Find Over 16% YTM with Revlon, Bonds Mature February 2021

  • Adjusted operating income increased by 82% year-over-year.
  • A 35% increase in Adjusted EBITDA.
  • An increase in e-commerce sales of 23%.
  • Significant sales increases in China as well as North America.

This week, Durig Capital takes a second look at an iconic cosmetic company that is continuing to refine its market strategy. Revlon, founded in 1932, has been identified with some of Hollywood’s biggest stars over the years. The company, under the direction of a new President and CEO, has recently posted some fantastic results for the third quarter including:

 

  • Adjusted operating income increased by 82% year-over-year.

  • A 35% increase in Adjusted EBITDA.

  • An increase in e-commerce sales of 23%.

  • Significant sales increases in China as well as North America.

Revlon has just unveiled an Optimization Program that is slated to generate between $125 million and $150 million in annual cost savings. These savings, along with increasing product sales and profit margins, look to keep Revlon as one of the premier players in the global cosmetics industry. The company’s 2021 and 2024 bonds are currently selling at a discount, giving them a yield-to-maturity of  over 16% and over 18%, respectively. Based on the company’s solid Q3 results, these bonds are an ideal candidate for additional weighting in Durig Capital’s Fixed Income 2 (FX2) Managed Income Portfolio, the most recent performance of which is shown below.


Recent Quarterly Results

Earlier this month, Revlon posted its third quarter results. The results surprised analysts, beating on both revenue and earnings per share. The company remains focused on its three key strategic pillars – strengthening the brand through innovation, better communication and connecting with customers through media channels, and ensuring product availability both in-store and online. Some of the company’s third quarter wins include:

 

  • Adjusted EBITDA increased by 35% in the third quarter representing the largest quarter-over-quarter adjusted EBITDA growth since the Elizabeth Arden acquisition in 2016 ($72.4 million versus $53.7 million).

  • Adjusted operating income in the third quarter was $26.0 million compared to $14.3 million a year ago, an outstanding increase of 82%.

  • E-commerce sales increased 23%.

  • The company’s Elizabeth Arden brand saw net sales increase by 17% in the third quarter.

  • In China, net sales were up 49%.
     

Revlon continues to respond to the changes in the beauty products marketplace. Company President, Debra Perelman, commented on the company’s most recent results. “We are very pleased with our third quarter 2018 results and believe that they are reflective of the strength of our business strategy and efforts to stabilize our business operations. We are seeing strong growth in our strategic focus areas as we continue to work to build momentum across our businesses.”

 

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 over 85% of Revlon.
 

2018 Optimization Program
 

Along with its third quarter results, Revlon also announced its 2018 Optimization Program. This program is designed to streamline Revlon’s operations to maximize productivity, improve profitability, cash flow and liquidity. The major initiatives associated with this program include:
 

  • Optimizing Global Supply Chain: Drive manufacturing efficiencies to rationalize the company’s global warehouse networks and office locations. Enhance Revlon’s speed-to-market capabilities for new innovations.

  • Enhance In-Market Execution: Optimize Revlon’s commercial and organizational structures, creating more efficient global and regional capabilities.

  • Reduce Overhead Costs and Streamline Operations: Leverage technology to streamline workflows, standardize and simplify business processes, leading to greater agility and faster decision making.
     

This Optimization Program is expected to be substantially completed by December 31, 2019, and is expected to generate annualized cost reductions in the range of $125 million to $150 million by the end of 2019. These savings should flow directly to Revlon’s bottom line, enhancing profitability.
 

What’s Next for Ron Perelman and 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. 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.
 

In 2017, Perelman continued to increase his ownership in Revlon, purchasing stock 33 times in the open market. Fast forward to 2018, and Perelman again increased his ownership in the third quarter purchasing 365,000 shares from August 8th to September 25th at prices ranging from $15.17 to $21.29 He now controls in excess of 85% of the company. This of course is fueling rumors that Perelman might again attempt to take the company private sometime in 2019. In the meantime, earlier this year he hired his daughter, Debra Perelman, as the company’s President and CEO, the first female President in the company’s history.
 

Trends in the Global Cosmetic Industry
 

The global cosmetic products market was valued at $532.4 billion (USD) in 2017. Between 2018 and 2023, this market is projected to grow to a value of $805.6 billion by 2023. This represents a compound annual growth rate of 7.1% between 2018-2023.
 

Global cosmetic sales remain largely impervious to the ups and downs of the global economy. The amount of product sales are affected, however cosmetic sales maintain a certain volume overall, regardless of the greater economic picture. This is due in large part to the the still growing usage of these products by women and increasingly, by men as well across the globe. Over the past twenty years, declining fertility and mortality rates have translated to a rise in the aging population around the world. This, coupled with a strong desire to maintain a youthful appearance has resulted in a growing and thriving cosmetics industry. This aging population has increased demand for anti-aging products that will prevent wrinkles, age spots, dry skin and uneven skin tone. Revlon, with its long history and global presence, is perfectly positioned to benefit from these trends.
 


 

Interest Coverage and Liquidity

 

Interest coverage is of paramount importance to bondholders as it indicates a company’s ability to service its existing debt. Third quarter adjusted operating income for Revlon was $26.0 million. Adding back non-cash depreciation charge of $40.1 million for the quarter gives an operating income of $66.1 million. Third quarter interest expense totaled $46.4 million, for an interest coverage ratio of 1.4x.
 

As of October 31, 2018, Revlon had approximately $113 million of available liquidity, consisting of $67 million in cash, $40 million from its senior line of credit with MacAndrews and Forbes and $6 million available from its revolving credit facility.
 

Risks
 

The risk for bondholders is tied to the company’s continued progress in streamlining its operations to generate cost savings and increasing its market penetration. Revlon registered increases in both its North American sales as well as its sales in China in Q3. E-commerce also showed healthy growth in Q3. The company’s 2018 Optimization Program is also slated to generate between $125 million to $150 million in annual cost reductions by the end of 2019.  Based on these considerations, the over 16% yield on the company’s 2021 bonds and the over 18% yield to maturity on their 2024 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 appears to be gaining traction. On a constant currency basis, the company’s Q3 sales were slightly positive as compared to a year ago. There were increases in the company’s sales of Revlon and Elizabeth Arden products in North America in Q3, as well as a handsome increase of product sales in China.  With cost savings on the way from its 2018 Optimization Program, Revlon looks to be regaining its competitive edge in the cosmetics industry. Its 2021 and 2024 bonds, with a yield-to-maturity of over 16% and over 18%, respectively, are ideal candidates for additional weighting in Durig Capital’s Fixed Income 2 (FX2) Managed Income Portfolio, the most recent performance of which is shown above.

 

Issuer:  Revlon Consumer Products Corp.

Symbol: NYSE: REV

Coupon: 5.750%

Maturity: 2/15/2021

Ratings: Caa3 / CCC

Pays: Semiannually

Price:  81.0

Yield to Maturity: ~16.46%
 

Issuer:  Revlon Consumer Products Corp.

Symbol: NYSE: REV

Coupon: 6.25%

Maturity: 8/01/2024

Ratings: Caa3 / CCC

Pays: Semiannually

Price:  58.75

Yield to Maturity: ~18.26%

..

 

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Disclosure: Durig Capital and certain clients may hold positions in Revlon’s  February 2021 and August 2024 bonds.

Please note that all yield and price indications are shown from the time of our research.  Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports.  We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.

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