Monday, April 19, 1999

Allou Health & Beauty
Phone: 516-273-4000
Website: www.fragrancecounter.com
Price (4/16/99): $11 11/16


What sweet scent is this? Allou's alluring aroma is drawing in new investors like bees to a blossom. With the success of its online Fragrance Counter, this drugstore shelf stocker has become a trendy spray in stock market circles.

Allou didn't intend to earn this overzealous sniffing. Four years ago the company figured that the online world would be a more convenient way to distribute its wares than simply trucking them from store to store. The Fragrance Counter was born simply as an order-taking storefront on the user-friendly America Online (NYSE: AOL) service. Then came the website. Then came the investors.

However, equity success did not come overnight. It wasn't until last April, three years after the online counter's debut, that Wall Street first grew enamored of Allou's Internet-worthy business. Yet it was a scent that did not linger. By October a steep correction in the purveyors of online commerce sent the shares as low as $3 3/8.

Since then, the top has flown off the bottle and the stock is back in vogue. With big online commerce deals struck with the more popular portal sites, Allou is grabbing the eyes of Internet users -- in hopes of tempting their noses.


New York-based Allou is a distributor of fragrances, cosmetics, and non-perishable food items to independent drug and convenience stores.

The company also owns a pair of e-tail sites in fragrancecounter.com and last year's launch of cosmeticscounter.com. Together the sites offer more than 2000 brand-name fragrance and beauty items. Visitors receive free shipping and gift-wrapping on their purchases.


Income Statement
12-month sales: $325.1 million
12-month income: $3.3 million
12-month EPS: $0.51
Profit Margin: 1.0%
Market Cap: $76 million

Balance Sheet
Cash: $0.5 million
Current Assets: $205.1 million
Current Liabilities: $151.4 million
Long-term Debt: None

Price-to-earnings: 22.9
Price-to-sales: 0.23


Few investors may make the connection between Allou and its glitzy e-commerce sites. However, the company has certainly made it difficult to miss The Fragrance Counter. While it once shared an America Online storefront with a smaller perfume deep discounter, it went on to pay $12 million to the online services giant to serve as the exclusive fragrance vendor and boot its rivals out.

Over the past year it has also set up a similar competitor-free deal with Excite (Nasdaq: XCIT). On Yahoo! (Nasdaq: YHOO) the company is not alone, but it is a "premier" merchant on the world's most popular portal giving it unusually high visibility in category areas and keyword searches. To complete the quest for eyeballs, the company has also set up shop on Microsoft's (Nasdaq: MSFT) MSN Shopping site.

This news is as ancient as a Brut and Old Spice neckline cocktail. However, the real puzzler here is why the shares fell so far in October's correction. The last time the company had traded that low was in 1991. Even before the company inherited its online edge, Wall Street still managed to value its distribution business worthy of a share price in the high single digits. It was easy pickings for a bounce back even if The Fragrance Counter was dismantled -- which it wasn't.

The fact that the shares were trading for almost a third of Allou's book value back in October, when most of the assets on the company's balance sheet are price stable inventory items, was a value investor's dinner bell waiting to be rung. And it rang.


Are there dollars in scents? Earlier this month Internet Stock News added the company to its "Ones to Watch in 1999" list. However, the online stock service is actually owned by IP Equity, which Allou had hired as its investor relations firm just the week before.

Despite this, Allou seems genuinely worthy of the praise. With its two online storefronts the company owns the most popular Internet boutique. It was a savvy move when the company, realizing that it was winning over so many eyeballs with The Fragrance Counter last year, launched its Cosmetics Counter to set up those eyeballs with eyeshadow and eyeliner.

The key here is to not fall into the trap of thinking that Allou's revenues are Internet based. In the December quarter, just $1.5 million of the $89.5 million in reported revenues came from the online subsidiaries. Sure, online sales surged 291% and the company has continued to grow through creative promotions and expanded visibility, but that is still a small part of the whole company. A spin-off is always a possibility. That would probably unlock even more value in the company, or at the very least make sure its distribution-based business doesn't get marked down so unreasonably cheap again -- and make the eau de Allou even harder to resist.

-Rick Aristotle Munarriz

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