Can James Bond Help Revlon Fend Off Its Liquidity Crisis?
By SALLY BEATTY
Staff Reporter of THE WALL STREET JOURNAL

Sultry actress Halle Berry has a new role: trying to rescue Revlon Inc.

Revlon, staggering under $1.7 billion in debt, is expected to report its 16th straight quarterly loss on Thursday, when it will unveil third-period results. Credit-rating agencies and bond analysts warn that the New York cosmetics maker could default as early as the first quarter of next year.

Yet Revlon is plowing ahead with the costly rollout of new store displays and its biggest new product promotion in years, developed around Ms. Berry, a Revlon "spokesmodel," and her new James Bond film, "Die Another Day."

Revlon, which is 83%-owned by Ronald Perelman's MacAndrews & Forbes Holdings Inc., is mostly mum about how much it will spend to advertise the line of berry and frost-colored lipsticks, blushes and eye shadows. Marketing support for the 007-themed products, including ads and in-store displays, will be up "significantly" from such spending last year, the company says. Revlon estimates the Bond-themed products could generate retail shipments of $18 million in the fourth quarter, up from shipments of $6 million for its main fourth-quarter promotion last year.

Whether the 007-themed makeup and nail polishes will generate the cash flow Revlon needs to meet bank covenants will be uppermost on investor minds as the promotion rolls out. And liquidity questions will be the focus of investor concern when Revlon gives details of results for the quarter ended in September.

Revlon was once one of the shiniest stars in the cosmetics universe. In the mid-1990s, it had steady sales gains with its breakthrough line of long-wearing "ColorStay" lipsticks, face makeup and eye shadows. But more recently, with no new blockbuster to replace the fading ColorStay, Revlon has struggled amid strategic flip-flops, executive turnover and market-share losses to bigger, better-funded rivals including Procter & Gamble Co.'s Cover Girl and L'Oreal SA's Maybelline. Revlon's sales peaked in 1998 at $2.25 billion. Asset sales and market-share erosion followed. Last year, Revlon had a $153.7 million loss on revenue of $1.32 billion.

Revlon stock, which reached a high of $56 in 1998, nearly collapsed in early October, losing 30% of its value and dipping as low as $1.80 before recovering somewhat in recent weeks. As of 4 p.m. Monday in New York Stock Exchange composite trading, Revlon shares dropped 10 cents to $3.40.

New management led by Chief Executive Jack Stahl -- a former No. 2 at Coca-Cola Co. who became Revlon's third CEO in five years in February -- has been able to slow but not halt Revlon's decline. In the four weeks ended Sept. 8, the latest month for which figures are available, Revlon's total brand unit sales slumped 3.4% and its dollar sales contracted 3.9% compared with a year earlier, according to Information Resources Inc., which tracks sales at grocery stores, drugstores and mass merchants. IRI results don't include sales at Wal-Mart Stores Inc., which accounts for about 20% of Revlon's world-wide sales.

Some of Revlon's recent introductions are producing double-digit sales gains. Among them: High Dimension Hair Color, which promises to color hair in less than half the time of rival brands, and Skinlights, a new "skin-brightening" face makeup.

But unit sales of lipstick, Revlon's biggest product category after face makeup, slid 21% in the four weeks ended Sept. 8, IRI data show. Revlon Colorstay facial makeup, still one of Revlon's biggest and most important products, fell 14%.

According to AC Nielsen data supplied by Revlon, in the third quarter the company's total share of the color-cosmetics market was 22.4%, roughly equal to a year earlier, while the Revlon brand's share climbed to 16.7%, up from 16.1%.

Analysts expect Revlon's third-quarter earnings to remain weak. Of the three equity analysts who have registered estimates for Revlon with Thomson First Call, projections for the per-share loss range from a penny to a dime, compared with a loss of four cents a year earlier. Last quarter, the company missed estimates by a wide margin.

Mr. Stahl predicts a turnaround by 2004, with sales gains of 10% to 12%. He says two years of painful restructuring and cost-cutting have cleared the way for a new chapter of growth at Revlon. Despite its many troubles, Revlon remains the nation's third-largest seller of mass-market cosmetics, and it boasts an enduring brand name. To show sustained growth over time, Mr. Stahl says, Revlon needs to invest in its future.

But some analysts worry that in the short term, these same investments could hasten Revlon's cash crunch. They point to one of Mr. Stahl's biggest gambles, a pricey upgrade of Revlon's aging display cases. Many Revlon store shelves are cracked and so badly in need of repair they are held together in some stores by tape, so Revlon is spending $60 million to $65 million to roll out new ones. In a flash of showmanship meant to demonstrate how easily drugstore personnel can restock the new cases, Mr. Stahl led a troupe of Revlon executives into one New York drugstore last spring to install the plastic cases.

Moody's Investors Service recently cited the costly new displays as one of several factors in its decision to issue a rating on Revlon's debt of SLG-4, its lowest for junk-grade debt. The report followed a Moody's downgrade of Revlon in August.

Mr. Stahl says Revlon has access to the liquidity it needs to expand its business. If necessary, Revlon executives say, a MacAndrews affiliate will provide Revlon access to $40 million. But George Chalhoub, a Deutsche Bank analyst, says that amount is too small to address Revlon's fundamental problems of crushing debt and weak sales. Moreover, he says, he can find no language in the public statements of Revlon executives binding Mr. Perelman or his affiliates to provide such new funds. A spokesman for MacAndrews & Forbes says the firm considers the commitment binding.

Mr. Perelman, who couldn't be reached for comment, could also raise money for Revlon through new debt or loans collateralized against assets that would take precedence over junior debt securities in the event of a default. He did just that in November 2001, outraging many bondholders. Most of Revlon's current bonds aren't collateralized.

Meanwhile, ads featuring Ms. Berry in character as "Jinx" are appearing in fashion magazines, and a barrage of TV commercials planned to coincide with the film's U.S. premiere has begun airing.