New York-headquartered Revlon (REV) is a well-known manufacturer and seller of cosmetics. I am neutral on the stock.
In the era of meme stocks and self-directed trading, you never know which low-priced stock will jump into the financial headlines. On the morning of June 17, it was Revlon stock, as it soared 80% within the first half-hour of the trading session.
Was this due to speculative buzz on Reddit? That might or might not have been a factor, but the most obvious catalyst was an event that could determine Revlon’s future as a “going concern,” as economists sometimes like to put it. It’s a strange turn of events for a cosmetics retailer that’s been around since 1932 but is now mired in financial and legal issues that may confuse some investors.
Because of that confusion, cautious traders should probably avoid Revlon stock until the dust settles. Revlon may eventually return to its former status as a formidable cosmetics-industry giant, but for the time being, there’s too much uncertainty and volatility to make a confident decision about Revlon stock.
Also worth noting, on TipRanks, REV stock has a 2 out of 10 Smart Score rating. Indicating that the company will likely underperform the broader market from here.
Not Just Cosmetic Problems
Just the price action of Revlon stock will give you an indication that Revlon’s issues are deep and persistent. Prior to the onset of COVID-19, Revlon stock traded at $24, and two full years later, the share price is nowhere near pre-pandemic levels.
Even though COVID-19 lockdowns have mostly been lifted in the U.S., and cosmetic sales should theoretically have recovered by now, it’s evident that Wall Street’s not leaning bullish on Revlon stock. After topping out at $17.65 during the past 12 months, the stock recently fell below $5 and even touched $1.08 for a moment.
Revlon doesn’t pay dividends, so there’s no consolation prize for long-term investors who are currently holding a heavy bag. Even with the recent share-price jump to $3.73, Revlon stock still has a lot of catching up to do, and the technical damage is impossible to ignore.
Despite the stock-price carnage, Revlon CEO Debra Perelman seems to remain confident in the company’s future prospects. “Consumer demand for our products remains strong – people love our brands, and we continue to have a healthy market position,” Perelman assured.
That’s not the end of her statement, however, as the CEO added that Revlon’s “challenging capital structure has limited our ability to navigate macro-economic issues in order to meet this demand.”
We can safely assume that the “macro-economic issues” would include persistently high inflation as well as supply-chain bottlenecks and possibly worker shortages. There’s also stiff competition within the cosmetics market as e-commerce has opened the field up to a multitude of large and small retailers.
The Dreaded “B” Word
Along with the “macro-economic issues,” Perelman also referred to Revlon’s “challenging capital structure.” When CEOs speak of “challenges,” they usually use soft language to talk about serious problems. In this case, Perelman is likely alluding to Revlon’s deep debt and a legal maneuver the company is using to manage that debt.
Reportedly, Revlon had $2.3 billion in total assets as of late April and debts totaling $3.7 billion – not an ideal balance sheet, to say the least. Thus, it’s not difficult to understand why Revlon sought court protection, in the form of a Chapter 11 filing, in the Southern District of New York recently.
Chapter 11 filing is also commonly known as bankruptcy, and it’s a legal move that will often send a company’s share price lower. However, Chapter 11 doesn’t always mean that a company is going out of business. In actuality, it can allow a company like Revlon to stay in business while working out a plan to repay its creditors.
Apparently, Revlon has lined up $575 million worth of debtor-in-possession financing from existing lenders, so at least the company might have a lifeline while bankruptcy proceedings are in progress.
Confusion and Rumors
Adding confusion to an already frustrating situation is an apparent payment error that could complicate Revlon’s bankruptcy proceedings. According to Bloomberg, Citigroup (C) “wired the balance of a $900 million loan rather than just the interest, and then failed to get most of it back when investors claimed Revlon was in default and should have repaid them anyway.”
It’s an unfortunate wrinkle in a story that’s likely to have more twists and turns in the near future. The best policy right now is to stay out of the trade, as there are seemingly more questions than answers here.
On top of all that, it’s been reported that an Indian conglomerate called Reliance Industries is considering buying out Revlon. It’s difficult to get concrete details on this development, though, as Reliance Industries has reportedly stated that it doesn’t “comment on media speculation and rumors,” and it “evaluates various opportunities on an ongoing basis.”
Wall Street’s Take
Turning to Wall Street, Revlon stock comes in as a Hold based on just one Hold rating assigned in the past three months. Revlon’s price target of $8.50 implies 129.7% upside potential.
The Takeaway
If Revlon stock took a moon-shot trip due to rumors or speculation, it might be tempting to take a long position now. However, that’s a dangerous proposition as “buy the rumor” often leads to “sell the news.”
What’s known for certain is that Revlon has a deep debt problem, and the company is facing multiple macro-level challenges. Hence, the sensible thing to do now is to watch and wait for further developments or just stay out of the trade altogether.