What happened
Revlon (REV) shareholders beat a rising market on Tuesday as the stock gained 32% by 12:30 p.m. ET compared to a 2.3% surge in the S&P 500. The rally erased only some of investors' recent losses, though, and the struggling beauty products retailer remains lower by more than 50% so far in 2022.
The gain was powered by speculation that Revlon may emerge from its current bankruptcy process as a stronger company -- or attract an acquisition by a well-funded corporate suitor.
So what
Revlon stock jumped on Friday due to speculation that a conglomerate called Reliance Industries is preparing to make an offer to purchase the business. Revlon said a day earlier that it has filed for Chapter 11 bankruptcy protection due to financial challenges including slowing growth and soaring costs.
Net losses landed at $67 million in Q1, the company noted in early May, in part thanks to interest payments on its significant level of debt.
That speculation continued to swirl over the holiday weekend and helped spur another rally in the stock on Tuesday. Investors might also be pushing shares higher on news that Revlon received quick approval to take on additional debt that will help it navigate the short-term business disruptions it outlined in its bankruptcy filings.
Now what
It is anyone's guess whether Revlon will attract a buyout offer that's at or above its current market capitalization of nearly $300 million. Such an offer could always fall through, too.
That's why investors should instead focus on the fundamentals of the business before considering buying the stock. Revlon is struggling under the burden of high debt levels and hasn't demonstrated an ability to quickly shift its merchandising and supply chain strategies to account for changes in consumer preferences in this phase of the pandemic.
As a result, investors might want to look to other, more profitable retailers in this space such as Ulta Beauty. Sure, Ulta stock is unlikely to see a 32% spike in a given day. But its business is much better capitalized and is seeing improving, rather than deteriorating, operating results today.
