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Daily Trouble
October 12, 1999

Revlon, Inc.

Ticker: (NYSE: REV)
Phone: 212-527-5230
Website: www.revlon.com
Price (10/11/99): $11 1/16

By Rick Aristotle Munarriz (TMF Edible)

How Did it Find Trouble?

Sorry, Charlie. Cosmetics giant Revlon is having a hard time showing its face lately. In April, financier Ronald Perelman put the company on the auction block. A month later, Coty, the $1.6 billion fragrance subsidiary of Dutch conglomerate Benckiser NV, wanted in on the action. What Perelman wanted and what Coty wanted to pay were hues apart.

Yet speculators figured Perelman would find a suitor. Despite its bloated debt load, the company's brands were stellar. Besides, as cursed as Perelman had been in recent investments like Sunbeam (NYSE: SOC) and Marvel Entertainment, he did manage to sell New World Communications to Rupert Murdoch's News Corp. (NYSE: NWS) three years ago for a tidy profit.

Jilted at the block, Revlon decided earlier this month to go it alone. Selling its Professional Products division and some lackluster product lines in Latin America would provide some relief to tame its gangly $1.8 billion in debt. Unfortunately, the core assets were a bit of a liability.

A retail inventory imbalance, which took shape as the company overstocked its merchant accounts, has forced the company to scale back shipments that will cost $280 million in sales this year.

So, when Revlon stunned analysts who were expecting a profit in the third quarter by pre-announcing that sales would fall shy of $450 million, with a $120 - $125 million loss for the quarter, followed by another dreadful quarter, the stock got smeared. Does anyone know the words to Beauty School Dropout?

Business Description

Revlon, Almay, Mitchum, Flex, Charlie -- Revlon's portfolio of cosmetics brands should be household words in most homes. In 1985 Ronald Perelman bought Revlon.

Financial Facts

Income Statement
12-month sales: $2173.6 million
12-month income: ($94.5 million)*
12-month EPS: ($1.84)*
Profit Margin: N/A
Market Cap: $566.4 million (on 51.2 million shares)
(*Includes non-recurring items)

Balance Sheet
Cash: $26.8 million
Current Assets: $835.2 million
Current Liabilities: $488.7 million
Long-term Debt: $1,958 million

Ratios
Price-to-earnings: N/A
Price-to-sales: 0.26

How Could You Have Seen it Coming?

Problems in key international markets. Soft sales. Revlon is not alone. Avon Products (NYSE: AVP) also spooked analysts with a bleak outlook for the balance of 1999. Then again, the malaise is not industry contagious, since Estee Lauder (NYSE: EL) announced that it would buck the trend and actually live up to expectations.

Once-bitten Perelman watchers may have stayed away from Revlon. They saw how even a powerful brand like comic book giant Marvel can buckle under a Spider-Man spun web of debt. Perelman isn't always wrong. Perelman isn't always right. The Incredible Hulk has a soft side. However, watching Revlon's debt close in on $2 billion -- more than annual sales for the leaner Revlon going forward -- made the company vulnerable.

Where to From Here?

There's some good news and bad news here. On the dreary side is a company that may have anticipated eventual weakness when it first put itself up for sale in the spring. However, the company put pride before instinct when it walked away from the bargaining table. We don't know how much Coty, or any other unnamed bidder, was willing to pay for Revlon, but it's a safe bet that it was considerably more than what the shares are fetching today.

So are shareholders stuck? Not really. In ripping off the Band-Aid of its inventory control rather than peeling gradually as the company had first proposed, it opens up healthy prospects for next year. While the shortfall this year has the company's books violating financial covenants, the creditors will be hard-pressed not to give the company the benefit of the doubt. The non-core asset sales will generate $500 million, a healthy start in paying down the company's caked-on debt.

Even as Revlon prepares to report a loss as wide as $80 million for the full year, before we consider restructuring costs, the prospects smile kindly.

We live in an ever-aging society where vanity and outer skin preservation show no sign of abating. While competition grows, as skin treatment specialists Oil of Olay and Neutrogena expand their makeup lines, Revlon is clearly well entrenched in many different personal care niches.

The makeover in transition seems to have scared away analysts and potential investors. However, attractive brand names eventually come back into favor, and Revlon, quite possibly, will be back on the block under better circumstances.

Make a Living Foolin' Around.

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