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CCA Industries: Corporate Governance Concerns

December 12, 2012 | About:
CCA Industries Inc. (CAW) manufactures and markets health and beauty aids, each under its individual brand name. The products include, principally, “Plus+White” toothpastes and teeth whiteners, “Mega-T“ Green Tea diet supplements, “Mega-T” Green Tea gum and mint products, “Bikini Zone” medicated topical and shave gels, “Nutra Nail” nail care treatments, “Gel Perfect” UV free gel color, “Scar Zone” scar treatment products, “Sudden Change” anti-aging skin care products, “Cherry Vanilla” fragrances, “Solar Sense” sun protection products, “Hair Off” hair removal and depilatory products, “Wash ‘N Curl” shampoos and conditioners and “Pain Bust RII,” an analgesic product.

Valuation

CAW currently trades at a trailing 12 months P/E of 37.48 and a trailing 12 months EV/EBITDA of 11.36. In terms of asset-based valuations, CAW is currently valued at 1.22x P/B, a 12% discount to its five-year average P/B of 1.39. CAW achieved a ROE of 3.2% for the past 12 months and a five-yer average ROE of 6.5%.

Financial and Business Risks

CAW is almost debt-free with net cash of $11.3 million, representing 37% of its current market capitalization of $30.5 million.

CAW's products are discretionary in nature and it was negatively impacted by low consumer confidence and a resulting nation-wide trend of lower sales for all diet products in food, drug and mass market retailers in 2011.

CAW faces significant customer concentration risk with its top two customers, Walmart and Walgreens, accounting for 36% and 13% of its fiscal 2011 sales. Its 10 largest customers, in aggregate, accounted for 75% of its net sales. Each of CAW's products needs to be competitive to maintain its position on the retail merchandisers’ shelves.

Being a small player in the highly competitive cosmetic, health and beauty aid industry, CAW's success is dependent on its ability to successfully introduce new niche products and increase the growth and profitability of its current and new niche brand products.

While I typically see executive compensation at around 20% to 30% of net profit, CAW's management compensation has exceeded net profit in every single year since 2008. This surely raises a red flag over potential corporate governance issues.

Business Quality and Capital Allocation

CAW seemed to have hit a purple patch with its new nail polish line. Gross sales of Nutra Nail products increased 34.5% in fiscal 2011 as compared to fiscal 2010, due to the introduction of the Gel Perfect nail polish line. For the first three months ended Aug. 31, 2012, net sales of nail care products doubled, as compared to the same period in fiscal 2011. Gel Perfect, a UV free gel color nail polish, was introduced by CAW at the end of the third quarter of fiscal 2011. CAW anticipates continued growth and expanded distribution with this brand into fiscal 2013.

CAW has paid dividends in every single year since 2003 and currently sports a dividend yield of 6.6%. The most recent quarterly dividend will be CAW's 34th consecutive dividend.



Disclosure


The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap deep-value cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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