Revlon Inc.’s bankruptcy filing will not only give the ailing beauty company a chance to reorganize its debt, but could also serve as an opportunity to give its merchandise and marketing a makeover to better appeal to consumers.
The iconic beauty company said Thursday that it was voluntarily filing for Chapter 11 bankruptcy, but will continue to operate. Revlon expects to receive $ 575 million in debtor-in-possession (DIP) financing to support operations.
Revlon REV, +91.28% reported 2021 losses of $ 206.9 million on sales of $ 2.079 billion. The Wall Street Journal broke down the company’s mountain of debt and other liabilities totaling $ 3.8 billion, which included a debt maturity in September 2023 that involved an $ 866 million loan that was accidentally paid off by Citigroup Inc. C, -0.79% with the bank’s own money. Some lenders returned the money, but others kept $ 500 million of the payment.
“Revlon has an unsustainable capital structure with reported debt exceeding 1.5x of annual revenue that left the company with limited financial flexibility, including high leverage, weak liquidity and looming maturities,” said Dawei Ma, an analyst at Moody’s.
“Moreover, the company is facing supply chain disruptions, high inflation, intense competition from many successful larger competitors and rising interest rates on its heavy debt burden, partially offset by improved end-market demand as consumers resume more out-of-home activities and the company’s cost saving initiatives.”
Kelly Hyman, founder of The Hyman Law Firm, said Revlon’s iconic status will be useful as the company works its way out of bankruptcy and plays catch up with other, fresher brands that have tapped into what customers want.
“Consumer tastes and buying habits are changing significantly and yesterday’s iconic brands will be tomorrow’s nostalgic memories unless they significantly re-tool, become more limber financially and align with consumer taste and purchase patterns,” Hyman told MarketWatch via email.
Beauty brands, and the famous names behind them, are using social media to reach their audience. Kylie Jenner, who has 350 million Instagram followers, uses her account to promote her brand Kylie Cosmetics, which also has nearly 26 million followers on a separate account on the platform.
And luxury companies, like LVMH Moet Hennessy Louis Vuitton SE MC, +0.98%, which backs Rihanna’s Fenty line, have added another, very chic, layer to the competition that Revlon faces.
“Flexibility and innovation are now key,” said Hyman.
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The good news for Revlon is that beauty is on an upswing. UBS analysts recently met with executives from Ulta Beauty Inc. ULTA, +1.37%, who say that the beauty category is a strong one.
“Ulta thinks that the recent surge in cosmetics has been due to more than just cabinet restocking. Rather, it is likely due in part to a return to socialization,” UBS analysts wrote in the note published Monday.
“Management noted that the strength of the category has meant that it hasn’t made
sense for the leading players to reengage in promotions.”
UBS rates Ulta stock buy with a $ 500 price target.
Ulta is also a top pick for Cowen analysts. The group conducted a survey finding that 70% to 75% expect to spend the same amount on beauty products this year versus last year.
All of this could help Revlon turn around its business.
“Revlon is a brand that everyone knows and trusts; it is literally a generational staple for American consumers,” Hyman said.
“And the brand isn’t going away, it’s, financially speaking, going to the powder room to freshen up.”
Revlon stock rocketed 91.3% in Friday trading after closing down 13.3% on Thursday.