Beauty products makers Coty, Inc. and Revlon, Inc. are currently exhibiting worst-in-class FRISK® scores, signaling elevated bankruptcy risk over the coming 12 months to CreditRiskMonitor® clients. Although when comparing the financial statements for each one of the two is in worse condition – more on that below – there are a few easy ways we can help you guide your company in adjusting trade credit decisions over the coming year if you’re a counterparty to struggling outfits like Coty and Revlon.
The FRISK® Score Warning Mechanism
The first warning sign of building financial risk is revealed by a declining or bottom-rung FRISK® score. The FRISK® score range of "1" (highest risk)-to-"10" (lowest risk) typically provides one year of warning before a company declares bankruptcy. Not only do 96% of all bankruptcies fall into the high-risk "red zone", the bottom half of the range, but roughly 2/3 are at either a FRISK® score of "1" or "2" when they finally file. As of February 2021, both Coty and Revlon are at a "1." Additionally, the average FRISK® score for the personal & household products industry, in which both companies compete, is a "7." The low scores relative to the industry average is confirming evidence that Coty and Revlon need immediate attention.
Performing Deeper Analysis
Performance and financial leverage are always important factors to consider. The overarching performance problem has been the COVID-19 pandemic, which is impacting sales at both companies. Then there’s the massive debt both companies held coming into the pandemic: at present, Coty's total liabilities are twice its market cap while Revlon's liabilities are a huge seven times its market cap. Alternatively, the total debt-to-assets ratio at Coty is a high 45%, at year-end 2020, while this figure for Revlon was a shocking 120% at the end Q3 2020 (at the time of this writing Revlon had not yet released its Q4 financials). Certainly, Revlon's balance sheet is in a more troubled state:
Moreover, about 20% of Revlon's debt is classified as short-term. It will have to either repay or carefully refinance its debt at a time when operating performance is still being affected by the pandemic. Coty's short-term debt is minimal. In fact, a quick look at Coty's debt maturity schedule in its Q2 2020 period shows that it doesn't have any material maturities until 2023:
In terms of debt coverage, Coty was able to service its net interest expenses in both Q3 and Q4 last year, whereas Revlon fell short of that vital task in Q2 and Q3 of 2020. The company also burned cash over that span.
Coty burned cash during the worst of the industry hit, however, it was able to generate cash in Q4 2020 and, notably, doesn't have the same need to repay or refinance debt that Revlon does. Coty also recently sold a majority stake in its Wella beauty and haircare brands, with much of the cash earmarked for debt reduction. CreditRiskMonitor® subscribers were informed of this event via news alerts, which shows that Coty's financial position may finally be improving.
With this backdrop, CreditRiskMonitor® subscribers are showing notable concern about Revlon and less for Coty (for now). Subscriber crowdsourcing, which tracks information-rich research patterns on the CreditRiskMonitor® service, sent a negative signal to the FRISK® score beginning in September 2020. This is further supported by its Caa3 rating from Moody's, with a negative outlook. Coty's rating is Caa1, with a negative outlook, which is still quite weak but slightly better than Revlon.
While risk professionals should be tracking Coty closely, Revlon is the higher-risk company. Both companies are dealing with significant headwinds today. While economies are still reeling during the COVID-19 age, it is more crucial now than ever before to keep a close eye on your customers. Our subscribers do so by leveraging the FRISK® score, to see which companies pose the most risk and require preventative risk measures. Contact CreditRiskMonitor today for a personalized demonstration of how the service can help you stratify the risks in your portfolio so you can proactively manage risk and eliminate financial losses.