Parlux Fragrances' Turnaround Continues

Since I first wrote about Parlux (PARL), shares have fallen nearly 13% to just above $4.00. Of course this must mean that PARL's turnaround must have hit a few potholes in the road, correct? The answer is not that I can see.

PARL's recent 2Q earnings release exceeded analyst's expectations handily as they smelled mightily sweet to investors at $0.10 earnings per share. PARL's recent 10-Q filing shows a couple of factors that I did not anticipate. First, sales increased more than I expected due to increased sales albeit at lower margins to foreign distributors. Secondly, PARL was able to make deeper SG&A cuts than I expected. The benefits to these two factors are obvious: (i) diversification from the US economy and (ii) a reduced cost structure improves profitability and the chances for completion of a successful turnaround.

The product level trends were favorable as well. The Paris Hilton branded products continue to sell well and it appears likely that this line could exceed $100 million in revenues (a new record) during the current fiscal year. Reapproval of foreign distributors for Guess! branded products seems on track to continue. Perhaps most interesting of all was Neil Katz's statement that PARL was hopeful to announce 1-2 new celebrity signings within the next 90 days to add to the recent Nicole Miller and Jessica Simpson signings.

PARL's CFO recently indicated that it was PARL's goal to payoff their GMACCC line of credit by March 31, 2009. To this end, the balance no the line declined to under $11 million as shown in the 10-Q. Elimination of interest expense would save up to $0.10 in EPS.

My personal expectations for next fiscal year are for at least $0.60 in eps (and possibly quite a bit higher). Inter Parfums, Inc (IPAR) trades at nearly 16 times its analyst expectations and 18 times trailing earnings. The use of a 17 multiple for PARL and a $0.60 eps target for next year would imply shares could move to over $10 representing nearly a 150% return from recent prices with the prospects for continued growth the following year.

In summary, The combination of a stabilized operating environment at profitable levels, an expanding international footprint, favorable operating trends along with new upcoming new product launches (Simpson and Miller) and new celebrity signings all combines to make PARL shares appear to be a bargain at a near 30% discount to tangible book value. I am continue to remain bullish on PARL's future and the future of its share price.

Disclosure: Author is long PARL.