Strategic Management of Revlon Corporation - Case Study Example

Revlon Corporation Analysis Case Statement Revlon can be considered to have revolutionised the cosmetics industry across the globe. The cosmetics industry is characterised by strong competitors, high unemployment rate, economic crisis and a large debt which the company needs to deal with. Financial Analysis To be able to understand the company in a 360 degree, it is important to carry out a financial analysis so as to be able to understand how the company is fairing in that front. To achieve this we will use ratios. We will compare the ratio of Revlon to that of Estee Lauder which is arguably the leader in this industry and the industry average. Liquidity Ratios Current Ratio = Current Assets/ Current Liabilities Revlon Estee Lauder Industry average 1.36 1.76 0.87 Analysis: A current ration that is greater than 1 means that for every $1 of current liability there is $1.36 of current assets to cover. This therefore means that the company is able to meet its short term obligations which is satisfactory to creditors. The current ratio of Revlon is lower than that of its biggest competitor but above the industry average. Quick Ratio = CA – Inventory/ CL Revlon Estee Lauder Industry average 0.58 1.11 0.5 Analysis: This ratio is used to show the extent to which a business can meet its short term obligations without necessarily having to sell its inventory. Revlon has a quick ration of below 1 which means it will have to rely on the sale of its inventory. This signifies a small financial trouble for the company in the short run. This ratio is not good though it is still above the industry average. Estee Lauder has the ideal quick ratio. Leverage Ratios Debt to Equity Ratio = Total Debt/ Total Stock holders’ equity Revlon Estee Lauder Industry average -591.50% 0.77 0.5 Analysis: Revlon has a negative debt to equity ratio due to having a large debt than the contribution by shareholders. The company highly depends on its equity. Estee Lauder has 77% while the industry average is 50%. Activity Ratios Inventory Turnover = Sales/ Inventory of Finished Goods Revlon Estee Lauder Industry average 3.09 1.78 6.31 Analysis: This ratio is used to calculate the number of times that a company converts inventory to cash within a specified time period. The lower this ratio is the better for the company. A high ratio indicates poor sales strategy and excess inventory levels. Revlon has 3.09 as compared to 1.78 of Estee lauder and 6.31 of the industry average. It is operating below the industry average which is commendable. Total asset turnover = Sales/total assets Revlon Estee Lauder Industry average 0.93 1.14 1.06 Analysis: To calculate this ratio, all assets including receivables and fixed assets are considered. The lower the ratio the better for the company as it means that the company is managing its assets well. This ratio is satisfactory in regards to Revlon. Accounts receivable turnover = Annual credit sales/Account Receivables Revlon Estee Lauder Industry average 8.04 8.91 9.12 Analysis: A low ratio means that the company has problems collecting debt from its creditors. The low turnover at Revlon could be due to the bad debt that the company has. It has been able to collect its receivables 8.04 times in the previous year. Day’s sales in inventory Revlon Estee Lauder Industry average 118.05 205.37 150.25 Analysis: There is a big margin of difference between the days for Revlon and those of Estee Lauder and the industry average. The company is taking few days to sell its inventory when compared to its main rival Estee Lauder who take 205.37 days. The industry average is 150.25 days another signal that Revlon is doing well in this category. Profitability Ratios Gross profit margin = Sales – CGS/sales Revlon Estee Lauder Industry average 57.48 79.39 50.54 Analysis: Revlon has a margin of 57.48% to cover its operating expenses and still be in a position to make profits. When compared to the industry average it is fdoing well, though it is slightly behind when compared with the industry leader Estee lauder. Operating Profit Margin = EBIT/Sales Revlon Estee Lauder Industry average - 4.95% 13.68% 19.84% Analysis: The profit that is left before paying for interest and taxes is -4.5% which is not a good thing for the company especially comparing with the industry average of 19.48% and the market leader at 13.68%. Net Profit Margin = Net Income/Sales Revlon Estee Lauder Industry average - 4.35 10.56 21.37 Analysis: 4.3% (-Minus) does not paint a good picture for the company as it shows it is in debt. In 2015 the company had a positive net profit margin signalling a likelihood of a drop in its performance. The management needs to address this before it gets out of hand. ROA = Net income/Total Assets Revlon Estee Lauder Industry average -4.63% 12.01% 11.20% Analysis: The company has a negative return on its expenses for assets which is not a good sign meaning the company did not generate any profit after tax which is worrying to investors. ROE = Net Income /Total Stockholders’ equity Revlon Estee Lauder Industry average (-) 31.40% 28.95% Analysis: This ration gives the per dollar return to the stockholders equity. Revlon had a negative return on equity meaning the stockholders actually lost money for owning Revlon`s stock. This is not good as it makes it hard for the company to attract investors with this kind of performance. Price Earnings Ratio = Price/Earnings per share Revlon Estee Lauder Industry average -9.91 33.33 24.33 Analysis: This ratio is used to show the attractiveness of the company to traders on the stock market. It show the amount that investors are willing to pay for one unit of the company stock. Due to its poor performance Revlon`s ratio is actually negative signalling that investors are not interested in the company stock. The company is making losses and therefore the reason investors are not interested in buying its stock. This ratio should worry the management of the company. Growth Ratios Sales Values in millions ($) Revlon Estee Lauder Industry average $ 2,334.00 $ 11,824.00 $0.52 Analysis: The sales have been on an uptrend for the last three years from 1,941 in 2014, 1,914 in 2015 and 2,334 in 2016. This is commendable though the company still needs to do a lot so as to remain competitive and profitable. Net Income Revlon Estee Lauder Industry average -0.94% 10.56%   Analysis: The figure is negative since the company did not make any profits. The company is not performing well when compare to its main competitor Estee Lauder which is at 10.56% while Revlon has a negative. Strength of Revlon finances After analysing the financial ratios, horizontally and vertically checking the income statement and balance sheet it is clear that Revlon is struggling financially. Their profitability is not stable as it keeps on changing from time to time every year. After comparing it with the industry the firm is performing poorly and can actually be considered to be weak in the industry. The only ratios that give it positive feedback is liquidity ratios. The current ratio of the company is currently at 1.36. The higher this ratio is up to 2.0 the better for a company. However, this is not enough as they have a large long term debt that could take them many years to repay. The company sales are on an upward trend though this is yet to reflect in the firm`s profitability. Access to short term capital Due to its positive liquidity ratios Revlon will be able to acquire short term capital. The current ratio and the quick ratio show that the company is able to meet its long term obligations which give comfort to creditors. The company has assets that can be readily sold to pay its short term debts. Access to long-term debt From the analysis of the company`s balance sheet, it is clear that the company has a huge long term debt of up to $1.8B. This is straining the company`s finances making it hard for the company to get a debt. The company P/E ratio is negative signalling that investors are not interested in the company stock. This makes it hard for the company to raise long term debt as either debt or equity. Working capital Revlon Inc. has sufficient working capital as it has few payables. The company is also turning over inventory in a reasonable period and times. Capital budgeting Capital budgeting procedures in Revlon are not effective. This is clearly seen in the negative return on assets. Dividend pay-out policy Revlon has not paid dividends for more than five years due to making losses or insignificant profits. Relations with Investors and stockholders Investors and stockholders are interested in increasing their wealth. This can be done through increase of company stock or through dividends. Both have been minimal or lacking for a long period now. Financial managers The financial managers of Revlon seem to be well experienced and trained. They have managed to keep the company afloat even without making substantial profits for a while now. Revlon’s Generic Strategies From the analysis Revlon has type 3 differentiation strategy. The company has strong brands such as Colorstay, Charlie perfume and Almay. These three brands did very well and the management got comfortable and did not realise when their competitors caught up with them (Serwer, 2014). Their R&D was did not stay up to date thereby not introducing new products to entice their clients. In efforts to remain relevant the company then turned to Type 1 low cost strategy. For this to be effective the company will struggle due to its huge debt that has been growing from year to year. The company is trying to streamline its operations with the aim of cutting costs and thereby reduce the prices and regain their position in the industry, (David, 2013, pg. 148-149) Strategy Selection Process To determine whether the strategy to employ was ethical enough we used Markkula centre for applied ethics to find out if it was relevant. The strategy to be advised for Revlon Inc. will affect Shareholders, Employees and suppliers. For utility it was agreed that the strategy would produces positive returns in the long run thereby doing more good than harm. The strategy to be employed will ensure that the rights of every stakeholders. Every staff and supplier who would be affected by this move would be compensated or given a notice in advance. Through this strategy, Revlon will get back on its knees, it will be able to give back to the community through CSR and pay shareholders and suppliers. As a financial manager and advisor to the management any strategy that will help the company improve would be welcomed. The results was 91 meaning that the strategy was probably ethical. The Quantitative Strategic Planning Matrix (QSPM)     Strategy 1 Increasing products and venturing to new areas Strategy 2 Divesting - Reducing product size Key Internal Factors Weight AS TAS AS TAS Strengths           Strong brand name, image and reputation 0.10 4 0.40 4 0.40 Large market share 0.10 3 0.30 2 0.20 Strong global presence 0.05 3 0.15 2 0.10 Strong financial performance position 0.10 2 0.20 3 0.30 Introduction of new products 0.10 3 0.30 4 0.40 customer focus 0.15 4 0.45 4 0.60 focus on marketing mix 0.10 4 0.40 3 0.30 Weaknesses:           Diseconomies to scale 0.10 1 0.10 3 0.30 Weak management 0.15 2 0.30 2 0.45 No innovation 0.05 3 0.15 3 0.15 Subtotal 1.00   2.75   3.20             Opportunities           1st move advantage 0.1 2 0.2 3 0.3 product and service expansion 0.12 4 0.48 3 0.36 emerging markets and expansion abroad 0.15 3 0.45 2 0.3 Growth of the industry 0.1 3 0.3 3 0.3 Threats           exchange rate fluctuation 0.1 2 0.2 2 0.2 Price war 0.09 3 0.27 3 0.27 competition 0.12 3 0.36 4 0.48 cheaper technology 0.1 2 0.2 2 0.2 product substitution 0.12 2 0.24 2 0.24 SUBTOTAL 1         SUM TOTAL ATTRACTIVENESS SCORE   5.45     5.85 Suggestion The company should reduce its number of products and divest in those operations that are not profitable. The company should also develop organizational capability by attracting and retaining clients. The company should now focus on profitable business only. Recommendation & Implementation Plan Considering the wrong decisions that have been made by the company in the recent years the company does not have many choices. The company has a huge debt which it is unable to either clear or reduce. The stockholders of the company are now weary for going many years without dividends. The company also has an unfavourable credit score. With these in mind expanding and introducing new products is not viable as it will consume more resources. The company now needs to employ a divesture strategy. The company currently manufactures colour cosmetics, women’s hair colour, skin care, fragrances, antiperspirants, deodorants, and beauty tools (Revlon Products, n.d.). The company needs to maintain only three main products. According to their revenue and market share, these are fragrances, hair colour and cosmetics. They should divest from the other products. The company will now have the time and resources to focus on these three product categories. At the beginning, their differentiation strategy was working fine. This worked until when the industry was flooded with better and equal products thereby taking their market share (Jennifer, n.d.). The management did not react to these new changes of the market. Through the strategy of divesting the company will use some of its resources to reduce debt, rebrand, reorganize operations and push to regain market share. Through concentrating onto three products, Revlon is able to streamline operations and increase capacity which will then enable them to shift to type 2 best value strategy. By this strategy the company will be able to produce unique, quality and distinct products and offer competitive prices. This will give the company leverage which it needs to gain competitive advantage and sustainability. The divesture process would take approximately 9-18 months to be complete (The Divestiture Process, n.d.). Their long term debt and operating expenses are estimated to reduce by approximately 35-40%. This will drastically improve the company`s financial position. R&D unit needs to be refurbished with skilled staff to make it competitive. The marketing department will need to introduce new campaigns to promote the three new products. With these changes we expect that Revlon will get back on track to becoming bigger and stronger than it is for now. References David, F. R. (2011). Strategic management: Concepts and cases. Peaeson/Prentice Hall. Jennifer, K. (n.d.). Types of Competition in Economics | eHow. Retrieved October 28, 2017, from http://www.ehow.com/info_7904519_types-competition-economics.html Kell, J. (2016, March 28). Revlon just named Fabien Garcia its new CEO. 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