Did Revlon Put Lipstick on a Pig?

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Revlon (REV) is the #1 search by financial pros for household and personal products in the last month.

Yes, you heard that right.

This once revered company, now a penny stock, garners more than twice the interest of Procter & Gamble (PG).

Are we in some episode of the Twilight Zone?

Not exactly.

For years, short-sellers feasted on poorly managed businesses. That all came to a stop in 2020. 

Thanks to some rather unusual moves in GameStop(GME) and AMC Entertainment (AMC). Shorting poorly run businesses became risky because traders started buying up shares in hopes of causing a short squeeze. 

One of the most highly-shorted stocks in the market right now is Revlon (REV). 

Over the last month, shares have risen nearly  50%. 

Could this be the next GameStop, and is it worth investing in?

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Revlon’s (REV) Business

Revlon sells beauty and personal care products across the globe. 

Its Revlon segment offers color cosmetics and beauty tools under the Revlon brand while the hair coloring division is under the Revlon ColorSilk and Revlon Professional brands. 

Other brands in the Revlon portfolio include Elizabeth Arden, Prevage, Eight Hour, SUPERSTART, Visible Difference, Skin Illuminating, Almay, American Crew, Cutex, CND, Creme of Nature, and Mitchum. In addition, it owns Britney Spears Fragrances, Christina Aguilera Fragrances, and fragrances from All Saints, Juicy Couture, and John Varvatos. 

The firm breaks down its business into the following segments: Revlon, Elizabeth Arden, Portfolio, and Fragrances. 

On June 16th, 2022, Revlon announced Chapter 11. The filing will allow the firm to strategically reorganize its legacy capital structure. REV expects to receive $575 million in debtor-in-possession financing from its existing lender base. 

Why exactly did they need to go through bankruptcy?

Financials

Revlon is bleeding money, left and right. The firm has total debt of $3.44 billion while holding only $70 million in cash, with a market cap of $447 million.  

Sales oscillated around $2.0-$2.5 billion for the last five years.

Yet, gross margins fell while operating income turned negative.

Operating cash flow turned negative in 2017 and never recovered, leaving the company worse off every year.

Eventually the massive $3.3 billion debt took its toll as the company was shelling out $250 million in interest costs every year, and growing.

Valuation

Revlon’s EPS has been negative since 2015. And its net income has been negative since 2015. On the bright side, its price-to-sales ratio is 0.22x, which is better than its 5-year average of 0.35x. 

Growth

Revlon’s revenue growth (YoY) stands at 11.44% and its EBITDA growth (YoY) is 210%

Profitability

Despite its financial woes, REV has a gross profit margin of 59.55%, and an EBITDA margin of 11.33%. Its return on assets is 4.15%. And its return on total capital is 7.15%

The problem for Revlon was never about its direct product profitability. It was the complete mismanagement by executives that buried the company in debt and left them with bloated overhead.

Our Opinion 1/10

REV is drowning in debt. Shares recently spiked on its Chapter 11 announcement.

But the main reason it’s drawing attention is that only 5.49 million shares are floating, and 85.4% of that is short the stock. It does have the potential to become a “meme” stock and cause a massive short squeeze. However, it doesn’t make much sense to get involved with this stock as an investment. 

In fact, we expect that once the current squeeze is over, this may become a tradable short opportunity, especially through options.