Revlon shares slide 6.5% after report of material weakness in financial controls

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Revlon Inc. shares tumbled 6.5% on Tuesday, after the cosmetics company said it would be late filing its annual report for 2018, after identifying a material weakness in its financial reporting.

The stock














REV, -6.82%












 has now fallen 23% in the last 12 months, underperforming the S&P














SPX, -0.01%












 which has gained 4.3%.

The weakness stems from problems Revlon has faced in implementing a new enterprise resource planning system, or ERP, in the U.S., the software it uses to manage its supply chain and logistics and its accounting. The issue first surfaced in its regulatory filings last year after the company launched the new ERP system in the U.S. in February of 2018 and immediately experienced problems at its Oxford, North Carolina manufacturing facility. That hurt its ability to manufacture certain quantities of finished goods and fulfill orders to major retail clients in the U.S., it said in its 10-K filing for that year.

“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,” Revlon management said in the filing. “Also, these ERP-related disruptions have caused the company to incur expedited shipping fees and other unanticipated expenses in connection with actions that the company has implemented to remediate the decline in customer service levels, which could continue until the ERP systems issues are resolved.”

On Monday, the company cited the “lack of design and maintenance of effective controls in connection with the previously-disclosed implementation of its enterprise resource planning (“ERP”) system in the U.S.” as the primary factor behind the delay in filing its 2019 10-K. That means Revlon has still not managed to get its act together in more than a year.

Chief Financial Officer Victoria Dolan told analysts on the company’s earnings call that she expects that to change.

“We have already developed and begun to implement a remediation plan to address this finding, and we’ll continue to enhance our internal control environment as we move forward,” she told analysts, according to a FactSet transcript. “The company expects that this matter will not result in any changes to its financial results.”

Adding to the gloom, the company’s unaudited results for the fourth quarter showed a net loss for a seventh straight quarter. The company said it had a net loss of $70.3 million, or a loss per share of $1.33, in the quarter, narrower than the loss of $76.9 million, or $1.46 a share, posted in the year-earlier period.

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Sales fell to $741.6 million from $743.0 million. With just one analyst covering the company, there is no reliable FactSet consensus.

On the earnings call, Chief Executive Debra Golding Perelman highlighted improvements in operating income and adjusted EBITDA.

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EBITDA is a non-GAAP number that the company defines as EBITDA, or earnings before interest taxes, depreciation and amortization, plus additional adjustments that exclude gains or losses on foreign currency fluctuations, gains or losses on early extinguishment of debt and other expenses. Adjusted EBITDA further adjusts for the impact of non-cash stock compensation expense and certain other non-operating items.

In other words, it is a number that has nothing to do with actual profit. However, it is one key metric the company uses to determine executive compensation, according to its 2018 Proxy.

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