After becoming a meme stock recently, Revlon (NYSE:REV) declared Chapter 11 bankruptcy last night. Yesterday REV stock soared 20% to $2.25, but the shares are not trading yet this morning.
A legendary makeup brand, Revlon’s financial results have been undermined this year by its heavy debt and supply chain issues. Nonetheless, due to their meme stock status, the company’s shares jumped 100% on some trading days earlier this year.
Recently, however, REV stock had fallen about 50% after The Wall Street Journal reported on June 10 that a Revlon bankruptcy was in the works.
When companies declare Chapter 11 bankruptcy, their stocks typically lose nearly all of their value. That’s because the rights of bondholders and other lenders are given higher priority under bankruptcy law than shareholders’ rights.
Ultimately, the share price of bankrupt companies may rebound slightly from their lows. Or their stocks can be eliminated altogether, becoming worthless.
Revlon’s Problems
After carrying out many expensive acquisitions over the years and being hurt by the Covid-19 pandemic, Revlon had “long-term debt” of $3.3 billion as of the end of the first quarter of 2022. The cosmetic giant’s precarious financial situation made it difficult for the company “to navigate macro-economic issues,” Revlon CEO Debra Perelman explained. In particular, as managing supply chains became more challenging, the company was unable to obtain enough merchandise to meet demand.
Additionally, in recent years, Revlon has been hurt by competition from online brands backed by TV and music stars.
The Immediate Future for REV Stock
Reuters noted that Revlon expects to obtain “$575 million in debtor-in-possession financing from its existing lender base.” This would enable it to stay in business for the time being.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
