Elizabeth Arden (RDEN) plummeted Tuesday, falling 24% by midday, after the company reported its fiscal 2014 results. Elizabeth Arden's fourth quarter sales sank 28.4% compared to the same quarter last year. According to The Street, the decline marked Elizabeth Arden's "steepest in a decade, and the company warned that the weakness, which started about a year ago, would continue for the next six months."
In Elizabeth Arden's press release, the company said it is implementing a plan to "rebuild profitability." The plan is expected to result in "annualized savings of $27 million to $35 million" with a goal of savings of $40 million to $50 million upon full implementation of its plan. ELizabeth Arden also announced that a private equity firm had made a $50 million investment in the company - but the real question is whether that will be enough and whether the current sell off introduces an opportunity for investors to buy into Elizabeth Arden.
Elizabeth Arden is struggling. The implementation of a cost savings plan and the involvement of an investor with experience in turning around fragrance companies may help but Elizabeth Arden's problem exist just as much in its structure as it does in market demand for its products. The combination could prove to be fatal and Elizabeth Arden may find its best value to investors as the target of an acquisition.
Breaking It Down
In fiscal 2014, Elizabeth Arden saw sales in North America fell 14% - an important metric given that North America accounts for roughly half of the company's sales. The number was a little better for international sales, but the company still posted a decrease of 8%.
Elizabeth Arden blamed the steep declines on its fragrance division. "While the Company had expected weaker sales comparisons due to the lower level of fragrance launch activity in fiscal 2014 versus fiscal 2013, the decline in sales of celebrity fragrances, particularly the Justin Bieber and Taylor Swift fragrances, was steeper than anticipated," according to its earnings press release. Going forward, Elizabeth Arden expects "The first quarter of fiscal 2015 will continue to be challenged by the same factors that affected recent quarters," and for "net sales headwinds to continue for the first half of fiscal 2015, resulting primarily from a lower level of product innovation as compared to the first half of the prior fiscal year."
A New Investor
Elizabeth Arden also announced "that investment funds affiliated with Rhône Capital L.L.C. ("Rhône Capital") have agreed to purchase $50 million of redeemable preferred stock of the Company and also will receive warrants to purchase 2.5 million shares of the Company's common stock at an exercise price of $20.39 per share, representing approximately 7.6% of the Company's outstanding common stock on an as-exercised basis. Rhône Capital also has advised the Company that, subject to market conditions and applicable legal or regulatory approvals, it intends to increase its ownership of the Company's common stock over time."
The $50 million investment may help Elizabeth Arden implement its cost savings plan and the restructuring goals the company identified earlier this year, but the need for the capital was not made clear. Elizabeth Arden made clear that Rhône Capital would not be managing the company: "Rhône Capital has the right to designate one member to the Company's Board of Directors for so long as it maintains its initial percentage interest in the Company, and the right to designate an additional member in the event that Rhône Capital acquires an ownership stake in the Company's common stock of 20% or more on a fully diluted basis."
A Case Of Precedence In The Coty
But investors should remember that Rhône Capital has worked with fragrance issues before - namely Coty (NYSE:COTY). In 2011, Rhône Capital teamed up with Berkshire Partners to acquire a minority stake in the cosmetic and fragrance company. Coty bought out Rhône Capital and Berkshire Partners' investment in June 2014.
"Over the past three and a half years, we have been honored to partner with Coty on its path to becoming a leader in the global beauty industry as it built a growing presence across new product categories and emerging markets around the globe," said Steve Langman, Managing Director at Rhône. "While we now exit our shareholding as the company has completed its transition from the private to public capital markets commensurate with our original investment horizon, we continue to believe in the strength and creativity of its management team and growth potential of its brands. We thank Coty and its board for this extraordinary opportunity."
Rhône Capital may be planning to do the same thing with Elizabeth Arden, but that doesn't necessarily mean that investors will see a massive boost in share price should the venture be successful. Coty filed to go public in 2013. It opened on June 13, 2013 at $17.50 per share. Today, Coty stands at $18 per share - hardly an increase.
In addition, there is a question of timing. "The Rhone investment is $0.07 dilutive to EPS-the head scratcher to analysts on the call was 'Why dilute the shareholder now, when on recent quarterly calls you touted your strong balance sheet?'", explains B. Riley's Linda Bolton Weiser in Barron's.
"In each fiscal year, Elizabeth Arden increases debt by at least $200MM (usually by $250MM) in F1Q to fund heavy working capital needs for their very seasonal business. So, in FY15, it looks like Elizabeth Arden has only $167MM available to fund working capital ($92MM remaining on the revolver + $25MM cash on hand + $50MM from Rhone). Is this enough to meet 1H15 working capital needs? What's the risk that current shareholders will be diluted further by additional capital infusion from Rhone? The CFO said operating cash flow would be positive in FY15, but positive enough to fund the estimated capex of $32MM-$35MM?"
Elizabeth Arden took a major hit in 4Q14 but things have not been well for the company. It may have some top-tier managerial guidance come from Rhone Capital, but ultimately this is a company with weak fundamentals that sells products with weak demand. Investors could ride it out - maybe Rhone Capital will have a positive influence on the company - but there are better investments and better return for the risk.
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