Dive Brief:
- Cosmetics giant Revlon Inc. filed for Chapter 11 bankruptcy protection Wednesday citing its burdensome capital structure, which includes more than $3 billion in debt, as well as struggles with supply chain and inflation.
- The company said in a press release that it had $575 million in financing lined up to keep it operating through the bankruptcy process. Revlon intends to simplify its capital structure and reduce its debt in Chapter 11.
- The company quickly filed a court request to pay certain vendors, warning that it may soon have to shut down two U.S. manufacturing facilities and could lose well over $100 million in sales in the coming periods without sufficient inventory.
Dive Insight:
Revlon has been struggling under its debt load for years, a burden made all the more pointed by a chaotic macroeconomic environment, with cost inflation spiking, dynamic and rapidly shifting consumer patterns and ongoing supply chain challenges.
According to analysis from RapidRatings, Revlon has posted negative free cash flow for five straight years while keeping afloat thanks to cheap debt in the COVID-19 era and years prior.
The pandemic exacerbated Revlon’s financial woes. Sales fell by more than half a billion dollars in 2020 and its net loss nearly quadrupled, before easing in 2021 (but still standing above pre-pandemic levels). Last year it paid well over twice in interest expenses than what it pulled in in operating income.
Without specifying a detailed plan with lenders, the company signaled in the release that it intends to reorganize in bankruptcy, which could mean a shift in ownership if the company trades equity for debt relief from lenders. At the time of filing, MacAndrews & Forbes, headed by investor Ronald Perelman, owned just shy of 85% of Revlon’s equity. In past years, the investment firm has looked into selling the beauty company but no deals came of the effort.
In the release, Revlon CEO Debra Perelman, daughter of Ron Perelman, said that the filing would provide a “clearer path for our future growth” as it addresses its capital structure.
“By addressing these complex legacy debt constraints, we expect to be able to simplify our capital structure and significantly reduce our debt, enabling us to unlock the full potential of our globally recognized brands,” Debra Perelman added. “We are committed to ensuring the reorganization is as seamless as possible for our key stakeholders, including our employees, customers and vendors, and we appreciate their support during this process.”
According to David Silverman, retail senior director with Fitch Ratings, along with debt reduction Revlon could potentially use the Chapter 11 process to "prune its portfolio" of brands, which have had mixed performance.
"If executed effectively, Revlon could emerge from bankruptcy with a cleaner balance sheet and a better operating profile, improving longer term business prospects," Silverman said in emailed comments.
Revlon’s difficult operating environment will continue as its Ch. 11 case unfolds. In a filing, the company noted that it does not carry large inventories, and shortages of any one of 35 to 40 raw materials would shut down production of all related SKUs.
Revlon has been behind peers in filling orders on time because of struggles to acquire materials. The company said if it can’t keep up with orders from its customers, which include some of the largest retailers, it could lose retail shelf space to competitors now and in the future.
Moreover, at the time Revlon filed, facilities in North Carolina and Florida have “reduced production significantly and will be required to shut down temporarily within two weeks due to a lack of inventory, at a time those facilities need to be increasing production in time for the critical holiday and new product development (“NPD”) season.” On top of that, an affiliate in Mexico that supplies key products has shut down because of lack of inventory.
If the company can’t “rapidly resume” production, it stands to lose at least $87 million in committed holiday sales and $94 million in new product development sales just in Q4.
To shore up its supply chain, Revlon is asking for court approval to pay $40 million to key suppliers, lien holders and other vendors in the interim and $79.4 million total.
