Elizabeth Arden: A 20% Upside Opportunity

| About: Elizabeth Arden, (RDEN)

Elizabeth Arden (RDEN) is a leading manufacturer of prestige fragrances and other beauty products in the skincare and color cosmetics categories. It operates in two segments: North America and International. North America contributes 64% of its revenue, and the company sells its portfolio of owned, licensed, and distributed brands. The international segment contributes 36% of Elizabeth Arden's revenue, and the company sells its brands in approximately 120 countries.

We believe the stock price for Elizabeth Arden has many reasons to draw investors' attention. The initiatives the company is taking include, the repositioning of its stores, the expansion in the Western Europe, and the new fragrance acquisition is expected to ensure revenue growth in the coming quarters. We believe that investors can enjoy a 20% upside potential in the stock price by the end of fiscal year 2014.

Repositioning initiatives to draw more consumers

The repositioning of the Elizabeth Arden brand and stores that is underway now, will likely take 12-18 months more to be complete. Through this initiative, which began in 2012, the company aims to modernize the well-known and respected brand, restore the prestige image, and strengthen its presence in the U.S. market. At the start of this fiscal year, which began in July 2013, Elizabeth Arden initially targeted 50 flagship stores for a revamp. The goal was to evaluate the consumer response and fine tune the effort before expanding the number of stores. It completed the initial rollout in North America in October 2012 with great success. The revamped flagship counters have shown a 20% increase in sales year over year through March 2013. The revamp in international stores completed in April this year, and their performance is very strong as well. These stores observed a 17% rise in sales. Retail sales of skincare and color products are driving these increases.

The recent trends in revenue from these stores are much stronger than the revenue trends before the revamp, indicating continued traction. With the success to date, the company is expanding the program in the fiscal year 2014, which started in July 2013, and it has already completed the revamp of 200 stores by the end of June 2013. We believe the revamp will have a positive impact on the operating margin since it is focusing on selling company owned brands, which means it doesn't have to pay licensing fees. The corporate and distribution infrastructure is essentially in place to give the operating margin a boost, which was 5.35% in fiscal year 2013. Moreover, the largest opportunity is internationally, where the company owned brands have an excellent reputation but modest sales; the higher margins can give decent revenue growth and a significant impact to the bottom line. The company has sizable opportunities in Japan, Germany, and France. We believe that the international segment is expected to account for around 40% of the Elizabeth Arden brand sales.

Source: Glahnretail.com

Fragrance acquisition will enhance the product portfolio

The licenses acquired late in fiscal year 2012 offer a significant opportunity for Elizabeth Arden. For instance, Ed Hardy Skulls and Roses launched in October of last year now represent 40% of the North American prestige sales. Other licenses included the initial fragrances from Taylor Swift and Justin Bieber. When Elizabeth Arden acquired these brands, it inherited the marketing plans that had been set with retailers and aggressive distribution strategies to ensure revenue growth.

1. The Taylor Swift brand grew 74% year over year for the fiscal year, driven by the launch of second fragrance, 'Enchanted' by Taylor Swift, as well as growth in the U.S. sales for both 'Wonderstruck' and Enchanted. The company is currently in early stages to launch its third fragrance called 'Taylor' by Taylor Swift, which is supported by a strong digital marketing plan as well as sponsorship of her current Red Tour, a global concert tour.

2. The fragrance business experienced a 16% year-over-year sales increase in fiscal year 2013 driven by strong sales of the Justin Bieber brand. This was based on the global launch of his second fragrance, 'Girlfriend' by Justin Bieber. The company is in process of launching Justin's third fragrance brand called Justin Bieber 'The Key', which is also supported by a strong digital marketing plan.

We believe a driver of growth for the next few years will be the international roll out of these products. For instance, Taylor Swift's international sales for both of her fragrances were up 58% year over year in the last quarter of 2013. Regarding the portfolio of acquired brands, they have proven strategically appealing and financially accretive just based on performance in the U.S. Over the next two years, we expect Elizabeth Arden to leverage these fragrances internationally and get incremental returns. It will focus on doing this by accelerating its marketing strategies and improving its distribution channel.

Expansion in Western Europe

The Western Europe market has an excellent opportunity to grow in terms of sales, particularly in fragrance, where Elizabeth Arden has dramatically less market share, which is 2% in Europe compared to the 15% in the United States this year. The Western European region has been the key focus for the company over the past two years. Overall, the sales from international fragrance grew 14% year over year in fiscal year 2013 despite having inventory shortage at times for the company owned brand and extremely weak economic conditions.

According to the management, ''The products sold in Europe have higher margin in comparison to the products in North America''. We believe the company will take this initiative in the next year that will guide it strengthen its presence and increase their market share in the European market.

The distribution agreements are important as they make Elizabeth Arden more appealing to retailers and also can position the company well to acquire the brand or license it in the future. This is due to the company having an inside track with the product and a relationship with the brand's owner. In addition, we believe the recent acquisition of brands like One Direction, a band, make strategic sense as they appeal to consumers in Europe, which as we have explained is an important market for growth. According to Women's Wear Daily, the One Direction fragrance is expected to generate $120 million in its first year, and Elizabeth Arden is the distributor of the fragrance. This builds our confidence about the company as it has potential to grow in the European market, as the band is very popular and has huge fan following, especially in the U.K.

Going forward, Elizabeth Arden will face tough competition around the globe from Coty (COTY), the fragrance and beauty products manufacturer and distributor, which came up with an IPO in June this year. Europe is responsible for more than 50% of Coty's total revenue. Coty generates most of its revenue from perfume brands including Calvin Klein, Davidoff, and Playboy as well as those it sells under the names of celebrities such as Beyonce Knowles, Lady Gaga, and Jennifer Lopez. Additionally, Coty is looking forward to expand in Europe. This, in our view, will be a direct competition to Elizabeth Arden's revenue from fragrances sold in Europe.


Ø Loss of a major customer - Wal-Mart Stores (WMT) contributed 13% of its $1.24 billion in sales last fiscal year. The company is facing a downturn as this giant retailer has changed its buying habits and is keeping less on the shelves. It is waiting to stock inventory closer to the holiday season when the products are actually expected to sell the most. We believe this can prove to be a huge risk and can impact Elizabeth Arden's sales and earnings if it is unable to replace the lost distribution.

Ø New Product Introductions - New product introductions have been a driving force of revenue growth over the past decade and are essential to maintain share in the global fragrance and cosmetics market. The failure to introduce new products that gain acceptance with retail accounts or with consumers could limit top line growth and hamper the company's financial health.

Stock price movement

RDEN Chart

RDEN data by YCharts

The stock has behaved very vaguely in the past one year and has been trading in the very wide range of $30.37 to $49.75. We believe that there is still an upside potential for this stock, which is trading at the current levels of $34, based on the opportunities it has in the coming fiscal year.

The earnings estimate for fiscal year 2014 is in the range of $2.15 - $2.30 per share. Based on the company's estimate of earnings per share for the next fiscal year, we can estimate the stock's target price for the end of fiscal year 2014. At the current price level, the current P/E and the forward P/E, for June 30, 2015, should be around 26.09 and 13.72 respectively. We assume a P/E ratio of around 19.25 to the forward earnings estimate as this is a midpoint of the given ratios, which we expect it to reach by June 30, 2014. That gives us a price target of $41.38 - $44.27 by the end of this fiscal year 2014. Considering, the stock is currently trading at around the $34 mark, there is still an upside potential of about 20% by the end of the coming fiscal year. So, we believe that investors looking for assured gains should buy the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Madhu Dube, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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