What’s Really Wrong With Revlon?

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In a filing with the U.S. Securities and Exchange Commission (SEC) on Monday, cosmetics maker Revlon Inc. (NYSE: REV) said it needed more time to file its fourth-quarter and full-year 2018 audited results as it reviews the “effectiveness of internal control” over its financial reporting for the past year.

Revlon also filed another report with the SEC on Monday explaining its reasons for the delayed filing of its audited results. According to the company, it has found a “material weakness” in its financial reporting for last year “primarily related to the lack of design and maintenance of effective controls” resulting from its problems implementing a new enterprise U.S. resource planning (ERP) system. The ERP system is being implemented by SAP.

Revlon also noted that it did not expect any changes to its unaudited results and that it will file its 2018 Form 10-K annual report no later than March 29.

The company’s problems with the ERP system surfaced shortly after Revlon launched it in February 2017. Such systems are designed to integrate everything from a company’s inventory of manufacturing goods to its customer relationships. In its annual report for fiscal year 2017, Revlon revealed the difficulties at its Oxford, North Carolina, manufacturing facility:

[T]he Company launched the new ERP system in the U.S., which caused its Oxford, N.C. manufacturing facility to experience service level disruptions that have impacted the Company’s ability to manufacture certain quantities of finished goods and fulfill shipments to several large retail customers in the U.S. The Company cannot provide assurances that it will remedy the ERP systems issues in time to fully recover these sales and/or that the ERP implementation will not continue to disrupt the Company’s operations and its ability to fulfill customer orders.

The disruptions have continued, apparently, and Revlon’s warning a year ago has come true:

To the extent that these disruptions occur in larger magnitudes or continue to persist over time, it could negatively impact the Company’s competitive position and its relationships with its customers and thus could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and/or cash flows.

Revlon posted an adjusted diluted net loss of $0.86 in the fourth quarter, compared with a consensus analyst estimate for a profit of $0.15 per share. For the full fiscal year, the adjusted net loss totaled $3.69 compared with a net loss of $1.93 per share in 2017. The disruption caused by the failure to implement the SAP ERP system successfully contributed to an enterprise-wide GAAP operating loss of $85.2 million for the year and a net loss for the year of $294.2 million.

The company’s board chair, Ronald Perelman, owns nearly 86% of Revlon’s outstanding shares and his daughter, Debra Perelman, is the company’s chief executive officer. Normally a lightly traded stock, averaging about 127,000 shares per day, volume topped 400,000 on Tuesday and was above 415,000 on last look on Wednesday. According to Yahoo Finance, all the outstanding shares not owned by Perelman are owned by institutional investors.

Revlon’s problems, aside from flubbing a massive investment in ERP, include not investing more in its brands and advertising. Bloomberg Intelligence’s Noel Hebert wrote, “The delayed 10-K is less of a concern [than Revlon’s other missteps], but is emblematic of a tendency toward self-inflicted wounds that need correcting.”

Revlon stock traded up about 6% in the noon hour Wednesday, at $19.09 in a 52-week range of $14.00 to $29.62. The stock’s 52-week target price following Tuesday’s drop of nearly 7% is $19.00.

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