In the past, financial data was the only information risk teams had to base their business decisions on. That’s not true anymore. Everything from the way people express themselves to how companies do business has changed. Today, there are over 5 billion internet users worldwide and over 90% of corporations have adopted or plan to adopt a digital-first business strategy. This push towards all things digital has greatly increased the amount of alternate or nonfinancial data available. If identified and measured effectively, such information can prove invaluable to financiers looking to better manage and monitor their risks. The events surrounding the Revlon bankruptcy are a case in point. Examining it can illustrate the importance of nonfinancial data monitoring and why it must be included by lenders and investors in their risk management processes.
What is nonfinancial data monitoring?
Simply put, nonfinancial data monitoring is the process of evaluating a company using information that is non-monetary in nature. In other words, you won’t find such data in balance sheets or P&L statements. That said, however, non-financial data can certainly impact the bottom lines in both. For example, verified customer reviews can impact a product's future sales prospects positively or negatively depending on their tone. Similarly, news of a company losing its factories to fires or other environmental/geopolitical factors indicates a reduced production capacity for the business. This in turn will adversely affect its profit margins. Such information is largely unstructured and can be found in abundance in the digital world today.
The Revlon bankruptcy and events surrounding it
Founded in 1832, Revlon is a behemoth in the cosmetics industry and a household name across the globe. Sadly, that didn’t prevent the 90-year-old company from declaring bankruptcy on June 16, 2022. The company cited mounting debt (to the tune of $3.7 billion), a crowded beauty market, and supply chain issues as primary causes for its downfall. The news was met with a mixture of shock and disbelief the world over. However, though an unfortunate event, the Revlon bankruptcy was not a surprising one to industry insiders. The legacy brand has been a problem-plagued one over the past few years. Due to a series of financial, marketing, and branding missteps, the company has been in the news for all the wrong reasons.
It's no wonder then that Revlon bankruptcy predictions have been circulating since 2018. This was in part due to a decline in year-over-year sales for the beauty brand from 2017 onward. In addition, the company was embroiled in several class action lawsuits - one involved a bungled ERP deployment, another unauthorized image usage, and a third saw the company being sued by some of its shareholders for improper asset transfer. It was also indirectly implicated in, arguably, one of the biggest accounting gaffes of all time – Citibank’s $900 million accounting transfer blunder to Revlon lenders. None of this helped the company’s credibility.
Add to this, Revlon faced increasing competition from upcoming celebrity cosmetic brands that were more in tune with changing consumer tastes. The company’s outdated marketing tactics also couldn’t keep up with the times. Unsurprisingly, the Covid-19 pandemic amplified the company’s troubles and the cosmetics giant only narrowly avoided bankruptcy in 2020.
For all intents and purposes, the recent bankruptcy filing should have meant curtains for the beleaguered brand. But funny things can happen in the digital world.
Could Revlon be the latest meme stock?
When rumors of an imminent Revlon bankruptcy swirled in early June, the company’s stocks predictably crashed, plunging by over 50% in just one day. However, in the days following the bankruptcy announcement, the unexpected happened. Against all odds, Revlon shares surged by 34% as retail traders purchased them in the millions, driving gains from a record low to a record high of 650%.
So, what was going on? As it transpired, Revlon’s iconic status and fall from grace combined to catch the eye of many online investors, several of whom took to the popular sub-Reddit channel ‘wallstreetbets’ to discuss the investment implications of it all. And just like that, the latest meme stock was born!
If this sounds familiar, it's because the same phenomenon happened fairly recently with companies such as Hertz and AMC. In 2020, similar events helped bankrupt car rental company Hertz recover its losses and exit its bankruptcy smoothly in just one year. In AMC’s case, its meme stock status helped it avoid bankruptcy altogether.
Will Revlon enjoy the same fate? It’s too early to tell just yet. The investor-driven spike may help the company to restructure or be acquired more easily. Or it may just delay the fall. At the time of this writing, Revlon stocks have slid from $8.15 to $4.94. This is still higher than its pre-bankruptcy price of $1.50 per share. Will it continue to decrease? At this point, it’s anyone’s guess what will happen with Revlon but the whole saga just goes to show the power of digital media and why it’s a good idea to keep track of it. In the digital age that we live in, nothing is set in stone and fortunes can change at the drop of a hat.
Why nonfinancial data monitoring is important
In our interconnected ecosystem, nonfinancial events have the potential to wreak havoc in the business world. The Covid-19 pandemic and the ongoing Russia-Ukraine war are two recent events that have established this. According to the Boston Consulting Group, nonfinancial risks are on the rise today and, more importantly, can cost companies millions of dollars. As the risk landscape evolves, financiers and risk teams should look to stay in tune with the changes. Otherwise, they risk repeating the same mistake that Revlon is guilty of – relying solely on strategies that brought them success in the past instead of adapting to a changing landscape.
Financially-oriented risk monitoring systems are important. However, given how the world works now, they are no longer adequate. For one, they provide only half the picture. Tracking your counterparty’s revenue can tell you that profits have dropped over the last quarter or so but it won’t provide insights as to why. Nonfinancial data can fill in the gaps and provide additional contexts that complete the picture.
For another, they completely ignore intangible assets such as reputation or brand identity. Such assets can have as much bearing on a company’s value as does its balance sheet. According to The Economist, brand value accounts for over 30% of a company’s stock market value. Additionally, a survey conducted by global communications firm Weber Shandwick found that business executives, on average, attribute over 60% of their company’s market value to its reputation. Nonfinancial data monitoring allows you to incorporate all these value drivers into your risk assessments giving you gap-free vigilance.
Perhaps the biggest advantage nonfinancial data monitoring has over a financial-only approach is that it is a better forecasting tool. That’s because nonfinancial data can track key leading indicators of a company’s future financial performance. Conversely, financial data is limited to tracking lagging indicators or historical financial performance. In other words, it is foresight driven as opposed to being only hindsight driven.
This not only makes nonfinancial data monitoring a more accurate forecasting tool but also a speedier one. For example, customer reviews can indicate future sales growth much before an actual sales report certifies it. So, instead of waiting on a quarterly or biannual report to make a decision, financiers can now respond instantly to macroeconomic changes. And, the ability to respond quickly can be an invaluable competitive advantage in today’s volatile markets.
What the Revlon bankruptcy reveals about nonfinancial data monitoring
Given its financial condition, Revlon stocks had no business going up. But, that’s just what happened. This uncharacteristic event was solely driven by digital and social media hype. Such an event would be hard to track and understand using a financial ledger. What’s more, the digital world is like a sponge with a memory. It absorbs and records everything. And oftentimes, it reveals information that would otherwise have been difficult to access. Today, a company with an online presence can’t hide behind its accounting records alone.
This was the case with Greensill, which despite having great finances went on to become insolvent in the space of a few months. Monitoring digital data can reveal red flags and is a good way to reinforce your financial risk monitoring. The TRaiCE Digital Risk Index can be an invaluable tool for this. It essentially tracks leading indicator digital data to identify companies that are exhibiting signs of distress and then ranks them according to risk for easy surveillance. For more information on how TRaiCE helps with nonfinancial data tracking, read our blog on Digital Risk Indices and why they matter in credit and counterparty risk monitoring.
Financial data monitoring and reporting have long been the backbone of the risk management process. Times have changed, however, and nonfinancial data monitoring with its predictive insights and early warning signals can make risk monitoring processes more efficient and resilient. It should therefore be included if financiers want to gain much-needed agility and accuracy in today’s ever-changing risk landscape.