Revlon may be the first of several supply chain bankruptcies to come.
That is to say, when the cosmetics giant filed for Chapter 11 protection last week, it cited as causes a host of complications throughout its supply chain, many of them outside its control and all of which followed years of cash burn and heavy indebtedness.
Revlon is a supply chain bankruptcy the same way that (heavily-indebted, long-struggling) J. Crew was a pandemic bankruptcy and (heavily indebted, long-struggling) Toys R Us was a “retail apocalypse” bankruptcy.
Still, Revlon went into bankruptcy with a major supply problem, which has exacerbated its financial woes and vice versa, and which the company needs to resolve in short order while at the same time trying to reorganize in Chapter 11.
Robert Caruso, a managing director with the turnaround firm Alvarez & Marsal who is serving as Revlon’s chief restructuring officer, laid out the many problems in court papers last week. In short, the company has struggled to acquire materials and inventory as well as labor in manufacturing and logistics. At the same time, vendors have been tightening Revlon’s trade credit, worsening its liquidity issues, and retail customers have imposed fines on the cosmetics company as its inventory issues have turned into late product shipments.
None of those problems went away when Revlon filed. And now it is racing to smooth relationships with suppliers — and pay them — so it can meet demand and product orders for the pending holiday season.
Scrambling for supply and shelf space
As Caruso told it, Revlon was seeing strong demand for its products by late spring this year — after its sales tanked in the early phases of the pandemic. The rebound for Revlon tracks with rising sales in beauty. Target, for example, has pointed to strong performance in its beauty category as consumers have started going out more in social settings.
But as Revlon’s sales increased, so did supply chain disruptions and competition for raw materials. Caruso said Revlon’s vendors began tightening terms at this time, requiring payment on outstanding amounts or cash in advance for new orders instead of offering 30 to 75 day payment terms as in the past, as well as putting credit holds on the company for overdue payments.
“If [Revlon] did not comply, they would simply sell their products to one of the many other willing buyers,” Caruso said.
It’s a deadly cycle. Tightened credit terms have strained Revlon’s liquidity and put constraints on its supply, which led to delayed shipments and revenue shortfalls, hurting liquidity further and hurting its ability to procure product.
Caruso also nodded to global labor shortages for Revlon and suppliers that led to “higher costs and delays in production and transportation” while “global inflation rose at a rate faster than the Company could pass the increased costs through to its customers.”
“If the Company cannot demonstrate an ability to deliver sufficient quantities of its products to its customers, that critical shelf space is at significant risk of being lost.”
Robert Caruso
Managing Director, Alvarez & Marsal
For all the increases in e-commerce, Revlon’s wholesale relationships with traditional retailers — including Walmart, Target, CVS, T.J. Maxx and other massive chains — are critical to the life of the company. Caruso noted that “if the Company cannot demonstrate an ability to deliver sufficient quantities of its products to its customers, that critical shelf space is at significant risk of being lost.”
To serve those retail customers and its other channels, Revlon has a tangled suite of brands and some 8,000 SKUs it sells, with a complicated supply chain behind them given that many of those products have 35 to 40 ingredients comprising them. And there’s competition to acquire those ingredients.
“[B]ecause many of the Company’s competitors have more cash on hand, they have been able to build more inventory in advance, invest in stocking up on components and raw materials, and pay up front or a premium where needed to secure additional supplies,” Caruso said. Competitors have even been able to outmuscle Revlon for ingredients when the latter had a purchase order with a vendor, Caruso noted.
In turn, Revlon’s manufacturing capacity has wilted with supplies. At the time of filing, Revlon facilities in North Carolina, Florida and Mexico had closed or were within weeks of shutting down because of a lack of supply.
If the company can’t “rapidly resume” production, it stands to lose at least $87 million in committed holiday sales and $94 million in new product development sales just in Q4, Revlon said in separate court papers.
The need for liquidity
In the short term, the solution is money. Revlon filed with hundreds of millions of dollars lined up from lenders to fund it through bankruptcy, in what’s known as debtor-in-possession financing.
The company also filed with a request to pay key vendors — those deemed “critical” as well as foreign vendors and various vendor claimants — $40.4 million in the interim and $79.4 million on a final basis. The bankruptcy judge overseeing Revlon’s case has signed off on the interim payments.
All of this is happening as Revlon — roughly 90 years old and today majority-owned by investor Ronald Perelman’s MacAndrews & Forbes — tries to forge its financial and corporate future.
While Revlon’s experience is singular in many ways, it also reflects many of the fears in the market around retail. Debt loads overall have increased since the pandemic. In some cases cheap capital has masked operating weakness, looming as a hidden risk in supply chains. Retailers, meanwhile, face rapidly downshifting consumer demand for discretionary goods as the cost of supply, freight, fuel and other inputs continue rising for businesses.
As for Revlon, the company has set up a restructuring committee to review any reorganization plans, as well as any sale of some or most or all of the company’s assets. Revlon has signaled that it intends to cut its debt and reorganize in bankruptcy, but it still has to put forward a detailed plan for how to do that.
Whatever it hashes out with lenders, the company’s future hinges on the present. If it can’t procure supply to meet retailer demand going into the holidays and next year, the days ahead will be that much darker for the maker of “Super Lustrous” lipsticks.
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