Parlux Fragrances' Financials Smell Good

May.15.11 | About: Parlux Fragrances, (PARL)

Parlux Fragrances (NASDAQ:PARL) makes and sells fragrances and beauty products through stores and pharmacies worldwide. Apparel store sales have gone up quite a bit this quarter, and this bodes well for perfume sellers. Macy's (NYSE:M) hit it out of the park and almost doubled analysts' estimates with earnings of $0.30 per share for Q1 2011. JC Penny (NYSE:JCP) and Nordstrom's (JWM) also had increased sales. PARL displays products in these stores and many others.

Although for fiscal year ending March 31, 2010, PARL posted a loss of $14,759,000, or $0.72 per share, it is on track to posting a gain this year. Its earnings for the nine months ended Dec. 31, 2010 were $1M or $0.05 per share.

Coming back into positive earnings territory, a Price/Book of only 0.68, $1.00 per share in cash, and zero debt makes PARL a solid value play. At the writing of this report, PARL is trading at $3.30. (A word of caution: PARL has extremely low trading volume, so if you decide to start a position, it's best to use a limit order or buy in small increments.)

Even though sales have gone down quite a bit from the nine month period ending Dec. 31, 2009, PARL has aggresively reduced expenses. It has drastically cut its work force and advertising expenses. For the nine months ended Dec. 31, 2010, sales were $94M, COGS was $42.7M (45% of sales) and marketing expenses were $24.4M (26% of sales). In comparison, for the nine months ended Dec. 31, 2009, sales were $130M, COGS was $69M (53% of sales), and marketing expenses were $39M (30% of sales). Despite higher sales than 2010, the 2009 period ended with a net loss of $4.9M. The US government could take a lesson from PARL in how to effectively reduce spending to erase a deficit.

PARL has yet to report quarter and year ending Mar. 31, 2011 results. Its competitor Inter Parfums Inc. (NASDAQ:IPAR) on May 9 reported record earnings for its first quarter ended March 31. IPAR sells popular fragrance brands like Burberry, Jimmy Choo, and Van Cleef & Arpels. I predict PARL will also have a good quarter.

Unlike IPAR, PARL uses many celebrities to represent its products. Rihanna, Paris Hilton, Jessica Simpson, and Queen Latifah are the more prevalent ones. To be a long term holder of PARL, one must be a believer that perfume represented by celebrities will remain profitable. PARL management definitely believes all the royalties and profit sharing it pays to celebrities to cover its fragrances is worth it. Hilton's brand and accessories are by far its most successful, and accounted for 42% of sales in fiscal year 2010.

In 2009, PARL signed a deal with Jay Z's company Iconic Fragrances to make scents covered by stars Rihanna and Kayne West. The deal didn't cost PARL anything up front, but Iconic Fragrances and the celebrities are paid royalties, take a share in the profits, and were given warrants to purchase PARL stock at $5 a share. This deal was done during the financial crisis when PARL was trading for under $1 a share.

Earlier this year, PARL put out Rihanna's Reb'l Fleur perfume and made a video. The perfume and video premiered in February 2011, and the video has over 1 million views on YouTube. PARL is currently launching a widespread ad campaign for Reb'l Fleur. It hasn't released a scent for Kayne West yet.

PARL used tennis stars Maria Sharapova and Andy Roddick to cover fragrances starting five years ago, but they were failed products.

PARL CEO Fred Purches said people like sports celebrities, but they aren't good representatives of fragrances. “People looked at these people sweating on the court and said, ‘No, I don’t need that fragrance,’ ” he said.

Disclosure: I am long PARL.