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Elizabeth Arden Inc. (NASDAQ: RDEN) is something more than just a pretty face. Despite a warts-and-all stock performance in the final four months of 2006, the company appears to have undergone a successful makeover that could benefit investors.

And at least one analyst smells the possibility of a takeover at some point, in light of recent market consolidation, of the global beauty and fragrance company.

Elizabeth Arden offers a cadre of fragrances bearing the names of such luminaries as actresses Elizabeth Taylor and Catherine Zeta-Jones, along with motorsports star Jimmie Johnson as spokesman for a NASCAR men’s line.

In addition to Taylor’s long-running White Diamonds brand and other fragrances, and Zeta-Jones, the company has continued to extend its appeal to younger potential customers, marketing products from Mariah Carey, the Brittney Spears’ Curious scent and Hillary Duff’s … with Love brand. Its other more-traditional brands include Geoffrey Beene’s Grey Flannel and Halston. For rugged, four-wheelin’ men, it also has a Hummer fragrance.

Elizabeth Arden began in 1910 as a salon founded by its namesake – who actually was Canadian born Florence Nightingale Graham. From its New York City roots along the always-trendy Fifth Avenue, the company has developed a worldwide appeal for its ever-expanding family of products that have emerged from behind its bright red door.

What started with face creams and cosmetics, Elizabeth Arden began to successfully add fragrances starting in 1935, with one called Blue Grass. Elizabeth Arden Graham was an ardent equestrian and thoroughbred breeder, and named the fragrance after the Blue Grass region of Kentucky, where she had an expansive farm outside of Lexington. Her Jet Pilot won the Kentucky Derby in 1947.

Her company was the first to produce commercials to run in movie houses in the 1930s. The company also pioneered putting a train traveling case chock-full of its products in some special designer-edition luxury automobile models before World War II. In 1945, couture apparel was added to the Elizabeth Arden product mix.

Now with its headquarters in south Florida, the former FFI Fragrances acquired the Elizabeth Arden line in 2000 from international conglomerate Unilever for roughly $190 million, and changed its name to match that of its new headliner.

In recent years, Elizabeth Arden has been taking its upscale image more downscale, bringing its products into the mass-market settings of Wal-Mart Stores Inc. (NYSE: WMT) and Target Corp. (NYSE: TGT), while maintaining its higher-end salon and spa development. Research firm Information Resources put U.S. mass-market retail sales of fragrance, skin-care and makeup products at $15 billion in 2006. For the quarter ended March 31, the company said that its mass-retail business net sales grew 26% year-over-year, ahead of expectations.

Yet no amount of makeup can mask the stock’s performance last year. Following release of its fiscal 2006 results last August, when the company missed its earnings and revenue projections, shares bottomed at $13.63 on August 26. Since then, the stock has fought back to restore investor confidence, hitting a 52-week high of $24.73 on June 15, while riding the stock market’s growing general optimism.

Last year’s results were impacted by some added expenses, as it worked on completing two acquisitions – of prestige fragrance distributor Sovereign Sales and the brand licenses of Riviera Concepts. It also was undergoing a restructuring, as it encountered weakness in the retail industry, including store shutdowns as Macy’s Inc.'s (NYSE: M) predecessor Federated Department Stores consolidated its store numbers after acquiring the May chain.

Wal-Mart also has downsized its inventory levels of late, which has weighed on many suppliers in addition to Elizabeth Arden. Industry followers estimate that Elizabeth Arden relies on Wal-Mart for about 15% of its sales.

In the all-important quarter covering the holiday shopping season, Elizabeth Arden reported a 22% drop in earnings to $25.9 million, while sales rose 19% to $410.8 million. Then for the quarter ended March 31, net sales increased 14.6% to $219.2 million, while net income rose to $3.2 million, from $700,000. The consensus estimate of analysts surveyed by Thomson Financial was calling for earnings of $0.03 a share; EPS came in at $0.11.

Scott Beattie, the president and chief executive, told analysts on the May 3 third-quarter conference call that “over 50% of our revenue growth came from the contributions of new products and the acquisitions that we made during the fiscal year, the remainder was organic growth.”

Part of the EPS increase, according to Wedbush Morgan analyst Rommel Dionisio in a May 4 research note, was due to a shift in advertising expense from that quarter to the just-completed fiscal fourth quarter. The company’s sluggish U.S. department store sales growth was offset by mass-market sales and a double-digit international profit improvement.

Wedbush Morgan maintained a buy rating and a $25 price target in that report, with Dionisio noting that the shares “should trade at a multiple in line with the peer group average” of nine times calendar year 2008 EBITDA. Dionisio raised his FY2007 earnings estimate to $1.19 from $1.16 per share, and boosted his FY2008 EPS outlook to $1.51 from $1.44. But he also cut his revenue outlook slightly for both fiscal years.

The company is to report its fiscal 2007 results for the year ended June 30 on August 16. In May, while reporting its third-quarter results, the company reiterated its outlook for the fiscal year, expecting to report earnings of between $1.15 and $1.20 a share. It’s looking to report revenue growth of between 15% and 18% over FY2006’s $954.6 million – indicating sales reaching between $1.1 billion and $1.3 billion.

For the just-ended quarter, the Thomson estimate calls for $0.18 a share, up from the loss of $0.04 a share in the final quarter of fiscal 2006.

Following release of the third-quarter report, CIBC World Markets analysts Joseph Altobello and Henry Capellan maintained a “sector perform” rating on Elizabeth Arden, without issuing a price target. However, in a May 4 research note, they said they “continue to view valuation as modestly attractive,” while expecting FY2007 earnings per share of $1.18, and predicting possibly $1.65 EPS for FY2008.

SunTrust Robinson Humphrey’s Bill Chappell, who upped his rating on Elizabeth Arden to “buy” from “neutral” in February, increased his share target price to $28 from $27 after the company posted Q3 results in May.

The Thomson Financial median price target is $27, with a FY2007 earnings consensus estimate of $1.19, which rises to $1.57 for the 2008 fiscal year.

With the $1.16 billion acquisition of Playtex Products Inc. (NYSE: PYX) by Energizer Holdings Inc. (NYSE: ENR) this month, Goldman Sachs analyst Lori Scherwin mentioned in a research note that the deal could raise takeover interest in other small-cap household and personal-care companies including Alberto-Culver Co. (NYSE: ACV), Church & Dwight Co. Inc. (NYSE: CHD) and Elizabeth Arden.

The Playtex acquisition “could serve as a catalyst for other similar deals, as small companies focus on gaining critical mass,” Scherwin wrote.

If someone comes knocking on Elizabeth Arden’s red door with an attractive buyout offer, shareholders would benefit. Even if that doesn’t materialize, however, the company appears to have a strong product pipeline not just for the U.S. market, but for the international marketplace as well.

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Source: Elizabeth Arden: The Product of a Successful Makeover