Comparison of the Long-term Debt Burden of Two Publicly Traded Companies

Comparison of the Long-term Debt Burden of Two Publicly Traded Companies.

This paper will analyze and review the financial statements of two publicly-traded companies, Coty Inc. and Revlon Inc. These two beauty companies are similar in belonging to the same household and personal products industry. In this paper, the author will include a brief overview of the two publicly-traded companies, assess each company’s financial statements, identify any similarities and differences between the two statements, address information in the cash flow statements, identify the accounting policies, classify the companies’ auditors, and propose her opinion about investing efforts in these companies.

 First, Revlon is one of the largest cosmetic companies in the beauty industry. In 1932, Charles and Joseph Revson founded the company with the help of CR Lachman. CR Lachman was a chemist who helped the two brothers formulate their products. Revlon’s first product was a nail polish that was designed to come in more colors other than red. Moving on to the 1950s, Revlon started formulating lipstick and became known for its “Fire and Ice” color (“Beauty,” n.d.)—the Revlon campaign aimed to depict American women as glamorous and compelling, even in everyday life. In the 1960s, Revlon began advertising with United States models to bring the “American look” to the globe. The company wanted to stray away from foreign styles and begin dominating popular culture with the “American look” (“Beauty,” n.d.). During the 1970s, a new wave of feminism rushed through the United States. Revlon developed new products to create an image of women’s progress and success. The company created face and eye makeup during this period. In 1973, Revlon developed a fragrance known as “Charlie,” which would become its age’s top-selling and sought-after product. Moving to the 1980s, Revlon decided to move on from department stores and became one of the top mass-market cosmetic brands. After much innovation, Revlon came out with its iconic “Colorstay” lipstick collection in the 1990s. The brand featured Halle Berry as the model, becoming the industry’s top long-wear brand. To this day, Revlon has partnered with Gucci Westman and pushed itself to be at the forefront of fashion and trends. After countless partnerships and projects with celebrities, Revlon has earned the trust of women consumers across all age groups. Revlon products can be found anywhere from beauty salons to individual make-up bags and vanity tables across the globe.

The next company that this paper will analyze is Coty Inc. In 1922, Francois Coty founded Coty Inc. in New York City. Coty created a fragrance, which was the company’s first product. The company initially began as a fragrance manufacturer that now produces cosmetics and other beauty or health products. Although the company is New York-based, Coty generates most of its sales in Western Europe, such as France and Germany (Editorial, n.d.). Coty began the company after his fragrances gained popularity due to American soldiers bringing perfumes and face powder home after World War I. By 1929, the company began assembling and selling 23 perfumes, powders, bath salts, hair and hand lotions, vanishing cream, toilet soaps and waters, shaving soap, and powder and rouge compact portables. In 1923, the company’s net income was $1.07 million and increased to $4.05 million by 1928. Coty Inc. became a publicly traded company in 1925 and created a board of directors after Francois Coty died in 1934.

Coty’s fragrance products include a variety of women’s and men’s products and now includes Calvin Klein, Balenciaga, Marc Jacobs, Chloe, Miu Miu, Katy Perry, Guess, Roberto Cavalli, Beyonce, Bottega Veneta, and Davidoff (Editorial, n.d.). The company produces lip, eye, nail, and facial color products to meet with competitors, including brands such as OPI, Sally Hansen, Rimmel, and Bourjois. As for skin and body care products, the company distributes the brands, Philosophy, Playboy, and Adidas. All these products can be found in supermarkets, independent and chain drug stores, pharmacies, upscale fragrance stores, nail salons, specialty retailers, traditional food, drug, and mass retailers, and upscale and mid-tier department stores. To this day, Coty nonetheless generates more than two-thirds of its revenue outside the United States.

Analysis of Coty Inc.’s Financials

Coty Inc. appears to be struggling to meet its short-term demands, although it generates minimum profits. The company’s total assets are $22.63 billion, and most of its funding is from accounts receivables of $1.536 billion. There is not much cash in the company, as in 2018, the cash amount only equals $362 million (“COTY,” n.d.). Although the company has many total assets, the current assets do not surpass the current liabilities. The company currently owes more than it currently has, with the current liabilities at

$4.044 billion, and current assets at $3.651 billion. These numbers indicate that Coty Inc.’s current ratio of 0.90, suggesting the company struggles to have sufficient liquid assets to cover its short-term liabilities. This further suggests that the company may be at high risk of default or financial distress. Additionally, the company’s receivables turnover is much lower than the payables turnover, demonstrating that the company is struggling financially. The days’ receivable ratio is at 6.25, while the days’ payable receivable is 136.03 (“COTY,” n.d.), indicating that Coty Inc. is not paying back its suppliers quickly enough. On the other hand, the company has no problem collecting from consumers, which is indicated by the days’ receivable ratio. Coty Inc.’s balance sheet indicates that most of its funds come from accounts receivables and inventory, and the assets are not being used efficiently to cover the liabilities. The company needs to manage its assets more effectively to cover its debts and improve its value.

As a result of Coty Inc.’s current financial situation, the stock price is currently at $7.31, the lowest it has been compared to the previous three years. The stock price indicates that investors do not feel the company is worth a high price and that the company’s earnings are not sufficiently high to generate a favorable stock price. Earnings are crucial in determining a company’s stock price, whereas Coty Inc. struggles to generate profits to surpass its debts. Supply can also be another factor in the company’s stock price. With the new market changes and the addition of competitors daily, Coty Inc. may not be as appealing to investors as other companies. The price-to-earnings ratio is at -31.78, indicating that the company is losing money to its shareholders. The company is not generating enough profit, and the high current liabilities may indicate that it had to make a large one-time expense. The expense may have been incurred from investing in or working with larger companies or purchasing costly product manufacturing materials.

Analysis of Revlon Inc.’s Financials

Based on the 2017 financial statement, Revlon Inc. appears to be a financially stable company. Revlon’s total current assets equal  $1.143 billion, with total current liabilities at $932 million. These amounts generate the company’s current ratio at 1.23, which is excellent in financial terms. The company’s cash, accounts receivables, inventory, and other assets are sufficient to pay all short-term obligations. The company’s funds appear to come from mostly the accounts receivable at $445 million and inventories at $498 million (“REV,” n.d.). As a cosmetics company, its assets should come mostly from its inventories. The company manufactures numerous types of products that all come in various shades and types, which are then distributed all across the globe. Any given pharmacy, department store, and salon in the United States and other countries can be found distributing Revlon’s products, indicating its accessibility to consumers worldwide. With such a large customer base, Revlon must manufacture enough products to meet consumers’ demands. The company has a receivables turnover of 6.20, indicating that Revlon is quickly collecting its consumer profits. On the other hand, the payables turnover is 247, which may indicate that Revlon is struggling to pay back its suppliers. A company that manufactures and distributes such a large product would have issues repaying all its suppliers for the needed materials.

Next, the stock price for Revlon Inc. is $24.95. The stock price steadily increased in 2018, starting at $22.60 in January, but the high point of the price was $28.09 in November (“REV,” n.d.). This stock price also indicates a price-earnings ratio of -7.17. The negative number suggests that the company has not been extremely profitable and is losing money. This effect can be observed in the company’s accounts payable and other current liabilities, as they are quite high, and the current assets minimally cover these debts. The accounts payable are $337 million, and other current liabilities are $364 million, resulting in debt and obligations that are almost as high as the current assets. Revlon’s earnings are minimal, reflected in the negative price-earnings ratio, suggesting that the company’s value is not that high to investors.

Currently, the price-earnings ratio is still low. Thus, the company has time to turn around and move towards a positive EPS. This can be achieved by building up sales and profitability, cutting expenses and costs in other areas, or creating a new project to boost sales significantly. In the cosmetics company, trends and fashion die rather quickly. Thus, a company must be able to create projects that will generate maximum profits for the short time that the products are popular. The profits must cover the expenses and debts, increasing the company’s earnings and stock price.

Similarities and Differences between the Two Companies

First, Coty Inc. and Revlon Inc. are in the same industry of beauty and personal items; thus, their financial statements are also similar in the way they operate and allocate funds. As a company in the retail industry, both must have a large amount in their inventories. Inventory should be one of the largest assets for a company, as the products will generate revenue for the company. As stated before, Coty Inc. has an inventory of $1.149 billion, and Revlon Inc. has an inventory of $498 million. Coty Inc. is a large company responsible for manufacturing and distributing products of multiple brands, which is indicative of its massively large inventory number.

Additionally, Coty Inc. produces more variety of items than Revlon Inc., as Coty also manufactures skin care products and bathroom essentials, while Revlon only manufactures cosmetic products. Such an extensive list of products to manufacture and distribute certainly leads to high inventory assets. Coty Inc.’s inventory has a proportionate amount of finished goods at $849 million and raw materials at $279 million, indicating the company’s variety of resources and materials to operate. Additionally, since the company has to manufacture such a variety of products, the company also needs adequate machinery and equipment to complete the products. Even with the machinery and equipment at $866 million, its’ assets insufficiently cover the short-term obligations.

Although Revlon Inc. has a significantly lower inventory amount than Coty Inc., Revlon appears more effective in using its assets to cover short-term debt and obligations. Revlon does not let itself borrow more than it is financially capable of, resulting in more benefits for the company. As a result, the price-earnings ratio is much more positive than Coty’s, which would bring in more investors and shareholders for the company. Revlon is cautious with its spending and ensures its profits can adequately cover all costs and expenses. Coty Inc. appears to be a company that takes more risks and borrows more than it is financially capable of, which may work for them in the short-term only if it can generate enough profits to boost itself back up. Perhaps their financial managers could find less costly suppliers and materials, which would help them decrease their expenses.

These two beauty companies are quite similar in the overall amount they invest in their inventory, but they are vastly different in their spending abilities. Coty Inc. appears to spend significantly more than it can handle, putting the company at financial risk for distress or bankruptcy. The receivables turnover may be positive, but it may not be significantly high enough to generate profits for the company to leave its risky state. On the other hand, Revlon Inc. appears to be spending wisely, but it is making minimal profits to compete against other companies in the market. Both companies’ current assets are quite high, and as retail companies, they rely on their inventory to mitigate the financial burdens.

Cash Flow Statement

To add to Coty Inc.’s financial statement, the cash flow statement portrays unfavorable amounts to the company’s financial situation. The company’s net operating cash flow in 2018 massively decreased from 2017, with the amounts being $413 million and $757 million, respectively. This change in operating cash flow produces a growth of -45.39%, nearly half of the total amount in decrease. This activity suggests that the company is struggling to produce profits and is not generating enough cash from the sales. The amount of cash used to produce and sell the goods are extremely high, and the company is not making enough from operations.

Additionally, the amount in depreciation has increased to $737 million, indicating the company is not investing its materials and equipment efficiently. As for the investing activities, the net assets from acquisitions also decreased to a more favorable amount of -$278 million, compared to -$752 million in 2017. For 2018, Coty Inc. sold out more of its assets rather than stock, meaning that the company’s assets and liabilities had been bargained. Other investing companies had been more attracted to the company’s assets, which would allow those funds to be allocated to their short-term obligations. Coty Inc. achieved a more positive net investing cash flow by having other companies invest in their assets. As for the financing activities, Coty Inc. reduced its debt by $482 million in 2018. This indicates that Coty Inc. put most of its assets and profits into paying back debt for this year. Other than the debt reduction, the funds in other financing activities were not significantly different from 2017.

For Revlon Inc., the company’s net income had significantly changed in 2017. The net income decreased to -$183 million, compared to -$21.9 million in 2016. This high decrease may suggest that the company’s revenue and sales were not meeting with the depreciation and depletion of its products, equipment, and machinery. The depreciation in 2017 also increased to $100 million, suggesting that the company is not investing in the right areas for its operating activities. In addition, the working capital decreased significantly to -$143 million, compared to -$53 million in 2016. This decrease indicates that the sales and revenue from the products were not financially sufficient to pay off the goods and services used to sell the products.

However, the receivables increased favorably to -$9.9 million, compared to -$59.5 million. Consumers may have purchased more products, which would generate more receivables for the company, but the company was still spending more on its products than earning back its profits. The company had no net assets from acquisitions for the investing activities. The company did not purchase any of its assets in 2017, so it did not unnecessarily spend any funds to put the company at risk. Revlon Inc. increased its net investing cash flow growth by not unnecessarily spending to 90.04%. Lastly, for the financing activities, Revlon Inc. can be observed to deal with debt efficiently. In 2017, it only borrowed $155 million in long-term debt, while it repaid the debt to $141 million. In 2016, the company had outstanding charges of $838 million in debt. Thus, the year change indicates that the company found a solution to avoid increasing its debt. By not spending extra funds and by restricting the amount they were borrowing, the company experienced a more positive cash flow. For 2017, however, Revlon Inc. experienced a major decrease in the free cash flow, an amount of -$247 million. This indicates the company’s inability to generate sufficient cash to support the business. The company had most of its assets in inventory and cash receivables, but the cash amount was extremely low.

Unusual Activity

In 2018, Coty Inc. appeared to struggle significantly, as its working capital decreased from $866 million to -$218 million. This is an extreme change, and it is possible that the company had some difficulties selling products, as it could not generate a reasonable profit. The most change appeared in the accounts receivables, from -$279 million in 2017 to -$79 million in 2018. This is a $200 million change, which is a significant measure and may indicate that consumers were purchasing the products, but it was not enough to create profit. Additionally, the inventories changed from $162 million to -$60 million over the year—the amount of inventory the company held drastically changed, possibly in quantity and quality. The significant decrease in inventory ended up hurting the company by lowering its overall assets and disabling it from paying off its debt.

Accounting Policy

There appeared to be a difference in the business combination accounting policy for the two companies. For Revlon Inc., the fair value of its goodwill and intangible assets was determined by discounted estimated future cash flows. For Coty Inc., the company defined the fair values utilizing a probability-adjusted discounted cash flow method according to extreme changes not observable by the marketplace. Any changes in the fair value from the passing of time or events occurring after the acquisition date are defined in earnings.

Inventory Valuation Methods

In Revlon Inc.’s financial statements, the inventory valuation method was the first-in-first-out method. The cost components included “direct materials, direct labor and direct overhead, and inbound freight” (“REV, n.d.). Revlon Inc. identifies the inventory value based on its plans to sell its inventories and planned discontinuances. The inventories’ physical condition, such as age and quality, was also considered while establishing the inventory valuation. The adjustments were estimates, given if there were any changes to economic conditions, product discontinuances, customer inventory levels, or from unexpected sales return levels and competitive conditions.

In Coty Inc.’s financial statements, the inventory valuation method was the first-in-first-out method. The inventories included items that were usable in future periods, stated at the lower of cost or net realizable value, with cost including “direct materials, direct labor and overhead, and in-bound freight costs” (“COTY,” n.d.). The inventories in the financial statements were classified into various categories depending on their stage in the product life cycle, disposition process, and future marketing sales plans.

Auditors

For Coty Inc., their auditor was Deloitte and Touche LLP. The opinion letter stated that the company’s financial statements were presented fairly in all material aspects of the company’s financial situation as of June 30, 2018, and 2017. The results of the operations and cash flows followed the GAAP guidelines in the United States.

The auditor for Revlon Inc. was KPMG LLP, who stated that the preparation of the company’s consolidated financial statements conformed to the GAAP guidelines of the United States. The opinion letter also included that the consolidated statements included the company’s accounts and information after removing material intercompany transactions and balances. Additionally, several previous years’ numbers have been changed and categorized to match the current year’s guidelines. Significant estimates were made in the acquired intangible and long-lived assets, the recoverability of goodwill, income taxes, and the net periodic income costs calculation.

Conclusion

Based on my analysis of Revlon Inc. and Coty Inc., I would have been much more comfortable investing my assets into Revlon Inc. From the start, Coty Inc.’s financial statements portrayed that they were financially struggling by generating insufficient sales and profit to pay back their short-term obligations and expenses. The company had been spending too much on the production and sales of the products, but the profits were not meeting the production demands. On the other hand, Revlon Inc. was much more financially stable than Coty Inc. Revlon Inc. can be seen to avoid unnecessary spending and restrict itself from obtaining any excessive long-term debt. From the cash flow statement, I noted that Revlon Inc. had struggled with its working capital, but it efficiently worked with its overall debt. The debt was controlled and handled cautiously, as any more debt would have pushed the company into risk for financial distress. Coty Inc. appeared reckless and had some unexpected expenses that pushed its short-term obligations to a large amount for 2018. Although Coty Inc. had a large inventory to attempt to cover its assets, the inventory was inadequate in producing enough assets to cover the current liabilities. Both companies appeared to be struggling with meeting short-term obligations, but Revlon Inc. was more effective at turning its inventory and assets into cash. The company overall had more impressive ratios and a better liquidity rate than Coty Inc.

References

Beauty Products: Makeup, Fragrances, Hair Color, Nails, Beauty Tools. (n.d.). Retrieved from http://www.revlon.com/behind-the-color/legacy

COTY Financial Statements – Coty Inc. Cl A – Wall Street Journal. (n.d.). Retrieved from https://quotes.wsj.com/COTY/financials

Editorial, R. (n.d.). Company Profile | Reuters.com. Retrieved from https://www.reuters.com/finance/stocks/company-profile/COTY

REV Financial Statements – Revlon Inc. Cl A – Wall Street Journal. (n.d.). Retrieved from https://quotes.wsj.com/REV/financials

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Leverage can impose a financial burden on companies.

It can also create opportunity costs for the future. For this week’s discussion, compare the long-term debt burden of two publicly traded companies. Select two publicly traded companies from the same industry. Review the long-term liabilities section of the latest annual report for each company and write a 1-3 paragraph analysis of your findings as your main post. Include a copy of the companies’ balance sheets with your analysis.