Friday, August 28, 2009

Smells Like Value

Parlux (PARL) originates, markets and distributes "prestige" fragrances licensed from celebrities. The company pays royalties to Paris Hilton, Kanye West and other celebrities to sell perfumes headlined with these stars' names.

While the company has been through some rocky times (its subsequently-departed president actually won the award of "Worst CEO" in 2006), the company appears to be back on track. Sales were up last quarter (year over year) in a very tough retail environment, and costs were lower. Sales are expected to be up this quarter as well, as the company has been hard at work bringing in new celebrity fragrances that augment and diversify its product portfolio.

It's not clear that customers will embrace PARL's new products. But what is clear is that PARL is priced such that investors don't have to pay for these profits: the company trades for just $40 million, while it has net current assets of $100 million.

The company does, however, have some risk factors to consider. For one thing, it is owed $10 million by a related retailer that has defaulted on some payments. Furthermore, its rather large inventory of GUESS products ($20 million+) may have to be destroyed if not sold in the next six months. The company has also maxed out its current loan agreements (at $6 million) and is trying to find a new source of debt financing. Finally, while there are just 20 million shares outstanding, there are warrants outstanding for another 5 million shares.

Despite these risks, the market appears to have overpunished this stock. A reading of the notes to the financial statements reveals that 4 million of the outstanding warrants have a strike price of $5, meaning the current price would have to more than double before current shareholders are affected. Furthermore, even after writing off all moneys owed by Perfumania ($10 million) and all inventory related to GUESS ($20 million), the company still offers investors a generous margin of safety. While it's not neccessary that the company execute successfully on its new brands in order for the current shareholder to be rewarded, such success could serve to generate outstanding returns at the current stock price.

Disclosure: Author has a long position in shares of PARL


heterocedastico said...

I also have a position on this company on the expectation that it is a net-net and there for a very safe bet protected by its assets and with a reasonable margin of safety but with some prospects of becoming a earnings or growth stock with this agreenment they made to offer fragrances with the names of Kanye West and Rihanna. Indeed the warrants you speek of were part of the agreenment with Iconic Fragrances, LLC in which entertainment mogul and icon Shawn "JAY-Z" Carter is a principal, to commercialize those fragrances. Definitely a low risk high uncertain but probable high return investment!

luisitoahumada said...

Thanks for the interesting idea. Sounds very compelling. I have a general question on the warrant issue. Normally when I analyze stocks I do my analysis using market cap figures that are calculated by multiplying total outstanding shares * stock price, plus I evaluate firm wide levels of cash & debt to reach an estimate of the firm-wide Enterprise Value. I then proceed to estimate normalized EBIT and or FCF to the firm. After reading your posting I realized that my approach would overlook the warrant issue. How would you incorporate the outstanding warrants in a EV / firm level analysis? Should you take fully diluted shares and multiply that number times the price to reach a higher market-cap figure? I am not sure if I am being clear on the issue or not. I just am not used to analyzing stocks on a per share basis, so I was wondering what the right way to account for dilution issues would be? Thanks again for your all your great postings. One of the best blogs I've read! Keep up the good work!

Saj Karsan said...

Hi Luis,

One way to do it is to value the outstanding warrants, and subtract this value from your equity valuation, thereby treating these warrants as a liability.

heterocedastico said...


What do you think of recent developments, considering the possibility of takeover?

Isn't there a poison pill to prevent this?


Saj Karsan said...

Hi Hetero,

I think it took long enough! Acquisition of shares by potential buyers has been going on a while now. The talks are friendly, so any poison pill could easily be removed. I believe the biggest impediment would be the payout to warrant holders, but I believe that provision expires in the next 8 months.

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