Revolution Beauty [LON:REVB], the Kent-based, AIM-listed, cosmetics company was one of the worst performing shares on AIM yesterday (11th August), falling from 16.3p to close at 12.85p, hitting 7.9p mid-morning.
It’s been a tough year for Revolution Beauty, after debuting on AIM on 19th July 2021, raising GBP300m on IPO, the share price has – after an initial summer of goodwill – experienced a declining trajectory.
Shares opened trading today at 13.2p and Revolution has offered a year-to-date return of -89.7% and a one-year return of -92.6%, ranging from 7.25p to 170p with a market capitalisation of GBP39.8m
AIM is a notoriously volatile market, but notwithstanding things have turned pretty ugly for the beauty product company.
Revolution Beauty came to market with much fanfare and promise – an ethical, cruelty-free, vegan accessible, affordable, British make-up brand. Clever at using social media and ‘influencers’ to sell its products, Revolution Beauty has posted consistent annual growth and its cosmetics are sold in 11,000 stores in 45 countries. Set up in 2014 by Adam Minto and Tom Allsworth, it quickly found itself on the shelves of high street stalwarts, Boots, Superdrug and ASOS, and into the bathroom cabinets of millions of women (and men) worldwide.
Prior to listing, Revolution was lionized in the British press, as an affordable British cosmetics brand that could duke it out with global titans like L’Oreal and Revlon. In fact, Minto spoke about rebuffing takeover enquiries from these two global brands, as well as from Unilever and Coty. His company has outlasted Revlon, which filed for Chapter 11 bankruptcy in June after 90 years as the ‘Queen of Lipstick.’ A large part of Revlon’s woes was that – unlike Revolution – it did not embrace the world of TikTok and Instagram warmly, concentrating on bricks and mortar distribution, over digital retailing. It also priced on the back of ‘luxury’.
Revolution Beauty made it into the top half of the Sunday Times Fast Track 100 List in 2019, and as recently as May was reporting sales had increased 73% in the first quarter of the year, raking in GBP22m. Year-on-year the cosmetics company reported 42% growth – with the US leading the way with 20% attributable – as post-pandemic party people decided to don their glad-rags once again.
Primarily marketing through digital sales, as a bonus Revolution benefitted from a return of high street footfall, especially after completing a successful Boots retail roll-out.
Revolution Beauty accused of product duping
However, in the last year, as Revolution walked into the spotlight, its make-up started to run. Firstly, its carefully curated product marketing strategy started to take heat, as other brands and influencers, including YouTuber Manny MUA accused the company of copying their own designs. This caused Revolution to withdraw a number of products from sale.
Losses began to pile up at the back end of 2021, as costs started to rise, nevertheless management double-downed on their ambitious expansion plans into the US, with Minto still maintaining the business was capable of becoming “one of the Top 20 beauty companies in the world”.
As war reared its ugly head, Revolution warned of a loss in customers in the region. In a statement earlier this month, Revolution said two of its key growth markets, Russia and Ukraine, immediately ceased trading from end-February, negatively impacting annualised revenue by GBP9m.
The company also announced that it expected to make a first-half loss due to low revenue growth as inflation, supply chain issues and the war in Ukraine pose: “short-term challenges”. For the full year to February 2023, the beauty product company said it now expected between GBP215m and GBP225m of net sales and adjusted EBITDA of between GBP18m and GBP20m.
Rolled-in with higher freight, raw materials and staff costs, and slower direct-to-consumer volumes, compounded by the cost-of-living crisis – meaning some less well-off consumers are cutting back on discretionary spend – it creates a difficult market for all cosmetics companies.
In the statement earlier this month, the company pushed back its final results reporting to 30th August as its auditors needed “additional time”. In a follow-up, yesterday Revolution published an update saying: “The company will now report its final results for the year ended 28th February 2022 on 30th August 2022. This is due to additional time required to complete the company’s audit. Management is not aware of any material issues that have been raised by the auditors during the audit process to date. The annual report will be sent to shareholders and made available on our website on the 31st August 2022.”
Problematic accounting practices
As part of the audit, issues with “certain accounting practices”, were raised with management which, “could have a material impact on the results for FY22”. The company warned that: “…In the event that material adjustments are required, the group profitability for FY22 could be materially reduced across a number of potential adjustments including stock and bad debt provisioning and revenue recognition.”
Analyst, Zeus cut its 2022-23 EBITDA forecast for Revolution Beauty by 38% to GBP19m, and its pre-tax profit forecast by 64% to GBP6m, or 1.5p a share on the back of a higher net debt burden. Jupiter Fund Management reduced its stake from 16.8% to 11.5%.
The problematic accountancy practices have not affected Revolution’s net debt position, which was GBP21.2m at the end of July, driven by higher levels of inventory, working capital and capex. However, a GBP40m revolver should offer enough headroom in terms of future liquidity.
Arguably, the market may have over-reacted to Revolution Beauty’s news stream and the company’s shares aren’t reflecting enterprise value-to-sales and EBITDA multiples of less than 0.5x and 5.5x respectively.
The issues with the audit have not, to date, categorically revealed any material issues, and Revolution Beauty may well surprise many when it eventually releases its results.
Fashion is very fickle by nature, as seems to be the AIM market, and a delay in reporting results doesn’t mean that the gloss has come off Revolution Beauty’s appeal to many retail customers, as the foundations of the cosmetics firm are more than skin-deep.
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