Revlon loses its glow under supply-chain and crushing debt problems

During lockdown beauty product companies faced severe pressure. Lipsticks and cosmetics were not selling, although skincare products flourished.

FIFI PETERS: Some ugly news has come out of the world of beauty: cosmetic giant Revlon could soon be filing for bankruptcy. Apparently the company is facing a whole lot of blemishes from supply-chain problems and heavy debt that it just can’t make over. But it’s a problem that started way before the pandemic. It apparently has been struggling to keep up with its competitors.

*This interview was recorded on 13 June. Revlon has since filed for bankruptcy. Read: Revlon files bankruptcy facing high debt, supply chain pain

One person who knows the story kind of closely is David Shapiro, the chief global equity strategist at Sasfin Securities. David, thanks so much for your time. Do you use any Revlon products, by the way?

DAVID SHAPIRO: I might. I don’t know. [Laughing]

FIFI PETERS: They’ve been around since 1932.

DAVID SHAPIRO: Don’t say that, because I think today a lot of men use skincare products as well and all the big houses certainly cater for that. So I think men become a lot more conscious of their look.

FIFI PETERS: Yes, true.

DAVID SHAPIRO: Revlon – I don’t know.

FIFI PETERS: Me too. And perhaps that’s a problem, perhaps that actually speaks to the lack of innovation that has come from the company, a company that has been around for years and years and years – from 1932 or so. But help us understand [it] financially. We’re talking about a whole lot of debt. We’re talking about bankruptcy. How did Revlon get here?

DAVID SHAPIRO: I think you touched on it. This was one of the big houses in the 1940s, 1950s, when beauty started to take control and was marketed mainly through the large department stores, Saks and Bloomingdales and so on. But I think the position that they held during the 50s, 60s, 70s has changed dramatically over the last few years, with heavy competition from some of the other new houses that have come across – and particularly now, particularly recently, your online houses.

I don’t know much about it, but they’ve had to change their strategy. I know that Kylie Jenner sold out her product line to Coty, I think, for a couple of hundred million [dollars] not too long ago. Here was a young lady of 20 or 21, who had her product on Instagram, had millions of followers and built up a massive strategy that I don’t think houses like Revlon could compete with.

FIFI PETERS: Yes, she became a millionaire. Or was it a billionaire?

DAVID SHAPIRO: Billionaire.

FIFI PETERS: She became a billionaire as a result of it. It’s true. I see that she made a whole lot of vegan makeup, clean makeup – just speaking to the sustainability trend. In fact, I bought a vegan lipliner yesterday, and it wasn’t Revlon.

David, these are rumours at the stage. Nothing has yet been confirmed. My question is, if giants and veterans and incumbents in the game like Revlon are perhaps finding it difficult to compete with  the likes of Kylie and Rihanna, who recently brought Fenty into South Africa, and all the other up-and-coming makeup brands in the space, what about the other incumbents and the veterans, the likes of Estee Lauder and all of that – L’Oréal?

DAVID SHAPIRO: No, they are doing incredibly well. L’Oréal is doing brilliantly. Both of those. If you look at Revlon, I think for the last four years they’ve been losing money, [and are] heavily in debt and unable to pull themselves out of the slump. I think the product just didn’t appeal to younger people.

On the other hand, you’ve got Estee Lauder with a huge product line, Clinique, M.A.C. What do they do? Jo Malone, Estee itself, La Mer, these appeal to the young – what would you call them? – growing adolescents or young ladies.

FIFI PETERS: I like to use La Mer.

DAVID SHAPIRO: Expensive.

FIFI PETERS: Very.

DAVID SHAPIRO: L’Oréal as well. L’Oréal has done the same thing. Both those businesses are doing incredibly well and have outperformed. L’Oréal is in Paris, so it’s outperformed the CAC Quarante [CAC 40] there by a long way, as Estee Lauder has done against the S&P. They’ve managed to adapt their whole strategy to cater for the generation that we are seeing now.

I want to point out one thing that was important. During lockdown these companies came under a lot of pressure because of stay-at-home; no one put makeup on and then, when you had masks, no one put makeup on as well. So your lipsticks and that were not selling, even with Estee Lauder. But what did take off was skincare products – and that’s changed dramatically.

FIFI PETERS: In fact the CEO of Clicks, Bertina Engelbrecht, a month ago was actually telling us that the demand from men for skincare products is pretty big right now, to the point that they’ve had to make a lot more space on their shelves for male skin products.

But you also mentioned a good point in terms of the fact that we are back at the office now, ladies are back at the office. We can’t get away. Well, if you choose to not wear makeup and you’ve got fabulous skin, that’s good for you, but the rest of us can’t get away from wearing makeup. So we are seeing makeup demand come back, and perhaps that’s speaking to the fact that these other companies that you mentioned are doing well. It’s also speaking to the fact that Revlon’s issue is not a broader-sector issue. It’s not an economic issue, it’s individual stuff.

DAVID SHAPIRO: No doubt about it, yes. It has just fallen behind. I’m trying to think of some of the other names as well. Even Coty, which bought Kylie Jenner, hasn’t done well and is trying to pull itself out of a rut as well. Profits have come back. In fact, quite honestly, I think there has been a big turnaround. I was looking at Coty mainly because of Kylie Jenner. If you believe analysts, they’ve got target prices there that could return something like about 50%, 60% if you believe the markets are going to turn around.

But, Fifi, one other thing, one other area, has been the Korean cosmetic companies as well. Also a very, very big story.

FIFI PETERS: What’s happening there, with the Koreans?

DAVID SHAPIRO: Well, the Koreans have got this look – what do you call it – this glossy look, this glass look.

FIFI PETERS: Oh, Kaldora [Naidoo] in our technical booth is nodding. She knows what it’s about. She’s in with the times.

DAVID SHAPIRO: It’s where you’ve got a glow. I don’t know what it is, but I’ve been looking at some South Korean cosmetic companies, but unfortunately the only one I know is a company called Amore Pacific, but it does everything from cosmetics to printers and everything – and seems to be underperforming.

But I’m looking there for something that might be of interest. It’s a very, very big area, a very profitable area and competition-intense. But so far I must say that L’Oréal  and Estee Lauder are holding their own against a lot of the competition that is emerging.

FIFI PETERS: Okay, David. Kaldora, the producer of the show, the really smart one, says it’s called the ‘glass skin’ effect.

DAVID SHAPIRO: There you are. Yes.

FIFI PETERS: So thanks a lot.

DAVID SHAPIRO: If you are looking at Kaldora’s WhatsApp picture, you will see exactly what you mean. You’ll see how she glows.

FIFI PETERS: I’m going to take some notes from her. My WhatsApp picture definitely doesn’t look like that, David. So have a great weekend. Listen to me, have a great evening. David Shapiro is chief for global equity strategy at Sasfin Securities.

We’ve been talking about Revlon, what is happening in the beauty space. It looks like that bankruptcy is definitely a stock-specific issue.  If you do want to dabble in beauty stocks, it sounds like he’s leaning more towards the Estee Lauders and the L’Oréals that are listed. So take your pick.

William Murphy

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