutive quarters of sales declines, Revlon is expected
to grow in the low single digits in the second half of the
year, bringing full year sales to about $2.2 billion, down
2% from last year when it had only 0.8% growth,
according to a morning report by analyst Andrew Shore
of PaineWebber.
And now, with its past sins of overloading distribution
channels, coupled with the absence of major new product
activity, the company has managed to weave its business
into a tangled web.
A sales shortfall wouldn't be such a problem if the
company wasn't sitting on a mountain of debt. A
cumbersome $1.75 billion debt means the company
must dole out $36 million in interest payments every
quarter. In the quarter just ended, Revlon generated
$34 million in operating income. With high interest
expenses chipping away at profits, the company can
barely afford to chip away at the actual debt.
So how does this affect the company's quest to find a
buyer?
As PaineWebber's Shore wrote in his report, 'Financially,
the company's $1.75 billion debt and negative equity
constrains the operational flexibility, and has the appeal of
deadly poison to any interested acquirer.'
However, analyst Melissa Grant of Warburg Dillon Read
says debt only presents a problem for a company that
wants to buy all Revlon's holdings. 'It limits some players
from buying the entire company, but it doesn't limit them
from buying a portion,' Grant says. 'Given Revlon's
portfolio, there are certain product segments Revlon's in
that could be strategic fits for certain buyers.'
But after the stock jumped in March on speculative
appeal that its knight in shining armor was standing by,
four months later, the auction house is empty. Past
interested parties included Japan's Kao, but it, along with
some others, reportedly opted out after assessing that
Revlon is not as strong an international brand as it is in the
U.S.
On Monday, the Financial Times of London said Revlon's
latest suitor, Coty Inc., decided not to bid for the
company.
Chances are Revlon is more likely to be dissected piece
by piece rather than as a whole. But first it needs a buyer
-- and at this point, any buyer.
Grant says today's resulting stock price decline may make
the company more enticing for a potential buyer. 'If
anything it looks more attractive,' she says. 'The stock
price is down, and it would be a better deal now than if
this had been done this few months back.'
But for investors, it was probably time to jump ship a long
time ago.
'Speculative appeal (we are skeptical of even that), for
whatever its worth, is the only driver for the stock in the
near term,' Shore notes. 'Revlon continues to be an
investment story that one would be better off to avoid.'
Bottom Line:
Revlon's goose is cooked, and the near-term outlook is
grim. Expect the stock to hover in the teens until there is
evidence to suggest things are shaping up at Revlon, or
until there is a bidder.
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