As I explained in my previous article on the qualitative look at Perfumania (PERF), the company has a bright future. The synergies and advantages gained from acquiring Parlux (PARL) make the merger a wise decision. In order to make my articles easier to read, I've chopped my analysis up into two articles. This article explains the financial numbers that I left out in the previous one.
Revenue and Earnings Growth
Perfumania's EBITDA for fiscal 2010 was about $19 million. For fiscal 2011, my model calculations show EBITDA will almost double to about $36 million. For the first three quarters of fiscal 2011, EBITDA was $7 million. For the same period in the previous year EBITDA was -$2 million. At the current market cap of $91 million, PERF is trading for 2.5 times EBITDA. This is very cheap for a company that's demonstrating consistent growth. Using those figures, EBITDA as a percentage of net sales for fiscal 2010 and 2011, is 4% and 7%, respectively.
By my calculations, Perfumania's revenue for 2011 will be $500 million, up from $485 million in 2010, for a 3% increase. Add to this, Parlux 2011 revenue of around $134 million for a total of $634 million in revenues. Note: I realize that a good chunk of Parlux' revenue was to Perfumania, but that is now money that Perfumania is saving, so for this comparison I'm still counting it as Perfumania's revenue. WIth 18.333 million diluted shares outstanding after the merger, revenue per share for Perfumania will be at $34.60. At PERF's current share price of $10/share, that puts its Price/Sales ratio at only about 0.29. This is much lower than other retail companies. Macy's (M) price/sales ratio is 0.63, for example.
Perfumania Comparable Valuation
As explained in the merger proposal, Parlux hired a financial and strategic advisor, PJSC, to give financial advice regarding the merger. To figure out the intrinsic value of Perfumania, PJSC compared its financials to a group of companies that PJSC deemed had similar operations. These are the comparable companies PJSC used: Sally Beauty Holdings, Inc (SBH), Ulta Salon (ULTA), Cosmetics & Fragrance, Inc, Elizabeth Arden, Inc. (RDEN), rue21, Inc (RUE), Charming Shoppes, Inc (CHRS), Cost Plus (CPWM), Body Central (BODY), Big 5 Sporting Goods (BGFV), and Hot Topic (HOTT).
The problem with comparing Perfumania with these companies is they as a whole have less room to grow. They all have higher revenues and market cap than Perfumania. Perfumania has stable revenue growth and will continue to gain market share in the industry, especially after the merger.
PJSC applied the following ranges of multiples for the selected companies:
Enterprise Value as a Multiple of:
Estimated FY 2011 EBITDA
Estimated FY 2012 EBITDA
8.5x - 11.5x
|8.0x - 11.0x||7.0x - 10.0x|
Equity Value as a Multiple of:
LTM Net Income
Estimated FY 2011 Net Income
Estimated FY 2012 Net Income
15.0x - 18.0x
|14.5x -17.5x||13.0x - 15.5x|
Based on this analysis, PJSC derived reference ranges of value for Perfumania common stock of between $8.00 to $17.00.
Right now, the market is valuing PERF towards the bottom of this range at only $8-$10 per share from the value of PARL shares. This appears to be too low of a valuation. Financials and growth expectations show the company is worth much more.
Right now, PERF's enterprise value is about $240 million. Using the above suggested ranges, with an estimated FY 2011 EBITDA of $36 million, the enterprise value should be between $288 million and $396 million. This is assuming Perfumania will grow at the same rate as the listed companies, and I think it will have a faster growth rate.
While Perfumania's revenue growth from last year doesn't seem like much, only 3%, Perfumania has been closing its underperforming stores. Becoming more streamlined means gross profit grows faster. Gross profit is on track to grow from $181 million in FY 2010 to $199 million in FY 2011, for a 9.9% increase.
Perfumania does a good job of monitoring and closing down underperforming stores and opening up new ones. Perfumania also opens seasonal locations and promptly closes them after the Christmas season is over. A wise business move to take advantage of peak seasons.
Before the merger announcement, PERF had risen up to its 52 week high of $20 in December mainly because same store sales (SSS) reported great revenue growth. In September 2011, Perfumania's SSS had risen 11.3% from the September 2010 sales. For the quarter ending January 2012, SSS increased by 6.9%. For the month of February 2012, SSS increased by 6.4%.
From Perfumania's latest fiscal year 2010 10-K:
"Perfumania's current business strategy focuses on maximizing sales and store productivity by raising the average dollar sale per transaction, increasing transactions per hour, reducing expenses at existing stores, selectively opening new stores in proven geographic markets and closing under-performing stores. When opening new stores, Perfumania seeks locations primarily in high traffic manufacturers' outlet malls, regional malls and selectively, on a stand-alone basis in suburban shopping centers in metropolitan areas. To achieve economies of scale with respect to advertising and management costs, Perfumania evaluates whether to open additional stores in markets where it already has a presence or whether to expand into additional markets that it believes have a population density and demographics to support a cluster of stores.
As of January 29, 2011, we operated 360 Perfumania stores in the United States and Puerto Rico, including 3 seasonal locations. The following chart shows the number of Perfumania stores operated in each state in which those stores are located.
In fiscal 2010 and 2009, Perfumania opened 3 and 19 stores, respectively, excluding 6 seasonal locations which opened in October and November 2010. Perfumania continuously monitors store performance and from time to time closes under-performing stores, which typically have been older stores in less trafficked locations.
During fiscal 2010 and 2009, Perfumania closed 16 and 4 stores, respectively, excluding 3 seasonal locations which closed in fiscal 2010. For fiscal 2011, Perfumania intends to continue to focus on improving the profitability of its existing stores and management currently expects to open 2 new stores and expects to close approximately 11 stores."
Information from Parlux's latest fiscal year 2011 10-K:
"Outside of the US, PARL markets its fragrances thru distribution agreements with independent distributors. These activities are monitored by international sales staff.
For the years ended Mar 31, 2011, 2010, and 2009, sales to PERF as a % of total net sales were 39%, 25%, and 27%, respectively. Sales to international customers as a % of total net sales for those years were 24%, 31%, and 37%, respectively. Sales to Macy's as a % of total net sales for those years were 21%, 21%, and 22%, respectively."
PARL generally doesn't have any long term or exclusive contracts with domestic customers, certain international distributors, or suppliers. So there was the risk of losing a major distributor or customer. However, now Perfumania calls all the shots. The combined company has a lot more revenue sources and options, so the risk decreases.
Perfumania's system of having small stores that only sell fragrances works. I see stores from other companies with the same strategy in fashion commercial areas around midtown New York City. Perfumania is very profit-motivated and can try setting up the stores in different ways, and changing the products around.
Looking At The Merger Details
Perfumania is assuming that almost every minor Parlux shareholder will take the cash + PERF shares conversion as opposed to the all-PERF stock conversion. This is excluding the minor Parlux shareholders that are part of the Nussdorf family that will take the all-PERF share conversion. From this calculation, described on page 53 of the merger proposal, holders of approximately 15,700,000 shares of PARL will take the mixed election and an all-stock election by holders of approximately 5,000,000 shares. This totals: 15,700,000 x .2 + 5,000,000 x .5333 = 5,833,333 PERF shares. On top of that, Artistic Brands is receiving shares and warrants from the merger. Premerger, it had 6,000,000 PARL warrants at a $5.00 exercise price. Postmerger, it will lose its PARL warrants but get 6,000,000 x 0.533333 = 3,200,000 PERF warrants at an $8.00 exercise price. On top of that, Artistic is also getting 300,000 shares of PERF as a "poison pill fee" from the merger.
Premerger there are currently about 9 million shares of PERF outstanding. Adding this all together, the total diluted shares outstanding for PERF will be 9 million + 5.8333 million + 3.5 million = 18.333 million.
Total cash paid at the acquisition will be about 15.7 million x $4.00 = $62.8 million. This cash will be borrowed from Wells Fargo (WFC) of $32 million and the $30.8 million will be borrowed from the Nussdorf trust. Add to this about $5 million of merger fees and expenses. The largest fee goes to the investment banker, PJSC, of about $2.5 million upon successful consummation of the merger. This totals $67.8 million in cash spent. Subtract from this cash received from warrant execution: $8 x 3.2 million = $25.6 million. $67.8 million - $25.6 million = $42.2 million.
With total stockholders' equity between the two companies of around $155 million at fiscal Q3 2011, minus $42.2 million cash paid for PARL, equals a $112.8 million book value. That will put the book value per share of PERF at about $112.8/18.333 = $6.15 per share post merger.
The warrants might not be exercised for awhile, so the amount of debt from the merger will be around $67.8 million. The interest on this debt is low, in the range of 3-4%. Parlux' cash will immediately be used to pay down some of the debt. From the quarter ending 12/31/11, Parlux had $23 million. Rounding down to $20 million used to pay down the debt, that leaves $47.8 million in added debt from the merger. Add to this the $156 million in debt Perfumania already has, giving it $203.8 million total debt. Not too much for a company with a growing EBITDA to handle.