Why Is Revlon Stock Up 600% After Filing For Bankruptcy?

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key takeaways

  • Revlon filed for Chapter 11 bankruptcy last week under $3.3 billion in debt
  • They have secured $375 million in additional debt that will allow them to attempt to restructure the company and secure its future as a running concern.
  • Surprisingly, the stock has been pumping since the announcement, largely driven by retail investments, including from Reddit’s Wallstreetbets crowd.
  • After reaching $1.95 in trading last week, Revlon’s stock price soared to $8.14 on Wednesday.
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Bankruptcy would generally be considered bad news, wouldn’t it? Apparently not for Revlon, whose share price has soared 600% from its all time low, It’s been some tough years for the cosmetics company, as it struggles to compete against a new wave of influential brands like Kylie Cosmetics and Rianna’s Fenty Beauty.

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Revlon filed for Chapter 11 bankruptcy last week under the weight of mountains of debt and little cash to support it. They’ve got court approval for even more debt, Additional $375m. with On the way to help buy time for business restructuring.

On the face of it, this story doesn’t lend itself to a stock price that’s rising in the double digits almost every day. There’s a lot going on behind the scenes to make Revlon an attractive bet for retail investors, including posters on Reddit’s infamous Wallstreetbets subreddit.

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This year has been a rough year for Revlon’s stock price. At the start of the year, Revlon was trading at $11.66 per share, but has since fallen to $1.95 since the bankruptcy declaration. Since then, the price has risen further, rising another 34.32% to $8.14 on Wednesday, June 22.

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Why is Revlon struggling?

Revlon is an OG in the cosmetics game. The company was started back in 1932 and was, for many years, second only to Avon in global cosmetic sales. It has once been a dramatic fall from grace for the industry giants.

Revlon is going through such a tough time for a number of reasons. As a brand that began long before the Internet, its business model is heavily dependent on retail stores and location at other retailers such as Walmart and Bed Bath & Beyond.

As with all bricks-and-mortar retail, it has been an ongoing battle to keep up with upstart, online-first brands. This is especially true in the cosmetics space, which is now dominated by influencers like Kylie Jenner. It’s not just billionaire reality stars who are taking a piece of the pie from Revlon; It’s also the countless smaller influencers who drive audiences on YouTube, TikTok, and Instagram.

Of course, there are several other challenges that aren’t unique to Revlon. They suffer from the same supply chain issues that have plagued many businesses in the cosmetics industry and beyond, increasing the cost of their ingredients and making it difficult to source some of them completely.

The global lockdown didn’t help either. The drastic reduction in opportunities to leave home means less demand for makeup, and this has remained somewhat in the post-Covid world where working from home has become much more mainstream.

While all of this has had an impact, Revlon’s biggest problem is debt. They are drowning in it. It remains a company with more than $3.3 billion in debt and a market cap of over $400 million, despite recent price increases.

High debt and low cash flow are an even bigger problem for a company like Revlon because they have little in the way of assets. Broadly speaking, his only tangible assets include his current physical makeup list (makeup he has created but not yet sold) and some invoices he has sent that have not been paid for yet. Overall, these assets total less than $1 billion, which is still a mile away from their current debt levels.

What Happens After Chapter 11 Bankruptcy?

The term bankruptcy often leads to thoughts of a business being completely shut down and ceased to exist. This may be the case in some circumstances, but Chapter 11 bankruptcy is specifically designed to allow a company to attempt to remain in operation.

This is often called “restructuring bankruptcy” because it allows the business to shuffle around debt, write off something, and potentially continue operating after it’s all done. This is actually a fairly common practice in corporate America, which has big names like General Motors, K-Mart, Ford, and J.C. Penney, all of which have Chapter 11 bankruptcies.

The purpose of Chapter 11 bankruptcy is to completely overhaul the capital structure that supports the business while keeping the customer-facing component as intact as possible, at least initially.

Whenever a company declares bankruptcy, there is a huge line of people and organizations who want their money back. Where you stand in that line depends on what type of creditor you are. For example, unpaid wages are considered a priority claim, so they are paid before any other debt is paid off.

After that, secured creditors like banks are usually cabs first by rank before heading down the line to unsecured creditors, bondholders, and suppliers. For companies with significant real assets, such as property, plant and equipment, or IP, that can be liquidated, there may be a substantial amount of cash that administrators can use to pay these creditors.

In the case of companies like Revlon, which have little in terms of tangible assets, this is unlikely. The most common outcome in these circumstances is that these creditors agree to accept equity in a new corporate entity in exchange for their debt. As a simple example, this could mean that Bank A, which granted a $100 million loan to Revlon, will agree to settle its debt for equity in Revlon 2.0.

Shareholders are usually on the last line. So this means that while shareholders may receive some cash hypothetically, chances are they will have nothing left. This is why a position at Revlon right now is too risky. This is a scenario where shareholders could see their position going to zero based on Chapter 11 results.

But one ace sleeve could dramatically change shareholders’ fortunes — a potential buyout.

Why Revlon’s Share Price Is Soaring

The buyout is likely one reason the Revlon stock price is pumping right now, and it’s being led by retail investors and Reddit’s infamous Wallstreetbets crowd. Chatter on the forums is comparing the situation with Revlon to the recent Chapter 11 bankruptcy for Hertz, whose stock also went nuts after its initial decline and bankruptcy declaration.

Trading volume for Revlon has been massive, over . with 600 times more shares Trading arm from last year’s average. Clearly, WallStreetBet is a buy on the card, and that’s exactly what happened with Hertz.

Why is shopping so tempting? We have already established that Revlon shareholders are playing a risky game. Should the company restructure into a new entity, they will almost certainly be left with nothing.

On the other hand, the other company may decide to make a move to buy Revlon. This would mean taking over the business, absorbing debt and paying existing shareholders. Given that a buyout offer almost always comes at a premium to the listed price, it can result in quick wins for investors who are happy to gamble.

In Revlon’s case, it’s not an entirely unreasonable bet. Despite not having the status that they once did, the name still carries a significant amount of brand value. After all, it’s a brand whose past spokespersons have included superstars like Halle Berry, Elle Macpherson, Jessica Alba, Gwen Stefani, and Jessica Biel.

have been before interest murmur There has been no official word from either party, however, from Indian conglomerate Reliance Industries.

What Revlon’s bankruptcy means for investors

As we’ve outlined, it’s a coin flip for Revlon investors at this point in time. A buy offer can be materialized, leading to a quick profit for those brave enough to move on. On the other hand, if no buyers are coming in, investors can completely wipe out their positions in Revlon. This is a high-risk bet, and any investor should be sure that they can afford to lose what they invest in these situations.

In a more general sense, investing in trending stocks can be a strategy worth considering. Riding the FOMO wave can yield massive returns in a short amount of time. Because of our relationship with Forbes, we have packed this concept into our forbes kit,

This strategy gives our AI access to Forbes data and uses machine learning to gauge popularity and sentiment for trending companies. We combine this with our core investment model to identify investment opportunities in a way that even the top hedge funds don’t have access to.

For investors who want to stick with the tried and true, we have our large cap kit, With a potential recession on the horizon, Revlon might not be the last big name to enter Chapter 11 this summer. In an environment with little or no growth, it hurts smaller companies, while the biggest players can weather the storm better.

Our large-cap kit aims to leverage this with long/short positions that are long on large-cap companies and short on short caps. We aim to hedge against market risk, which means that even if the market is down or overall flat, you can still make money on the difference.

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Credit: www.forbes.com /

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