Long $10, $15, and a small moonshot $25 August 20 calls
After shaking off near bankruptcy, Revlon is overlooked as a turnaround business. Reopening, high insider ownership, and a very healthy short to float ratio provide the stock near-term catalysts to get back to historical valuations.
End of March Notes
One thing about low float stocks exactly that, low float. They move, but it's on low volume. Swings can and will make very little sense intraday. I knew this going in, however, I didn't realize how divorced options prices would be from the stock due to this, just simply because there is no open interest. Essentially, so far, as the stock has risen, a tree has fallen in the forest and it's confirmed that it does not make a sound. Currently down a little over 20% as the stock sits about 5% up since my original memo. A lot of that is due to a reduction in IV after earnings, but as I mentioned..most of these August calls aren't moving. It seemed the market was catching on when things moved from $10.50s to $13.30s after earnings, however we've since come back down and settled in the $12, give or take 20 cents either way for the most part(as I write this we're about $11.70) Keep my eye on the trends but overall still positioned for the this to be a summertime stock.
Following up from my memo a week ago, one of the catalysts was Q4 earnings. The market has responded very well to them! $REV has been up anywhere between 6-10+% throughout the day. This whole thing is a moonshot for me, we'll see how it goes, it could very well be trying to pick up pennies in front of a bulldozer
EPS: $0.61 per share, beats consensus estimate of $0.14 per share
Revenue of $626.6M misses by $71.9M.
-Net sales were $626.6 million in the fourth quarter of 2020, compared to $699.4 million during the prior-year period, a decline of $72.8 million, or 10.4%. However Q3 net sales were $477.1M so this does represent an increase from Q3, the question is just how much of that is seasonal vs. real recovery.
-E-commerce net sales increased approximately 39% versus the prior-year period and represented approximately 20% of fourth quarter 2020 net sales, versus approximately 13% in the prior-year period.
The company estimates that if you back out the impact of COVID, sales grew 6.5% YoY. They give the number, but don't say how they got to that number. I'm ignoring that.
Gross margins continuing to improve, up to 58.5% from 56.9% in 2019.
Reaffirmed that the restructuring program from last year is on track to achieve between $200M and $230M in annual cost reductions by the end of 2022.
The biggest highlight in the portfolio was the Elizabeth Arden line, which grew 7.8% YoY. E-Commerce in this line grew 70% and China grew 54%.
Still debt-heavy, but the company continues to chip away at that, in addition to favorable refinancing and extensions.
87% of outstanding continues to be owned by insiders
26.58% of float is short
4.4 days to cover
-44.26% from 52-week highs @ $11.45
Long $10, $15, and a small moonshot $25 August 20 calls
Yes..that Revlon. The cosmetics company that traded at $40 a share in 2015 and now trades at $12 despite one of the greatest bull runs in market history. There's not really a question on the why, revenues have stayed relatively flat, profits have shrunk, and the liability side of the balance sheet has exploded over the last 5 years.
Funny story about some of that debt, if you haven't been following along. Citi ($C) accidentally paid off the full amount of one of their outstanding debt issues instead of just making an interest payment, totaling $900M. Revlon wasn't due to pay that debt until 2023. A judge ruled last month that lenders were allowed to keep this money, meaning Citi stays on the hook for it! A wild story that I'm sure is far far from over.
But anyway, back to Revlon and why I'm considering buying this stock. Why right now? A sleepy small value stock that's focused on cosmetics? Have I looked in the mirror and realized I know nothing about this space? (Yes)
But things I see quickly:
. COVID-19 Recovery
Cosmetics represent a fairly obvious COVID-19 recovery play. The more people are vaccinated, the more they'll be going out, the more they'll need Revlon products.
Distribution and Brand Recognition
Revlon has strong distribution throughout retail all across the country with a brand anyone can recognize.
Stop me if you've heard this before. If you peel back the distribution of revenues, Revlon actually has a growing E-commerce business...and it's not just Target.com growing so Revlon grows, but Revlon's direct channels also saw strong growth in 2020. Overall, E-Commerce represents 14% of Revlon sales, up from 9% the year prior.
Improving balance sheet
Calling a spade a spade here, the balance sheet still isn't pretty, but it's improving. Q4 earnings come out later this month, even beyond looking at the Citi debacle, we have improving operating income (actually positive in Q3 and up YoY to $21.6M from $16.7) while operating expenses have decreased by roughly $130M in the same time frame
Why right now? I'm burying the lead here but this is why I even looked at Revlon in the first place, it popped up in a couple of screeners:
Market cap- At $623M, Revlon has an interesting market cap that small changes can have large impacts on a % basis
Low Float - Revlon currently has a 6.8M share float
High short % - Currently 28% of that float is short.
Days to cover - 4.2. Because of the low-volume Revlon trades, it would take 4.2 days for shorts to cover their positions totally. To provide relative numbers, $TSLA's days to cover is 1.2
High insider ownership - Ron Perelman owns 87%(!) of outstanding shares via his holding company MacAndrews & Forbes
Cash - Revlon has been able to restructure debt and cut expenses to provide itself a healthy runway to the other side of COVID-19.
If you look at Revlon it currently trades at roughly 2x EV/Rev in comparison to its main peer, $EL who trades 7.4x EV/Rev. EL sits in a much better position financially than Revlon, so it demands a higher multiple, but this remains attractive.
Long story short, I think there might be a powder keg here. I have no position, but I may start one before this month's earnings call.
Assume they’re not an acquisition target themselves; Are there strong DTC brands that would be attractive to them with current rates and their improved balance sheet? More concerned about what competing brands P&G owns and overall DTC sentiment in the space.
Is this a long term play for you or short term? Are you interested in sector exposure or just this particular stock.
I’m not gonna talk you out of it. But I’m quite sold either.
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