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I spend a good bit of time leafing through companies that have come public in the last 12 months as it is a wonderful area to find emerging companies with strong growth prospects and possibly overlooked stocks. Such may be the case with Bare Escentuals (BARE). The company markets makeup and other cosmetic products through its boutique shops as well as through wholesale channels that filter down into department stores. One of the differentiating factors for the company is that BARE was one of the first to make mineral based products so popular and this type of product is now becoming the industry standard.

After coming public in September 2006, the stock has been subject to two secondary pricings as major shareholders are cutting back on their positions. The most recent sale, along with a company pre-announcement that wasn't taken too well on the street has brought the price lower in the last month. The large shareholders are still out there which may cause a bit of an overhang in the stock, but they have significantly lightened their positions so it is unlikely they will add too much more pressure to the stock.

Concerns with the pre-announcement center around poor performance in the infomercial portion which accounted for 1/3 of 2006 revenue. A new format was used for the company's infomercial and it wasn't received well by customers. Management was quick to realize the campaign wasn't working and soon after, the program had been changed. Sales picked back up with the new format, but the damage for the quarter had already been done. The stock is obviously pricing in continued weakness in that area.

While that news is definitely negative, there is much to be excited about when viewing the company as a whole. There are three main areas the company is counting on to drive growth and each of these departments appear to be in good health.

First is the boutiques which directly sell BARE's products. There are 33 of these stores nationwide and they generally enjoy margins 10-15% higher than the other distribution channels. The company is planning for 15 new stores each of the next 2 years and some speculate there is a potential for 150 doors long-term.

Second is the wholesale channel which has had some exciting news lately. Sephora which has picked up BARE's products as its top selling brand, will now be included in many JC Penny stores. In addition, there are over 200 doors in France which allow the company good exposure in Europe.

This brings us to the third driver which is International. The company is concentrating on Europe right now as they are able to widen their footprint while relying on marketing efforts to drive sales in multiple countries. Japan is another key opportunity as the demographics and product use statistics are very encouraging.

While not cheap, this stock reflects the tremendous growth potential for the company. It appears we are seeing evidence of institutional buyers stepping in at this level which will likely provide some support for the stock price. I would be careful as the overall industry is not one of the leading groups in this market, but the individual company metrics warrant a close look.

BARE 1-yr chart

bare

Disclosure: Author does not have a position in BARE

Source: Bare Escentuals: Sensing Growth