Perfumania Will Be A Fragrance Powerhouse After The Merger

 |  Includes: M, PARL, PERF
by: Adam Gefvert, CFA

Perfumania (NASDAQ:PERF) announced on December 23 that it will acquire Parlux Fragrances (NASDAQ:PARL) in a cash and stock deal worth $170 million. Well, it used to be worth $170 million. Now it's only worth $120 million because PERF stock plummeted after the merger announcement. Right before the announcement, PERF was trading for between $19-$20, now it's between $10-$11.

This big drop in value says the market thinks that Perfumania is giving up too much to acquire Parlux. That might be true, but I believe that at its current share price PERF is very undervalued. I explained the details of the conversion in my previous article.

For an easier read, I have split my Perfumania / Parlux report into two articles: a quantitative analysis (logistics) and a qualitative analysis (numbers). This first article is the qualitative analysis and won't cover the financial numbers. The financial numbers and growth of Perfumania will be covered in my next article.

I believe the Perfumania / Parlux merger is a good decision for many reasons. The expected benefits are listed by the Perfumania special committee in the merger proposal on page 64. From speaking to Parlux's investor relations, the biggest benefit Perfumania gets in acquiring Parlux is for the sales team and sales channels. Parlux sells in many different countries with 25% of sales outside the US, while Perfumania's sales are almost 100% in the US. Parlux markets its fragrances internationally through distribution agreements with independent distributors, monitored by its international sales staff. Perfumania will take them over and be able to add its own products to international sales. Parlux sells prestige products mainly in department stores like Macy's (NYSE:M), while Perfumania has historically sold in less prestigious stores like Target (NYSE:TGT), in addition to its own stores. Perfumania will now be able to capture market share for both prestige and non-prestige products.

The merger will allow redundant positions to be eliminated. Both companies have a full accounting team, so many accountants will be let go. Several executives won't be needed anymore-- Fred Purches, the CEO of Parlux, will be able to retire soon after advising Perfumania for a little while. Perfumania has a new, large warehouse, so it won't need Parlux's warehouse. Perfumania will be able to transfer over Parlux's $43 million inventory to its warehouse, enabling a more convenient sale of the excess products for maximum returns.

The combination of the two companies makes Perfumania a marketing powerhouse. The Parlux sales team will help Perfumania demonstrate how well it markets and sells celebrity brands, and more celebrities will want to market their fragrances through them. This CNBC article reported that celebrity fragrance sales rose 57% from 2010 to 2011.

As I explained in an article on Parlux I wrote last year, people buy celebrity fragrances to take on a little bit of the image and characteristic of that celebrity. Each celebrity will have a different fan base and can sell their fragrance to different customers. Parlux was a small, struggling company in 2009, trading at under $1 per share. It was successful with its Paris Hilton and Jessica Simpson brands, but needed some more star power. Then came Jay-Z and his company-- Iconic Fragrances (now Artistic Brands)-- and brought Rihanna's fragrance into the picture. Now Rihanna's sales of her Reb'l Fleur and Rebelle make up about 20% of Parlux' sales.

Artistic Brands is getting a good deal during the merger. It's getting both warrants and PERF stock, which I'll go into in more detail in my next article. As explained in my previous article, Rene Garcia, of the Garcia Group, is also a principal of Artistic Brands, and he personally is a large shareholder of both PARL and PERF stock. It's evident that Artistic Brands is in Perfumania for the long term. Jay Z's clout and management of other celebrities will no doubt help bring more products to Perfumania. Although it has been anticipated for a while, Kayne West, a celebrity managed by Jay-Z, is supposed to come out with a fragrance next.

New Fragrances

Just recently, Donald Trump has come out with a new fragrance line called "Success". This fragrance was launched and manufactured under Perfumania's subsidiary, Five Star Fragrances, and will be sold in the U.S. and internationally through Parlux's distribution channels. Perfumania will use the Parlux sales team to help sell Trump's cologne at Macy's. On April 18th, Trump will be launching the fragrance in the Flagship Macy's store in Harold Square. On April 22nd, his fragrance will be part of a task on the Celebrity Apprentice.

First, "Success" will be only sold at Macy's, then Perfumania will begin selling the fragrance in its own stores in May, 2012. Donald Trump is an image of "success" and his fans and businessmen who want to take on a "whiff" of success might want to give the cologne a try. Ivanka Trump, Donald Trump's daughter, has a popular clothing line that I see advertised all around New York City and in Macy's. She doesn't have a perfume yet, but I'll bet if Donald Trump's fragrance does well, Five Star Fragrances might also start a perfume for Ivanka.

In November, 2011, Five Star Fragrances launched the "Snooki" (from Jersey Shore) fragrance it had created in house. It started with a one month exclusive deal with the Home Shopping Network. According to Perfumania IR, the fragrance has sold very well. Now Snooki is being sold online and at Perfumania locations. Women might buy Snooki's fragrance because they like Snooki and her naughty ways.

In today's internet age, foreign countries are getting a lot more "Americanized". They read USA news on the internet, and have much more access to American culture and fashion. U.S. celebrities are much more well known and have more fans worldwide now than before the internet. Because of this, celebrity products, including fragrances, are more marketable in other countries now than ever before.

The combination of these two companies makes a much bigger company with more resources. About 30% of Parlux's sales are in countries other than the U.S. Perfumania's influence will expand its international influence.

As shown in this NPD report, prestige beauty products are selling better now than they did before the recession. The prestige beauty industry consists of products such as fragrance, makeup and skincare items sold in U.S. department stores only. These are more upscale beauty products and include celebrity fragrances. Perfumania is in the right place at the right time, and the merger shows it is ready to take advantage of this favorable environment.

Disclosure: I am long PARL.