For those of you that source ideas from a Ben Graham NCAV screen, such as this one, you might be familiar with Parlux. It trades at 67% of its NCAV currently, but it’s possible that recent events have created the opportunity for value greater than just its liquidation. Left for dead, but with low fixed costs and a debt free balance sheet, the founder and former CEO who has returned to the helm. All of the bad news seems to have long been priced into the stock, and even the run up from its lows still shows what low confidence Mr. Market has in Parlux. Let’s examine the story:
Three reasons not to like the stock:
1) Concentrated sales
2) Large account receivables outstanding to a struggling perfume retailer
3) Dependence on one brand for majority of sales
The company derives around 50% of its sales from 2 parties: Macy’s and Perfumania/Quality King. High sales concentration is worrisome because it can leave the company vulnerable to a huge drop in revenue without enough time for the company to cut costs. Further complicating perceptions is that the largest shareholder of Perfumania also holds 10.1% of Parlux stock. This creates potential outcomes that are detrimental to shareholders.
The company’s most recent 10-Q states that the company has $17m in outstanding accounts receivable related to Perfumania (PERF). This was up $7m YoY, most likely related to increased consumer confidence going into the 2010 holiday season. Perfumania is specialty retail company focused on, you guessed, perfume. The company walks a fine line on cash flow, balancing inventory, accounts payable, and a revolving credit facility. Perfumania is highly dependent on strong holiday sales.
Parlux manufactures and markets perfume under brand and celebrity names that is licenses. There used to be twice as much diversity in its main sales generators, with the Paris Hilton and GUESS brands being its top brands. GUESS decided not to renew its license with Parlux, leaving the company dependent on Paris Hilton perfume for 70% of its revenue.
Parlux is a going concern at this point, but one of the key points of this opportunity is that the balance sheet can take some heavy blows. Writing down the accounts receivables owed by Perfumania as well as half the inventory (approximately what one might expect will be sold to Perfumania) can show what the company might look like if Perfumania goes bankrupt. There are A/R of $19.5m and inventory of $20m that would be written down in this instance. That results in a book value of $60m and an adjusted NCAV of $45m, implying a $15m valuation on the business or a $15m premium over the liquidation value (same thing looked at two different ways).
A bright future might await the company due to its relationship with the Garcia Group and Artistic Brands. The Garcia Group owns 16.4% of the stock and hold warrants to another 6,000,000 shares at a $5 strike price. The Garcia Group’s key representative is also a key executive at Artistic Brands. Another executive is Shawn Carter, otherwise known as Jay-Z. AB represents other artists such as Rihanna and Kanye West. It was through this relation that the Rihanna fragrance is about to be launched and the Kanye West fragrance in the future. There is also an agreement for a Jay-Z fragrance as well another unnamed artist that will result in the issuance of an additional 3,000,000 warrants each. The warrants might allow one to interpret an alignment of incentives between the Garcia Group and shareholders in seeing an increased share price.
The dependence on Paris Hilton branded fragrances should decline over the next year as new fragrances launched in 2010 and 2011 gain traction. Although one can only guess, the Rihanna fragrance should prove popular based on the artists popularity. I have very little insight to offer into the psyche of perfume buyers. There is a Kanye West Fragrance slated for fiscal year 2013, which is in time for the 2012 holiday season. This seems quite far off in terms of celebrity trends.
This business is super lumpy because perfume sells in the Mother’s/Father’s Day period and the winter holidays. Annualizing run rate earnings from would not yield a figure that in any way represents the “truth,” provides clarity or offers an insight. The new CEO is the former CEO/founder and he has cut costs. There should be a return to profitability on an annualized basis that will result in a high single digit or low double digit PE, but that is likely where the business should trade since its cash conversion cycle is awful with 6-9 months of inventory and 3 months of accounts receivables. I wouldn’t be surprised to see the stock go up another 30% with positive developments, but similar downside exists at this point too if a Perfumania bankruptcy sucker punches Parlux. This is not an asymmetric bet an investor should take.
The discount to book value at this point isn’t great enough to offer a big enough margin of safety. Several months ago offered a good opportunity to enter the stock and little has fundamentally changed over the run up.
While the CEO has returned, it is doubtful that this represents a Steve Jobs (Apple) or Howard Schultz (Starbucks) moment. The CEO is 73 and has no ownership stake. The true upside in this stock is mostly allocated to The Garcia Group, which could end up owning close to 45% of the company if the company successfully rights the ship. It doesn’t need the company to be a wild success though because a related party to the Garcia Group will receives royalties from the sale of Rihanna and Kanye West fragrances. The alleged alignment of interest with stockholders will prove elusive in my opinion.
One thing to watch would be the traction that new fragrance releases gain. The next earnings release will contain the holiday season. There tend to be discounts in this period but increased volume. The recent news that December retail sales were weaker than expected might be a sign of caution on Perfumania and Parlux as an extension. If Perfumania were to go bankrupt, it would be interesting to see how extreme the valuation of Parlux would get. I would definitely revisit this company if this hypothetical thesis were to become a reality.
Three reasons not to like the stock:
1) Concentrated sales
2) Large account receivables outstanding to a struggling perfume retailer
3) Dependence on one brand for majority of sales
The company derives around 50% of its sales from 2 parties: Macy’s and Perfumania/Quality King. High sales concentration is worrisome because it can leave the company vulnerable to a huge drop in revenue without enough time for the company to cut costs. Further complicating perceptions is that the largest shareholder of Perfumania also holds 10.1% of Parlux stock. This creates potential outcomes that are detrimental to shareholders.
The company’s most recent 10-Q states that the company has $17m in outstanding accounts receivable related to Perfumania (PERF). This was up $7m YoY, most likely related to increased consumer confidence going into the 2010 holiday season. Perfumania is specialty retail company focused on, you guessed, perfume. The company walks a fine line on cash flow, balancing inventory, accounts payable, and a revolving credit facility. Perfumania is highly dependent on strong holiday sales.
Parlux manufactures and markets perfume under brand and celebrity names that is licenses. There used to be twice as much diversity in its main sales generators, with the Paris Hilton and GUESS brands being its top brands. GUESS decided not to renew its license with Parlux, leaving the company dependent on Paris Hilton perfume for 70% of its revenue.
Parlux is a going concern at this point, but one of the key points of this opportunity is that the balance sheet can take some heavy blows. Writing down the accounts receivables owed by Perfumania as well as half the inventory (approximately what one might expect will be sold to Perfumania) can show what the company might look like if Perfumania goes bankrupt. There are A/R of $19.5m and inventory of $20m that would be written down in this instance. That results in a book value of $60m and an adjusted NCAV of $45m, implying a $15m valuation on the business or a $15m premium over the liquidation value (same thing looked at two different ways).
A bright future might await the company due to its relationship with the Garcia Group and Artistic Brands. The Garcia Group owns 16.4% of the stock and hold warrants to another 6,000,000 shares at a $5 strike price. The Garcia Group’s key representative is also a key executive at Artistic Brands. Another executive is Shawn Carter, otherwise known as Jay-Z. AB represents other artists such as Rihanna and Kanye West. It was through this relation that the Rihanna fragrance is about to be launched and the Kanye West fragrance in the future. There is also an agreement for a Jay-Z fragrance as well another unnamed artist that will result in the issuance of an additional 3,000,000 warrants each. The warrants might allow one to interpret an alignment of incentives between the Garcia Group and shareholders in seeing an increased share price.
The dependence on Paris Hilton branded fragrances should decline over the next year as new fragrances launched in 2010 and 2011 gain traction. Although one can only guess, the Rihanna fragrance should prove popular based on the artists popularity. I have very little insight to offer into the psyche of perfume buyers. There is a Kanye West Fragrance slated for fiscal year 2013, which is in time for the 2012 holiday season. This seems quite far off in terms of celebrity trends.
This business is super lumpy because perfume sells in the Mother’s/Father’s Day period and the winter holidays. Annualizing run rate earnings from would not yield a figure that in any way represents the “truth,” provides clarity or offers an insight. The new CEO is the former CEO/founder and he has cut costs. There should be a return to profitability on an annualized basis that will result in a high single digit or low double digit PE, but that is likely where the business should trade since its cash conversion cycle is awful with 6-9 months of inventory and 3 months of accounts receivables. I wouldn’t be surprised to see the stock go up another 30% with positive developments, but similar downside exists at this point too if a Perfumania bankruptcy sucker punches Parlux. This is not an asymmetric bet an investor should take.
The discount to book value at this point isn’t great enough to offer a big enough margin of safety. Several months ago offered a good opportunity to enter the stock and little has fundamentally changed over the run up.
While the CEO has returned, it is doubtful that this represents a Steve Jobs (Apple) or Howard Schultz (Starbucks) moment. The CEO is 73 and has no ownership stake. The true upside in this stock is mostly allocated to The Garcia Group, which could end up owning close to 45% of the company if the company successfully rights the ship. It doesn’t need the company to be a wild success though because a related party to the Garcia Group will receives royalties from the sale of Rihanna and Kanye West fragrances. The alleged alignment of interest with stockholders will prove elusive in my opinion.
One thing to watch would be the traction that new fragrance releases gain. The next earnings release will contain the holiday season. There tend to be discounts in this period but increased volume. The recent news that December retail sales were weaker than expected might be a sign of caution on Perfumania and Parlux as an extension. If Perfumania were to go bankrupt, it would be interesting to see how extreme the valuation of Parlux would get. I would definitely revisit this company if this hypothetical thesis were to become a reality.
