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Physicians Formula Holdings Inc. Reports Operating Results (10-Q)

November 09, 2009 | About:
10qk

10qk

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Physicians Formula Holdings Inc. (FACE) filed Quarterly Report for the period ended 2009-09-30.

PHYSICIANS FORMULA HOLDINGS, INC. is one of the fastest growing cosmetics companies operating in the mass market prestige, or `masstige,` market. Under its Physicians Formula brand name, the Company develops, markets and distributes innovative, premium-priced products for the mass market channel. Physicians Formula differentiates itself by addressing skin imperfections through a problem-solving approach, rather than focusing on changing fashion trends. Currently, Physicians Formula products are sold throughout the U.S. including stores operated by Wal-Mart, Target, CVS, Walgreens and Kroger. Physicians Formula Holdings Inc. has a market cap of $31.94 million; its shares were traded at around $2.35 with a P/E ratio of 33.57 and P/S ratio of 0.28.

Highlight of Business Operations:

Net Sales. Net sales decreased $6.1 million, or 30.0%, to $14.2 million for the three months ended September 30, 2009, from $20.3 million for the three months ended September 30, 2008. The decrease was primarily attributable to a decrease in sales of our makeup products and an increase in our provision for returns, partially offset by a decrease in our trade spending. The decrease in sales of our makeup products resulted from the loss of a major customer, lower Canadian sales and sales of higher-priced promotional kits that were featured in 2008. The loss of a major customer contributed $2.1 million to our decrease in net sales for the three months ended September 30, 2009 compared to the same period a year ago. Our provision for returns increased by $98,000, or 1.6%, to $6.1 million for the three months ended September 30, 2009, from $6.0 million for the three months ended September 30, 2008 due to increased returns from our retailers. Trade spending with retailers decreased by $74,000 for the three months ended September 30, 2009 compared to the same period a year ago, which includes a decrease in our provision for cooperative advertising of $552,000 and a decrease in our provision for markdowns of $9,000, offset in part by an increase in our provision for coupons of $350,000 and an increase in our provision for cash discounts and miscellaneous allowances of $137,000. During the three months ended September 30, 2009, our results included net sales of $1.3 million from our international customers, compared to $3.2 million for the three months ended September 30, 2008. The decrease in sales to international customers was primarily due to our Canadian business, which has experienced softness due to the poor economy. Other factors contributing to the decrease in Canadian sales were lower prepack sales and timing of promotional programs. For information on our sell through performance, please see "U.S. Market Share Data".

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $3.3 million, or 33.3%, to $6.6 million for the three months ended September 30, 2009, from $9.9 million for the three months ended September 30, 2008. The decrease was primarily due to a $798,000 decrease in corporate administrative costs, a $501,000 decrease in the allowance for doubtful accounts, a $471,000 decrease in freight and warehouse costs, a $397,000 decrease in stock-based compensation expense, a $381,000 decrease in marketing expense, a $339,000 decrease in realized and unrealized foreign currency exchange losses, a $251,000 decrease in sales force and sales administrative expenses and a $126,000 decrease in distribution costs.

Net Sales. Net sales decreased $30.3 million, or 35.3%, to $55.5 million for the nine months ended September 30, 2009, from $85.8 million for the nine months ended September 30, 2008. The decrease was primarily attributable to a decrease in sales of our makeup products offset by a decrease in our provision for returns and a decrease in trade spending. The decrease in sales of our makeup products was primarily due to the loss of a major customer, lower Canadian sales, sales of higher-priced promotional kits that were featured in 2008 and tight inventory control by retailers leading to destocking, which reduced the pipeline orders for new products during the nine months ended September 30, 2009 when compared to the same period a year ago. The loss of a major customer contributed $9.5 million to the decrease in our net sales for the nine months ended September 30, 2009 compared to the same period a year ago. At the same time, our provision for returns decreased by $4.2 million, or 21.8%, to $15.0 million for the nine months ended September 30, 2009, from $19.2 million for the nine months ended September 30, 2008 due to decreased returns from our retailers. Lower returns are expected as a result of the loss of a major customer, from which we no longer expect to receive returns, and the higher-priced promotional kits that were only sold in 2008, and are no longer being sold, that had a significantly higher return rate than our other products. Trade spending with retailers decreased by $1.4 million for the nine months ended September 30, 2009 compared to the same period a year ago, which includes a decrease in our provision for cooperative advertising of $3.1 million and a decrease in our provision for cash discounts and miscellaneous allowance of $435,000, partially offset by an increase in our provision for coupons of $1.4 million and an increase in our provision for markdowns of $752,000. During the nine months ended September 30, 2009, our results included net sales of $6.6 million from our international customers, compared to $12.5 million for the nine months ended September 30, 2008. The decrease in sales to international customers was primarily due to our Canadian business, which has experienced softness due to the poor economy. Other factors contributing to the decrease in Canadian sales were lower prepack sales and timing of promotional programs. For information on our sell through performance, please see "U.S. Market Share Data".

Cost of Sales. Cost of sales decreased $13.3 million, or 33.5%, to $26.4 million for the nine months ended September 30, 2009, from $39.7 million for the nine months ended September 30, 2008. The decrease in cost of sales resulted primarily from a decrease in product costs of $15.1 million due to a decrease in sales of our makeup products, offset in part by an increase in the provision for obsolete and slow moving inventory of $371,000 and a decrease in actual and estimated inventory recoveries from retailers (inventory returns by customers deemed to be resalable) of $1.4 million. Cost of sales as a percentage of net sales was 47.7% for the nine months ended September 30, 2009, compared to 46.3% for the nine months ended September 30, 2008. The increase in cost of sales as a percentage of net sales was primarily due to an increase in the provision for obsolete and slow moving inventory and an increase in product costs, offset by an increase in inventory recovery from retailers.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $9.1 million, or 23.7%, to $29.3 million for the nine months ended September 30, 2009, from $38.4 million for the nine months ended September 30, 2008. The decrease was primarily due to a $2.3 million decrease in marketing spending, a $1.9 million decrease in freight and warehouse costs, a $1.4 million decrease in corporate administrative costs, a $1.1 million decrease in sales force and sales administrative expenses, a $1.1 million decrease in stock-based compensation expense, a $959,000 decrease in realized and unrealized foreign currency exchange losses, and a $360,000 decrease in distributions costs.

Future Liquidity and Capital Needs. Our net working capital decreased by $9.6 million, or approximately 32.1%, to $20.3 million as of September 30, 2009, from $29.9 million as of September 30, 2008. We anticipate that requirements for working capital will increase during the fourth quarter of 2009, when we typically experience higher inventory levels as we produce new products for shipment in the first quarter of the following year. We have budgeted capital expenditures of $5.7 million for 2009 for several key projects, including $4.7 million in investments in retail permanent fixtures (classified as other assets in the accompanying condensed consolidated balance sheets which are excluded from our capital expenditure covenant under our old senior credit agreement with Union Bank), $443,000 in improvements to other manufacturing and distribution equipment, $290,000 to upgrade a product assembly line, $209,000 in improvements to our information technology infrastructure and $58,000 in improvements to our research and development equipment. We expect capital requirements related to fixture infrastructure to total $6.2 million for the period from September 2008 (inception of the project) to December 2009, of which $3.5 million was incurred as of September 30, 2009. Approximately half of the capital spending for retail permanent fixtures will occur during the fourth quarter of 2009 in conjunction with the new 2010 fixture systems. Capital requirements related to manufacturing include an upgrade to a major project undertaken in 2007 to automate a product assembly line that is used to assemble products that represented approximately 24.5% of our total sales in 2008. We expect the aggregate capital requirements of this project to total $1.7 million for the period from August 2008 (inception of the project) to December 2009, of which $1.6 million was incurred as of September 30, 2009. We spent $649,000 for capital expenditures and $1.9 million for investments in retail permanent fixtures for the nine months ended September 30, 2009. We believe that our cash flows from operations and funds from our financing arrangements entered into during November 2009 will provide adequate funds for our working capital needs and planned capital expenditures for at least the next twelve months. No assurance can be given, however, that this will be the case.

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