Revlon, 15% Yield-to-Maturity, Maturing February 2021

This week, Durig Capital reviews an iconic cosmetic company that has made bold moves to improve its competitiveness. Revlon, founded in 1932, has been identified with some of Hollywood’s biggest stars over the years. In mid-2016, Revlon purchased luxury brand Elizabeth Arden. The addition of the Arden line has resulted in three consecutive quarters of net sales growth in 2017. Recently, Revlon released its preliminary Q4 and FY 2017 results:

Full year net sales showed positive growth year over year, coming in at $2.7 billion as compared to $2.3 billion a year earlier.
Revlon realized $70 million in synergies and cost reductions in 2017 from the Elizabeth Arden acquisition.

Ron Perelman, the majority shareholder for Revlon has recently increased his interest in the company, fueling speculation about the company’s value and creating investor interest. Additionally, Revlon continues to make progress in its online advertising and sales initiatives. Revlon’s 2021 bonds, currently priced around 78½ , have a yield-to-maturity of about 15% making them an ideal addition to Durig Capital’s Fixed-Income 2 (FX2) managed income portfolio, the recent aggregate performance of which is shown below.

Preliminary Q4 and FY 2017 Results

In late January, Revlon released preliminary, unaudited financial results for Q4 and full year 2017. The following are some of the highlights:

Full year 2017 net sales are estimated to be $2.7 billion, compared to $2.3 billion in 2016.
The company realized $70 million of synergies and cost reductions with respect to the Elizabeth Arden acquisition / integration. This was above the level the company estimated in its Q3 2017 results of $55-$60 million of synergies by year end.
The company estimates its full year net loss to be between $165 million and $185 million, which includes the impact of a significant non-cash charge related to recent tax legislation as well as an approximate $11 million projected non-cash goodwill impairment.
Revlon also announced that Fabian Garcia, CEO, would be stepping down. Paul Meister, a current member of Revlon’s Board of Directors, will oversee the day to day operations on an interim basis.

Chris Peterson, Revlon CFO commented on the results, stating “we’re encouraged by our fourth quarter results, which represent a sequential improvement from the first nine months of the year. Our liquidity position has strengthened and Revlon color cosmetics returned to growth in North America.” Most importantly, Peterson put to rest rumors of an asset transfer similar to the actions of J.Crew a few years ago. Peterson assured “Contrary to false rumors and pure speculation in public reports, a material asset transfer is not being considered.”

About the Issuer

Founded in 1932, Revlon provides consumers around the globe with high quality beauty products. In 2016, the company expanded into the luxury side of cosmetics, acquiring the iconic Elizabeth Arden company and its portfolio of brands. Today, Revlon’s diversified portfolio of brands is sold in approximately 150 countries around the world in most retail distribution channels, including mass, salon and prestige and online direct to consumer. Revlon is among the leading global beauty companies, with some of the world’s most iconic and desired brands and product offerings in color cosmetics, skin care, hair care, hair color and fragrances. Some of its brands include Revlon, Elizabeth Arden, American Crew, Almay, Cutex, and Juicy Couture. Currently, Ron Perelman, through his holding company, MacAndrews and Forbes, owns 85% of Revlon.

A Short History on Revlon

In 1985, Ron Perelman gained control of Revlon through a hostile takeover. Then in 2009, Mr. Perelman sought to take the company private, which resulted in a lawsuit from investors which he agreed to settle. He now controls 85% of the cosmetics company.

In January 2016, Perelman notified the SEC that he sought to explore “strategic alternatives” for Revlon. Many investors took this as a sign that a buyout or merger might be in the works. However, in April 2016, Perelman hired Fabian Garcia to take over as President and CEO, a move that surprised many in the industry. A few months following Garcia’s hiring, Revlon took another unexpected turn when it agreed to buy luxury cosmetic brand Elizabeth Arden. Since then, Revlon has been working diligently to integrate Arden’s products and systems into the Revlon fold.

Another interesting development as of late is Perleman’s buying spree of Revlon stock. Between May 2017 and October 2017, Perelman bought shares 33 times in the open market, which increased Revlon stock prices as well as fueled rumors that he may be positioning to take Revlon private.

Improving Sales

Since Revlon’s acquisition of Elizabeth Arden, net sales have shown year-over-year increases in Q1, Q2, and Q3 2017 results.

Quarter	Net Sales Increase Over Previous Year
Q1 2017	35.3%
Q2 2017	32.1%
Q3 2017	10.2%

Online Cosmetics Sales Trends

The Global Beauty & Personal Care Products market is anticipated to grow from $432.7 billion in 2016 to $750 billion by 2024, at a CAGR of 7.15% between 2016 and 2024. But this industry is extremely competitive, with many different players vying for the consumers’ attention and dollars. For beauty products, and the companies that manufacture and sell them, image is everything. Prestige is part of the package, especially with so-called “luxury beauty brands” – think Lancome or Estee Lauder. Luxury cosmetic companies have been wary to sell their brands online because it lacks the “prestige factor”. However, mass-market brands (like CoverGirl and Clairol) have embraced the online space, resulting in Amazon becoming the largest online beauty retailer in the U.S., with 36% of the market. Revlon’s Elizabeth Arden line is considered a “luxury cosmetic brand”, and Revlon, unlike some other luxury brands, has embraced Amazon’s platform, selling these products with the online retailer since late 2016. Indeed, increasing online sales is definitely one of Revlon management’s top priorities as stated by Chris Peterson, CFO, “We’re gaining momentum on our strategy to respond to the accelerating pace of innovation and increasing migration to digitally-focused consumer engagement. We’re also pleased with our continued growth in e-commerce and look forward to expanding our share of this important category.”

Financials

Revlon’s last quarterly results (Q3 2017) reported company adjusted EBITDA of $53.6 million and interest expense of 38.6 million for an adjusted EBITDA / interest ratio of 1.3x. The company also has excellent liquidity. As of September 30, 2017, Revlon had $204.6 million in liquidity, made up of $79.0 million in cash and $125.6 million from the company’s revolving credit facility.

Risks

The risks for Revlon’s bondholders lies in whether the company can truly capitalize on its continued focus in the online advertising and sales arena as well as a successful integration of the Elizabeth Arden brand. Revlon has already been one of the few cosmetic companies to sell its “luxury” brand online via Amazon. In addition, Revlon also achieved greater than expected synergies and cost reductions in 2017, an impressive $70 million. In addition, sales increased in Q1, Q2 and Q3 of 2017, most likely from the acquisition of the Elizabeth Arden brand. In light of these developments, the near 15% yield to maturity on Revlon’s 2021 bonds, does appear to outweigh the risks identified.

In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments. Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.

Summary and Conclusion

Revlon has a long and distinguished history in the cosmetics industry. It has continued to remake and revitalize its products as fashion trends have continued to evolve. The company boldly acquired Elizabeth Arden back in 2016 and since then has worked tirelessly to integrate its systems and products into the Revlon brand. Cost savings and synergies are coming to fruition along with increases in net sales. With the continued focus in advertising and sales online, the company appears to be turning a corner to return to profitability. Revlon’s 2021 bonds are currently selling at a significant discount giving them an outstanding yield to maturity that’s about 15%. In light of Revlon’s recent improvements, the company’s 2021 bonds are an ideal addition to our FX2 managed income portfolio, the recent benchmarked, aggregate performance of which is displayed above.

Issuer: Revlon Consumer Products Corp.

Ticker: (NYSE:REV)

Coupon: 5.750%

Maturity: 2/15/2021

Ratings: Caa1 / CCC+

Pays: Semiannually

Price: 78.50

Yield to Maturity: ~14.88%

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Disclosure: Durig Capital and certain clients may hold positions in Revlon’s 2021 bonds.

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