Revlon Corp: Follow Up

Revlon warned it was going to miss its operating margin goals on Friday which led to the stock getting hit pretty hard. Of the six years of writing my newsletter, this is the first time one of the newsletter ideas have gotten hit so badly.

Revlon had six months of excellent performance going into May. The four years of restructuring that Stahl has been part of was beginning to working and it was picking up good momentum with its Vidal Radiance and Almay products. Sometime during the Spring, its competitors reacted to Revlon's success with a slash in prices to keep market share and create a price war.

While price wars are unpleasant, they often signal a bottom in an underperforming industry. Often when a mature industry gets stale, a new management team is brought in to rebuild one of the companies (as in this case with Revlon) and the others fall behind and react to market share losses with a drop in pricing. This is often a short term response (often about six months) driven by competitors weakness which is the result of not being focused on investing in new products.

What is happening with Revlon is almost exactly what happened in the hamburger price wars during 2002 and 2003 when investors thought that the big fast food chains were going to sell hamburger for $0.99 forever. However, from looking at McDonald's price chart, it was a great time to buy. This is most likely the case today for the cosmetics business. (McDonald's stock jumped from $14 to $35 when the price war ended.)

Revlon has done a lot of good things the last four years: restructured its balance sheet, re-invented old products, created new ones, come up with an entire new store format that has shown some success. Well-placed business investment wins out over competing purely on price over time.

Also, remember that it would be cheaper for a competitor to buy Revlon than continuing this price war. A competitor could easily afford paying a big premium for the stock to get access to its distribution network, product names and shelf space. I recommend staying with the stock and shareholders will be well rewarded. I thought Revlon could be a big bagger, but if not, it should get a nice take out price.