Retail IPO: Bare Escentuals files an S-1 (BARE)

San Francisco-based cosmetics company Bare Escentuals filed an S-1 last Friday. The proposed ticker is (NASDAQ: BARE). The following are key details from the filing:

Company Description:

Bare Escentuals is one of the fastest growing prestige beauty companies in the U.S. and a leader by sales and consumer awareness in mineral-based cosmetics. We develop, market and sell cosmetics, skin care, and body care products under our i.d. bareMinerals, i.d., RareMinerals and namesake Bare Escentuals brands, and professional skin care products under our md formulations brand. We believe our i.d. bareMinerals cosmetics, particularly our core foundation products, offer a highly differentiated, healthy and lightweight alternative to conventional liquid- or cream-based cosmetics while providing light to maximum coverage for all skin types. As such, we believe our foundation products have broad appeal to women of all ages including women who did not previously wear foundation before using i.d. bareMinerals. We utilize a distinctive marketing strategy and multi-channel distribution model consisting of infomercials, home shopping television, specialty beauty retailers, company-owned boutiques and spas and salons. This model has enabled us to increase our brand awareness, consumer loyalty and market share and achieve favorable operating margins. Bare Escentuals was the top-selling cosmetics brand company-wide at leading specialty beauty retailers Sephora and Ulta during 2005. Over the last five fiscal years, we have increased net sales approximately 87.5% on a compound annual basis, and during the fiscal year ended January 1, 2006, our operating income was 29.8% of net sales.

Key Financial Details:

Net Sales: Our distinctive marketing and distribution approach has enabled us to achieve significant revenue growth. Over the last five fiscal years, we have increased net sales approximately 87.5% on a compound annual basis compared with a 2.6% compound annual growth rate for the overall domestic color cosmetics market as reported by Euromonitor. In addition, we believe that our multi-channel distribution strategy has allowed us to generate operating margins superior to those of cosmetics companies that rely on traditional advertising. We have increased operating income from $5.5 million for the years ended December 31, 2002 to $77.3 million for the year ended January 1, 2006. Our operating income as a percentage of net sales has grown from 8.4% for the year ended December 31, 2002 to 29.8% for the year ended January 1, 2006. Our financial strength gives us the flexibility to drive growth across our multiple distribution channels.

Notable Issues to Watch For:

The regulatory status of our cosmetics or skin care products could change, and we may be required to conduct clinical trials to establish efficacy and safety or cease to market these products: The FDA does not have a premarket approval system for cosmetics, and we believe we are permitted to market our cosmetics and have them manufactured without submitting safety or efficacy data to the FDA. However, the FDA may in the future determine to regulate our cosmetics or the ingredients included in our cosmetics as drugs or biologics. If certain of our i.d. bareMinerals, RareMinerals or our other products are deemed to be drugs or biologics, rather than cosmetics, we would be required to conduct clinical trials to demonstrate the safety and efficacy of these products in order to continue to market and sell them. In such event, we may not have sufficient resources to conduct any required clinical trials, and we may not be able to establish sufficient efficacy or safety data to resume the sale of these products. Any inquiries by the FDA or any foreign regulatory authorities into the regulatory status of our cosmetics and any related interruption in the marketing and sale of these products could severely damage our brand reputation and image in the marketplace, as well as our relationships with customers, which would harm our business, prospects, financial condition and results of operations.

Our foundations and concealers as well as some of our md formulations products are considered over-the-counter (OTC) drug products by the FDA. The FDA regulates the formulation, manufacturing, packaging, labeling and distribution of OTC drug products pursuant to a "monograph" system that specifies active drug ingredients and acceptable product claims that are generally recognized as safe and effective for particular uses. If any of these products that are OTC drugs are not in compliance with the applicable FDA monograph, we would be required to (i) reformulate such product, (ii) cease to make certain use claims relating to such product or (iii) cease to sell such product until we receive further FDA approval. There can be no assurance that, if more stringent regulations are promulgated, we will be able to comply with such statutes or regulations without incurring substantial expense. In addition, OTC drug products must be manufactured in accordance with drug good manufacturing practice regulations. Our OTC drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA and corresponding state agencies to ensure strict compliance with drug good manufacturing practices and other government regulations and corresponding foreign standards. We do not have control over third-party manufacturers' compliance with these regulations and standards. If the FDA finds a violation of drug good manufacturing practices, it may enjoin the manufacturer's operations, seize products, or criminally prosecute the manufacturer, any of which could require us to find alternative manufacturers, resulting in additional time and expense.

Underwriters: Goldman Sachs, CIBC World Markets

Select Competitors: Elizabeth Arden, Inc. (RDEN), The Estée Lauder Companies Inc. (EL), L'Oréal S.A.