Finance

Share price of company that filed for Bankruptcy rallies over 300% in a week


The U.S. markets ended their three-week losing streak that saw all major indexes rally over 5%, as the bulls took matters into their own hands to push the market northward despite unfavourable macro-economic factors weighing on the interest and commitment towards risker assets. 

After all three major indexes snapped three-week losing streaks, with the S&P rising 6.5%, the Dow Jones average gaining 5.4%, and the Nasdaq Composite surging 7.5%, the question now is whether the markets have found a bottom or starting a bear market rally off oversold conditions. 

The rally in the market in the week under consideration is a result of released economic data on Friday that raised investors’ hopes. The economic data revealed better than expected new home sales for May and a slight improvement in inflation expectations from the latest University of Michigan survey of consumer sentiment, which was seen as potentially reducing the urgency for steeper interest rate hikes by the Federal Reserve. 

Although the market was down, we saw a stellar performance from Revlon Incorporated, an NYSE-quoted stock, that posted over 300%, starting the trading week at $1.95 to close the week trading at $7.95. 

Revlon  

Revlon Incorporated is an American multinational company that was in the business of cosmetics, skincare, fragrance, and personal care. The headquarters of Revlon was established in New York City on March 1, 1932, where it remains. The firm is listed on the New York Stock Exchange and its products are sold in 150 countries. The company has many global locations including Mexico City, London, Paris, Hong Kong, Indonesia, Sydney, Singapore, and Tokyo. 

  • Revlon, Inc., together with its subsidiaries, develops, manufactures, markets, distributes, and sells beauty and personal care products worldwide.
  • The company offers its products under some of the most prestigious brands such as the Juicy Couture, John Varvatos, AllSaints, Britney Spears, Elizabeth Taylor, Christina Aguilera, Jennifer Aniston, Mariah Carey, Curve, and many others.  

Revlon has been around for nearly a century, meaning it’s gone through recessions, wars, depressions, and pandemics, but current economic conditions were a perfect storm of calamity for the cosmetics company.  

  • Unfortunately, after 90 years in business, the legacy nation filed for a Chapter 11 bankruptcy protection after struggling with debt, rising competition, supply chain challenges, and falling behind evolving beauty standards.
  • Supply chain snarls put key ingredients in short supply and inflation battered it about the head, which, when combined with labor shortages, conspired to make it impossible to continue.
  • Although the news caused the stock to lose more than 13% a few hours after the bankruptcy announcement, the stock still managed to be the top gainer on U.S. markets during the week. 

What You Should Know 

  • According to a filing with the U.S. Bankruptcy Court for the Southern District of New York, Revlon listed assets and liabilities between $1 billion and $10 billion.  
  • Revlon which had been managed by Perelman’s daughter Debra Perelman since mid-2018 had long-term debt of $3.31 billion as of March 31, 2022. This comes after avoiding bankruptcy in 2020.  
  • The rally in the share price is a result of meme stock traders on Reddit, who are pushing the share price northward in a bid to make a quick buck.  

This type of rally has happened before as traders see parallels with another big bankruptcy, Hertz Global Holdings.  

  • The car rental outfit’s stock plunged to $0.56 per share upon its bankruptcy filing but subsequently soared 1,000% within just a few weeks. 
  • This is even more similar to that of Hertz Global because there are very few Revlon shares to trade and over one-third of them are sold short. This means traders are looking to ignite a short squeeze. 
  • This is because there are more than 54 million Revlon shares outstanding and chairman Ron Perelman owns 85% of them or some 46 million shares. That leaves precious few available for retail investors, particularly with anywhere from 33% to 37% of them. 

By filing for a Chapter 11 bankruptcy, Revlon will be able to get the breathing space necessary to repay its creditors the $3.31 billion in debt it owes while continuing to operate. 

  • Revlon said in a statement that it’s lined up $575 million of so-called debtor-in-possession financing from existing lenders to fund itself during bankruptcy. 
  • Revlon Chief Executive Officer Debra Perelman stated, “Consumer demand for our products remains strong – people love our brands, and we continue to have a healthy market position. But our challenging capital structure has limited our ability to navigate macro-economic issues in order to meet this demand.” 
  • By buying up the stock of the bankrupt business, traders are looking for a turnaround similar to what occurred with Hertz, which was able to pay off its bondholders in full and resume business in a more favorable market. 
  • The so-called Lipstick Effect, in which cosmetics companies shine during economic downturns because consumers allow themselves to spend on affordable luxuries, doesn’t seem to be at play here. 

It was one of the last remaining holdings of Ronald Perelman. Bloomberg News reported that the company’s bankruptcy process could be “complicated by financial controversies.” MarketWatch quoted industry analysts and commentators as saying that bankruptcy would allow the firm a chance to refresh and regroup as it attempts to compete with newer brands, like Kylie Cosmetics or Fenty. CNBC reported that Revlon’s bankruptcy might be the start of broader bankruptcy problems for the retail sector.  

The surge makes little sense to professional traders and is also strangely incongruous with the broader market, where everything from established companies to cryptocurrencies is getting crushed amid concerns over inflation and a more aggressive Federal Reserve.  

At a time when easy money and outsized stock gains are fading from memory, the move shows how some retail traders, encouraged by Reddit forums, are still able to move markets. 



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