Revlon Corp.: Will This Sleeping Giant Come Back To Life?

| About: Revlon, Inc. (REV)

Summary

Negative shareholder equity makes this a difficult stock to love.

Recent acquisition of Elizabeth Arden may put some life into what otherwise appears to be a boring company.

Revlon enjoys a global reputation for women beauty products at reasonable cost.

Revlon Corp. (NYSE:REV) is a household name that may be liked, if not loved, by Main Street but it has certainly had its issues in trying to convince Wall Street that it is a "must own" stock.

Introduction:

Rarely has there been a company of which continuing take-over rumors and whispers have been more prevalent than they have about REV. This has been the case for well over ten years fueled primarily by Ron Perelman's reputation for deal making coupled with the company's losing struggle against shrinking market share, disappointing earnings, high leverage, negative equity, and a revolving door of CEO's who were unable to put the magic back into a once great franchise.

Assessment:

The company which is about 78% owned by insiders cannot be described as extraordinarily minority shareholder- friendly. Shareholder presentations are infrequent and analysts' following is limited considering the company's long standing reputation. Founded during the great depression by Charles and Joseph Revson as well as chemist Charles Lachman, REV flourished during the early years with specific focus on women's nail polish and other nail enhancement products. In 1974, Charles Revson after being diagnosed with pancreatic cancer, named his successor, Michel Bergerac, who took the company to the next level by introducing cost and inventory controls, employee profit sharing as well as taking the company into the technology age.

In 1985, Pantry Pride, a subsidiary of Ronald O. Perelman's investment firm, MacAndrews & Forbes Inc. waged a hostile and hard-fought but ultimately successful takeover battle , paying $2.7 billion, or $58.00 per share, taking the company private, and ousting Michel Bergerac. The takeover was financed with debt with the assistance of then junk bond king, Michael Milken. Some may argue that REV has not had the benefit of a strong CEO focused on the company's business since then. REV was transformed into an entity that appeared to be more concerned with M&A related deal making than keeping its eye its core business.

As hinted above, the company has for some thirty plus years been involved in a large number of acquisitions, divestitures, a failed attempt in 1992 to take the company public again at $18-20 per share and finally taking it public in 1996.

Since then, there have been, in this writer's opinion, several missteps that have resulted in less than stellar financial performance, with the least not being the decision to exit the China market.

The future outlook:

In recent years, the number one reason to own REV was the possibility that Ron Perelman was ready and willing to sell the company. So when the company announced in the spring of 2016 that it had hired Fabian Garcia, a senior executive at Colgate (NYSE:CL) (CLQY), as its new CEO, the shares declined sharply. For the prior twenty years, a number of CEO's had been unable to halt REV's market share decline resulting from competition from much larger companies, i.e. Estee Lauder (NYSE:EL) with annual sales of $11.3 billion (63% from international) vs. REV sales of $1.9 billion (46% from international) as well as competition from smaller niche participants that may be more pricey but that do attract customers who do appreciate products that may not be sold in most drug and discount stores (Source: The Wall Street Journal, January 12, 2017, B7).

So the hiring of Mr. Garcia was a clear signal that the company would attempt to regain its previous reputation by working from within rather than putting the company up for sale. Another signal to the market was the $420 million acquisition of Elizabeth Arden in September of last year. Combined annual revenues are currently projected at $3.0 billion. With $2.6 billion of debt resulting from the acquisition, REV plans to cut about 350 jobs or 5% of its workforce within the next three years. Hardly a Herculean effort.

According to the Wall Street Journal article of January 12, 2017, Mr. Garcia appears to be aware of the challenges facing him. We can expect major management changes, taking development and manufacturing in-house and yes, as well as re-entering the China market. How this can be accomplished with a smaller projected workforce is not entirely clear. The China decision, to me, is the most important as I believe that any revenue and earnings growth that REV hopes to achieve over the next few years must come from the emerging markets as those consumers do require good quality products at reasonable prices. It is highly unlikely that the current 2% U.S. market share will improve significantly during the lifetime of most of us. One very positive factor is that Mr. Garcia appears to be very realistic regarding the task before him. He knows that there is no "quick fix". he realizes that the benefit of celebrity fragrances is questionable, and that the company cannot count on the U.S. market for its recovery.

Summary and Recommendation:

At its current price of $33.65, REV is almost half way between its 52 week high of $38.00 and its 52 week low of $27.07. With no dividend, an extremely heavy debt load, the uncertainty of the ability of management to execute its strategy in a reasonable period of time, (i.e. 12-18 months) negative net worth, and the probability that the sale of the company likely is on the back burner, the time to buy the stock should be deferred until a more attractive entry point is reached. The company does deserve close monitoring of its progress over the next several quarters and any decline of the shares to the high twenties may be that reasonable entry point. As I believe that the shares are somewhat ahead of realistic short and intermediate term expectations, I can, on current fundamentals, give it no higher recommendation than a hold for the risk averse investor.

The risk of this strategy is, that while the market may have adjusted to a no sale strategy, that an announcement of a sale may, in fact, be missed.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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