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Revlon caps rebound in 2007 with best results in 10 years

3/17/2008

NEW YORK —The sea has begun to calm for Revlon as it stabilized the business and recorded in full year 2007 the best financial results it has seen in many years. There still are challenges ahead, but its turnaround efforts appear to be taking hold—good news not only for the cosmetics company but also for the beauty market at mass.

“Fiscal year 2007 was the first year since 1997 that Revlon delivered positive operating cash flow. This was primarily driven by the best [read: smallest] net loss since 1997 of $16.1 million,” stated Credit Suisse analyst Filippe Goossens in a research note.

While Revlon’s history dates back to 1932 with the creation of a nail enamel, the company more recently made headlines in September 2006 when then-chief financial officer David Kennedy replaced Jack Stahl as president and chief executive officer. After taking the helm, Kennedy began a restructuring program that involved cost control, pulling the ailing Vital Radiance line and a round of job cuts.

Some industry observers viewed the withdrawal of Vital Radiance as altering the company’s prospects.

“Revlon took out the toe that it had dipped into the potential market for color cosmetics aimed at older consumers, and millions of dollars of investment, months of product development and planning were lost, despite the fact that some retailers had indicated that it was the prices that were at fault, rather than the product,” stated Euromonitor International, an independent provider of business intelligence on industries, countries and consumers, in its most recent Revlon report. “In choosing not to re-price and relaunch the range, the company showed a lack of faith in its understanding of its consumers—or perhaps it was a sign of billionaire backer Ron Perelman losing faith.”

The facts are that the company has been working hard to stabilize its finances, trim costs and rebuild its retailer relationships.

“We are executing our strategy, and our financial results in 2007 were our best in many years. We generated $224.5 million in adjusted EBITDA and, importantly, our negative free cash flow was $13.8 million compared with negative free cash flow of $161.1 million last year,” Revlon president and chief executive officer David Kennedy told analysts during a Feb. 28 conference call to discuss fourth-quarter and financial year 2007 results. “Our improved financial performance was driven by increased net sales, continued benefits from our restructuring actions and ongoing control of our costs.”

“The upside to the quarter came on the SG&A line, where the company is benefiting from its cost-cutting initiatives and tighter spending controls,” stated Sun-Trust Robinson Humphrey analyst William Chappell in a research note. “Operating margin grew 250 basis points year-over-year to 21 percent, allowing the company to exceed its EBITDA target for the year [$224 million EBITDA versus a $220 million target].”

And during 2007, the company recruited executives in marketing, product development and sales in an effort to strengthen its U.S. marketing and sales organization, Kennedy told analysts. In addition, the company issued a broad-based restricted stock grant to provide incentive to and retain vital employees.

Revlon is in the midst of rolling out new products for the first half of 2008—including the first long-wear minerals collection for face and eye—and is continuing to strengthen its international business.

While there remains much work ahead, Revlon executives remained optimistic.

“Looking ahead, we fully recognize the need to further improve our performance. We believe that our strong new product offering throughout 2008 will help build the Revlon brand,” Kennedy told analysts. And that is the key for many retailers. A financially stable Revlon is capable of delivering the kind of product innovation and promotion necessary to drive growth along the beauty wall.

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