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Talk Me Out of It: $REV (Revlon)
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.
- E-Commerce growth
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.
Why am I wrong? Talk me out of it.
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