(WSJ: "[REV] Drops Sale Plans, Reports Poor Finances; Shares Sink 34%")
October 4, 1999
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Revlon Drops Sale Plans, Reports
Poor Finances; Shares Sink 34%
By GORDON FAIRCLOUGH
Staff Reporter of THE WALL STREET JOURNAL
NEW YORK -- Revlon Inc. Chairman Ronald O. Perelman took the company off the auction block after a nearly six-month search for a buyer, leaving it to the financier himself to direct a makeover of the struggling and deeply indebted cosmetics maker.
Revlon, long the crown jewel of Mr. Perelman's business empire, said Friday that it plans to sell its salon-products business and a handful of Latin American brands, hoping to raise about $500 million. But the company said it will keep its core cosmetics, fragrance and personal-care operations intact, because, analysts believe, potential buyers wouldn't meet Mr. Perelman's undisclosed asking price.
Revlon, which sells Revlon, Almay and Ultima II brands, also released a flurry of disappointing financial news, which together with dropping the sale plans sent Revlon shares plunging 34%. The stock fell $6.25 a share to $12 in New York Stock Exchange composite trading Friday, slicing about $266 million off the market value of Mr. Perelman's 83% stake in the company.
Revlon officials sought to put the best face on the news. The moves "have cleared the decks for a very strong performance in 2000," said George Fellows, Revlon's chief executive officer. "We are very optimistic about what the future holds. We're in damn fine shape to do what we need to do."
But to some Wall Street analysts, the situation doesn't look pretty. "A lot of things have gone wrong for Revlon all at the same time," said Wendy Nicholson, an analyst at Salomon Smith Barney. And that has resulted in a string of net losses since last year's fourth quarter and uncertainty about future results.
Sales Abroad Cited
The company said Friday that lower-than-expected sales abroad and a reduction in retailers' inventories at home would result in a surprise "operating loss" for the year of between $1.37 a share and $1.56 a share, excluding interest costs, taxes and one-time items. The company also said it expects to take charges related to a restructuring plan unveiled last year, although it is still unsure of their timing and size.
The inventory adjustment stems from decisions by drugstore chains -- Revlon's most important outlet for its mass-market cosmetics -- to cut the amount of lipstick, nail polish, mascara and other makeup that they keep in their warehouses. The need to reduce excess inventories has been a long-running problem for Revlon, one that has taken a big bite out of company sales in recent quarters as retailers use up stock already on hand.
Revlon said it will reduce shipments to retailers for the rest of the year, forgoing planned sales of about $280 million, to clear the product pipeline by the start of the new year. As a result, the company said it estimates third-quarter sales of between $435 million and $450 million, and a loss, excluding any restructuring charges, of between $3.10 a share and $3.20 a share. Analysts were expecting profit, excluding special items, of 45 cents a share for the quarter, according to a First Call/Thomson Financial survey.
There have been other troubles as well, which Mr. Fellows traces back to the company's decision, in the middle of 1998, to ease up on advertising and promotional spending. "We thought we were on such a roll that we could afford to do it," Mr. Fellows said. "In retrospect, that was incorrect."
That was followed by a blast of activity by deep-pocketed rivals including Procter & Gamble Co., which has been promoting its Oil of Olay and Cover Girl brands, and Johnson & Johnson, which is pushing a Neutrogena cosmetics line, allowing them to make inroads into the mass-market business that Revlon had dominated for years. Specialty retailers like Gap Inc. and Intimate Brands Inc.'s Victoria's Secret also started grabbing market share.
'Eye Off the Ball'
Delays in the launch of products -- originally expected by the end of 1998, but only now hitting store shelves -- have slowed Revlon's comeback efforts. With uncertainty over the company's future as a major distraction, management really took its "eye off the ball of running the business to dress it up and sell the company," said Salomon Smith Barney's Ms. Nicholson.
Debt also clouds the picture. Revlon has $1.8 billion in debt left over from Mr. Perelman's 1985 leveraged buyout of the company. Merrill Lynch warned investors that the company "risks a liquidity crunch" until it sells the units that are now on the block.
About half of the Revlon shares controlled by Mr. Perelman are used to back $770 million of junk bonds issued by a closely held Perelman holding company. Those bonds come due in March 2001. Revlon bonds went into a tailspin on Friday.
To pay off the bondholders using only the Revlon stock, Mr. Perelman would have to sell the shares for between $30 and $38 apiece, depending on the timing, bond analysts said, far above their market price. Fueled by takeover speculation, Revlon stock has spent much of 1999 trading in the $20s, briefly topping $30 a share in June.
Mr. Fellows said Revlon is negotiating with multiple bidders and is "quite far down in the process" of selling the professional-products unit, which primarily sells shampoo and other hair-care products to salons, and the Latin American brands. Those operations have annual revenue of about $450 million, compared with Revlon's total of $2.25 billion last year. He said the company expects to complete the sales before March of next year and that proceeds would be used to pay down debt.
The company has launched a new advertising campaign featuring country-music star Shania Twain. And it is unleashing a bevy of products, including a new version of its successful no-rub-off lipstick, a popular mascara formulation and a three-in-one stick that can be used as eye shadow, blusher and lipstick.
Even so, some analysts remain skeptical. Heather Hay at Merrill Lynch said she is waiting for evidence that the company is adopting fundamental changes in the way it does business. In the meantime, she is cutting her earnings estimates for the company. "I didn't hear a lot that gives me confidence they've fixed their problems," she said Friday.
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