Parlux Open To Acquisition While Aiming For Profitability In Fiscal 2011

Back in the hands of its founder, Frederick E. Purches, Parlux Fragrances is optimistic that it will return to profitability "in the near future"; meanwhile, the company would not object to being acquired if the right opportunity arose, Purches said.

"If someone approached us with a reasonable, legitimate offer which would include some cash at least and some shares and it looked like it was a beneficial activity for our shareholders, we certainly would give it more than our intense scrutiny," Purches said Feb. 4 during a third-quarter earnings call.

However, his remarks came during the Q&A portion of the call in response to shareholder Richard Cabot's assertion that historically "Parlux Fragrances has not really been run for the benefit of shareholders."

Arguing that the company's stock is undervalued, Cabot continued: "I've spoken to many of the largest shareholders and a vast majority of them have felt that the best strategy for shareholders would be the sale of the company. I spoke to [former CEO] Neil Katz several times about this in the past two years. The response was a poison pill."

The poison pill currently discouraging a takeover of the company can be found in provisions inserted into Parlux's agreement with Artistic Brands Development, Cabot suggested.

"You are quite probably right about that," Purches said. "I was not completely familiar with the Artistic Brands situation. I don't think that there's any way around that problem at this point in time."

Between 2005 and 2007, then-CEO Ilia Lekach and shareholder Glenn Nussdorf made separate attempts to acquire Parlux, but deals did not materialize (¹ (Also see "Parlux Investor Seeks Consent To Remove Board For Administrative “Failings”" - HBW Insight, 29 Jan, 2007.) and ² 'The Rose Sheet' July 24, 2006, In Brief).

Purches has served "continuously" at Parlux in various capacities - including chairman, vice chairman and board member - since founding the company in 1984. Prior to that, he was president and CEO of Helena Rubinstein/Giorgio Armani Fragrances.

He now has been tapped to step in as chairman and interim CEO of the Fort Lauderdale, Fla.-based fragrance marketer following the Jan. 26 resignation of Neil J. Katz due to "philosophical differences regarding the future direction of the Company."

During the Feb. 4, call, Purches noted that Parlux has gone through both "wonderful" and "difficult" periods - the current qualifying as one of the latter.

"The company has always recovered and prospered. ... I'm confident that we will return to profitability in the near future," he said.

Ill-Timed Investment Drives Losses

In its fiscal 2010 third quarter, Parlux posted a loss of $5.4 million, compared with a $4.5 million loss in the comparable period last year. Sales were up 6 percent in Q3 to $50.3 million, which included sales of existing GUESS fragrance products to Coty, which is now distributing the brand after Parlux's license agreement was terminated (³ (Also see "Sales & Earnings In Brief" - HBW Insight, 15 Feb, 2010.)).

"The primary problem" faced by Parlux was that under Katz's direction, it "embarked on a strategy of heavy investment targeted towards U.S. department store business with the objective of expanding [its] position and prominence in those stores," Purches said.

The investment was planned for the holiday season - typically the highest-selling time for fragrances. However, in 2009 the dismal economy had consumers eschewing department stores in favor of discount retailers, Purches noted. Those who did patronize department stores were hunting for sales and largely avoided fragrances, which are not discounted in that channel, he added.

Department store sales of Parlux fragrances plunged 30 percent in the third quarter. "We could not reduce committed expenditures quickly enough to overcome the economic malaise," Purches explained.

Parlux Slims Down To Celeb Fragrances Only

New Josie Natori , Queen Latifah and Marc Ecko fragrances have been successful and are expected to "cover a part of the void" from the loss of GUESS.

Parlux has not renewed and has no plans to renew fragrance licenses for XOXO , Ocean Pacific , Andy Roddick and babyGund , based on the firm's filings with the Securities and Exchange Commission.

That leaves solely celebrity and designer fragrances on Parlux's active roster - Paris Hilton and Jessica Simpson , in addition to its newest three. The firm also distributes Paris Hilton watches, cosmetics, sunglasses, handbags and accessories.

Paris Hilton scents have been standouts for the firm, pulling in $21 million in sales in the third quarter Sales of Jessica Simpson products reached approximately $9 million in Q3, while Queen Latifah, Marc Ecko and Josie Natori fragrances recorded sales of $6 million, $4 million and $600,000, respectively.

Launches slated for 2010 include Nicole Miller in the spring and Rihanna in July.

Rihanna will be launched with "full bells and whistles" and is expected to gross over $20 million, Purches said. It will be the first product introduction stemming from Parlux's agreement with licensing company Artistic Brands, which has Shawn "Jay-Z" Carter as a principal.

Struck last year, the partnership gave Parlux access to four celebrity R&B and hip-hop artists without having to extend a major signing bonus by offering them a share in profits and future royalties from fragrance sales (⁴ (Also see "Parlux Licenses Hip-Hop Artist Fragrances Via Profit-Sharing Deals" - HBW Insight, 20 Apr, 2009.)).

Parlux is in the final "creative negotiations" for a Jay-Z scent, which it expects to launch in April 2011. The firm initially planned a Kanye West fragrance for late 2010, but "for the sake of prudence" put that project on hold following the rapper's unpopular rant at the MTV Video Music Awards, Purches said.

"Kanye is effectively lying very low, but he is also winning a lot of awards and making hip-hop history ... so we expect that he will once again become a very, very viable property and we will slot him in as soon as we can," the exec said.

At the time of the deal with Artistic Brands, it was speculated that the fourth celebrity tapped for fragrance development would be Carter's wife, Beyonce, but she has since signed a deal with Coty.

"The fourth celebrity continues to be, for us at least, something of a black hole," Purches said.

"I would not like to hold out too much hope that that is going to be consummated in the next two years with the way things are. And in fact, it may never be consummated," the exec said. "But with the three celebrities that we have, we feel that we will generate a tremendous amount of business."

COO Frank Buttacavoli noted that the uncertainty surrounding the fourth Artistic Brands personality has little to do with Parlux. "This has always been in that celebrity's court and it continues to be and really it's pretty much out of our control," he said.

Firm Expects Recovery By FY 2011

Looking ahead, Parlux anticipates a 10 percent to 15 percent drop in fourth-quarter sales, mostly attributed to the "GUESS gap." GUESS sales in the firm's fiscal 2009 fourth quarter reached $8.5 million, a sum Parlux does not expect to make up this year.

The firm expects to post losses for the fourth quarter and fiscal 2010 year, which ends March 31. Purches estimated that sales for the year will total approximately $150 million.

Sales in 2011 will be lower, though the firm will return to profitability, the exec forecasted.

Parlux expects new Paris Hilton and Jessica Simpson fragrances to hit department stores later in the calendar year.

"We will continue to invest in our existing brands and we'll aggressively seek further growth opportunities," Purches said. "That means new licenses, new businesses that may currently be in existence or anything else that we feel will reasonably provide us with growth and profitability."

Though it plans to "moderate" its launch pace with fewer fragrance introductions, Parlux will look for "high-visibility people whom we can effectively tie a fragrance to," as well as more opportunities posed by luxury jewelry brands that have "cache" and can have profitable fragrances built around them, Purches suggested.

Parlux has approximately $15 million in cash on hand, according to CFO Raymond Balsys.

- Lauren Nardella ( ⁵ [email protected] )