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Summary

  • Adversity could be opportunity for RDEN.
  • The Rhone Capital and Air Paris situations bode well.
  • Tolerance for uncertainty is needed with regard to this stock.

The banished duke in "As You Like It" has this to say of his exile in the Forest of Arden:

Sweet are the uses of adversity;

Which, like the toad, ugly and venomous,

Wears yet a precious jewel in his head

Executives of the fragrance purveyor Elizabeth Arden (NASDAQ:RDEN) may not say it, but they've found themselves like the banished duke in a forest where he feels "the penalty of Adam," the chill wind and other natural discomforts he deems "counselors that feelingly persuade me what I am."

And did Arden ever feel it. Shares plummeted more than 23% to $15.05 after it reported a loss of $5.24 a share on revenue of $191.7 million, compared with a year-earlier loss of 17 cents a share. Excluding nonrecurring costs, Elizabeth Arden reported a loss of $1.04 a share, compared with a year-earlier profit of 10 cents a share. Analysts had forecast a loss of 34 cents a share on revenue of $242 million.

Enter Rhône Capital LLC. Along with its dismal fiscal fourth quarter release, Elizabeth Arden announced yesterday that Rhône was purchasing $50 million of preferred stock with a 5% coupon and will receive warrants to purchase 2.5 million common shares at $20.39 each, which would represent about 7.6% of the company's shares outstanding. The deal envisions Rhône's stake going as high as 30%, at which point a standstill agreement kicks in.

Analysts on the conference call were curious why Arden felt the need for Rhône's cash at the expense of diluting shareholders. We think the question should be turned around. What does Rhône see in a company that was made much sport of for blaming its Justin Beiber and Taylor Swift celebrity brands for the fiscal fourth quarter's much worse than expected revenue and earnings results?

When asked on the conference call if Rhône had been involved in the turnaround plan Elizabeth Arden cooked up in fiscal 2014, CEO Scott Beattie replied with a one-word answer. "No." We think this exchange telling. Rhône will get a seat on the board, and Arden hailed the investment firm as a "strategic partner." Rhône , we believe, was brought in to aid in Arden's efforts to rationalize its distribution scheme, if not direct it, particularly overseas. With skin in the game, Rhône is likely to be an active partner.

Arden wants better price points and hence better gross margins. Rhône's experience in fragrance brand makeovers could be key. In June 2013, Rhône along with Berkshire Partners and the Reimann Family took Coty Inc. public, raising more than $1 billion, valuing the company at around $6.7 billion.

In the makeover vein, Arden has also hired the advertising agency Air Paris, an independent shop with glamor clients such as Dior and Longchamps. Air Paris says it aims to "expertly craft a custom universe around each brand."

All this is well and good, but Arden was maddeningly vague about quantifying the impact and when it would occur, other than to say the effects would not be seen until the second half of fiscal 2015.

Uncertainty, of course, is the constant enemy of successful investing. Those with a tolerance for it should consider Arden at these levels.

Source: Sweet Are The Uses Of Adversity In The Forest Of Elizabeth Arden

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