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SAP disruption leads to Revlon class action lawsuit

Investors at cosmetics giant Revlon are taking action following a bungled SAP ERP deployment

Zhang Investor Law is the latest law firm to announce a class action lawsuit on behalf of Revlon shareholders, alleging that Revlon failed to create measures to plan and monitor the implementation of its enterprise resource planning (ERP) system.

The lawsuit claims Revlon failed to design, implement and consistently operate effective process-level controls to ensure it appropriately recorded and accounted for inventory, accounts receivable, net sales and cost of goods sold.

On 17 May 2019, Bragar Eagel & Squire announced it had filed a class action against Revlon for the disruption caused by its new SAP ERP systemOn 21 May, Wolf Haldenstein Adler Freeman & Herz LLP announced that it, too, had filed a federal securities class action lawsuit against Revlon. Rosen Law Firm, a global investor rights law firm, also announced it had filed a class action lawsuit on behalf of purchasers of the securities of Revlon. 

The class action lawsuits draw on evidence from recent quarterly results filings where Revlon admitted it was unable to fulfil product shipments of approximately $64m of net sales and the company incurred $53.6m of incremental charges to remediate the decline in customer services levels

In its US Security Exchange Commission (SEC) Form 10-Q first quarter filing of 31 March 2019, Revlon stated that its net sales in the first quarter of 2018 were negatively affected by service level disruptions that occurred at the company’s Oxford, North Carolina, manufacturing facility resulting from the launch of an SAP ERP system.

The saga began in February 2018, when the company attempted to deploy the SAP ERP system.

According to the transcript of its first-quarter 2018 earnings call in May 2018, posted on the Seeking Alpha financial blogging site, company executives referenced SAP eight times. At the time, the company said it had identified a material weakness in its internal controls, primarily related to the “lack of design and makings of effective controls” in connection with the implementation of a new SAP ERP system at its North Carolina manufacturing facility.

SAP disrupts supply chain

Chief operating officer Christopher Peterson said: “In early February, we rolled out SAP for a large part of our North American business to integrate planning, sourcing, manufacturing, distribution and finance.

“We expect this roll-out to provide greater visibility into real-time transactional information that will enable better and faster decision-making, improve customer service efficiency and better working capital management. However, we experienced issues during the SAP changeover that caused the plant to ramp up capacity slower than anticipated.”

Peterson said the SAP disruption affected the company’s ability to manufacture certain quantities of finished goods and fulfil shipments to several large retail customers in the US. Revlon estimated that the disruption led to approximately $20m of lower net sales during the current quarter.

There was also $10m of incremental costs, which Revlon put down to unabsorbed factory overhead costs due to lower than normal production levels and non-recurring labour costs in the Oxford facility, in connection with actions it took to remediate the decline in customer service levels.

When asked about the implementation, he said the company had expected to execute flawlessly on the SAP implementation at its Oxford manufacturing facility.

At the time, Peterson said the North America implementation was meant to be the last major ERP implementation in Revlon’s current planning cycle.

Giving an update to financial analysts on the earnings call, he said: “We now have SAP implemented in about 22 countries on the Revlon legacy side of the business. And the Elizabeth Arden business is a JD Edwards ERP system that is implemented in the vast majority of the countries.”

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Peterson said the deployment of SAP had given Revlon a relatively upgraded ERP system in most of the markets around the world. He told the the financial analysts: “There is not a plan for future implementations at this point.”

Almost a year later, in March 2019, chief financial officer Victoria Dolan said the company spent $32m more in 2018 on operating activities compared to 2017, according to the Seeking Alpha transcript of the fourth-quarter 2018 earnings call. She attributed $54m of direct cost to remediating the SAP disruption.

When asked about whether the disruption would carry through during 2019, she said: “Our Oxford manufacturing facility is currently operating under normal conditions, and SAP is not stopping us from producing what we need to produce today. In fact, most of the pipelines around the world have been filled, and I’d like to thank our customers and partners for their patience throughout 2018.”

However, while its ERP disruption problems may now be resolved, the class action lawsuit, on behalf of shareholders, represents the next chapter in the company’s ongoing saga with the implementation.

Following its March 2019 financial statement, financial papers reported that shares in the company dipped. Zhang Law pointed to the fact that the disruption caused by SAP in the first quarter of 2018 at the facility in North Carolina meant the company was unable to fulfil product shipments of approximately $64m of net sales.

While Revlon has used the quarterly earnings calls to demonstrate to the market its digital and e-commerce strategy, it only began talking about the SAP system after it experienced production disruption due to the new system.

According to the class action lawsuit, the company made false or misleading statements and failed to disclose the extent of its issues with the SAP implementation.

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