Why REV Stock Trends After Chapter 11 Bankruptcy Filing
By Pete Johnson
Revlon (NYSE: REV), the iconic beauty brand, filed for Chapter 11 bankruptcy. Meanwhile, REV stock rallied on the news as traders promoted the idea of a takeover on social media.
After setting up a new strategy to drive growth, Revlon saw business pick up last year. But that was not enough to overcome the huge debt accumulated by Revlon over the years. Nevertheless, the company has been losing money since 2015.
Filing for bankruptcy will help the company “reorganize its capital structure” and “improve its long-term prospects”.
Will this be enough to turn the company around? Revlon continues to face intense competition and rising costs. Not to mention an uphill battle with its supply chain.
Still, the company has a strong portfolio of brands. On top of that, Revlon already has a takeover offer, according to reports. Will Revlon eventually be bought out? And if so, how will this affect investors holding REV shares?
Keep reading to find out why Revlon stock is all the rage and what you can expect next.
Why is REV stock trending
News of Revlon’s bankruptcy broke about two weeks ago. As a result, retail traders piled into REV stock, promoting it as a near-term contender.
The announcement caused the first crater in REV shares. And then, after hitting an all-time low of $1.08, Revlon shares rallied on significant volume. Revlon stock soared over 800% in one week, achieving meme stock status.
Traders on social media sites such as Reddit and StockTwits compared the situation to a car rental company Hertz (HTZ).
After the initial fallout, Hertz stock soared after announcing bankruptcy in 2020. As a result, HTZ stock gained over 900% as retail traders drove prices higher.
Doesn’t bankruptcy mean that the company is bankrupt? Why would anyone want to own a bankrupt business?
For one thing, Chapter 11 bankruptcy does not mean that the company is bankrupt. To illustrate, in the case of Hertz, the company sold over 200,000 vehicles. Not only that, but investors are betting on the company’s turnaround.
An investment group gave Hertz $5.9 billion while the company managed debt. As a result, Hertz has resumed operations, with rental demand heating up.
At the same time, the situation may be different with Revlon than with Hertz.
How did it happen
Revlon has been losing market share for years. Newcomers are entering the industry with attractive marketing campaigns, attracting younger clientele.
For example, a longtime rival, Coty Inc. (COTY), teamed up with Kim Kardashian and Kylie Jenner. Coty has a 20% stake in Kim’s beauty business and more than 50% in Kylie’s. With that in mind, the agreements are part of Coty’s transition to an online DTC business model.
Meanwhile, Revlon has failed to keep pace with the digital age. That said, the company was established 90 years ago and has built strong ties with major retailers.
But, as shoppers move online, especially younger ones, Revlon has been slower to catch the trends. Coty’s partnerships extend their reach online, especially on social media. Famous influencers offer products to their millions of followers.
Then the pandemic hit. Revlon saw its sales explode as a result. For one thing, with the lockdowns in place, people wore less makeup. And besides, if they were buying makeup, it was online.
Thus, Revlon lost even more market share. And then, rising raw material costs, shortages and increased labor brought the company to the brink. Below is an overview of Revlon’s debt by year since 2012.
As a result, Revlon began to miss payments, and suppliers had had enough. Overdue accounts piled up and the company couldn’t keep up. Thus, Revlon filed for voluntary Chapter 11 bankruptcy on June 16, 2022.
What’s next for Revlon
As noted, Chapter 11 does not mean Revlon is going out of business. In fact, it will give the company a chance to restructure its debt, like Hertz. Here’s what we know so far.
- Revlon expects to receive $575 million in funding to support day-to-day operations.
- Preliminary hearings are underway, with another today.
- Revlon will have the chance to work with creditors to cancel certain debts.
- Another option is for the company to be bought out.
We could also see a potential sale of Revlon assets. Revlon’s CEO says demand remains strong and “people love our brands,” adding the company’s strong market position.
But she added that the company’s debt situation made it difficult to conduct business. In particular, rising costs and shortages.
Revlon will continue to do business for now while working with those they owe money to. If they reach a resolution, the company can reduce its debt to better position itself for the long term.
At the same time, investors holding REV shares may get nothing.
Is it worth buying REV shares
The first thing to know about buying REV stock right now is that you can lose it all. If Revlon fails to turn a profit, it will continue to lose money.
Filing for bankruptcy will give the company a second chance to restructure its debt. But Revlon will still work with the tough conditions before.
Although raw material costs have fallen slightly over the past month, they are still well above pre-pandemic levels. Revlon will need to make significant behind-the-scenes changes to overcome the difficulties.
Can REV stock become the next GameStop (GME) or Hertz? That’s what marketers on social media are hoping for. But, with the competition gaining market share, the situation seems different.
At the same time, Revlon is a massive makeup brand. For example, Revlon is the world’s third largest cosmetics brand. Not only that, but they are also the number 1 mass perfume and nail brand for professionals.
Yet these facts do not mean that Revlon stock is worth buying. The company still faces rising costs. Additionally, Revlon has a long list of creditors that they will pay before investors. For this reason, it may be best to stay away for this one.
Disclosure: We expressly prohibit our editors from having a financial interest in their own recommendations of securities to readers. All of our employees and agents must wait 24 hours after posting online or 72 hours after sending a print-only posting before acting on an initial recommendation. Any investment recommended by Investment U should only be made after consulting your investment adviser and only after reviewing the company’s prospectus or financial statements.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.