Parlux Needs Love

The past year has not been kind to Parlux Fragrances (Nasdaq: PARL  ) , as reflected in a stock that has lost nearly half its value over the past 12 months, and substantially more over the past 24. Parlux Fragrances' previously delayed results have now been released. Between its 10-K filing and the company's latest earnings conference call, we have more clarity on the current state of the business.

Sales for the year were up a respectable 26% compared to last year. The big stink isn't sales so much as margin performance. Gross margins were negatively affected, as a greater percentage of revenue for the year was derived from the international market, which is typically wholesale in nature and carries lower margins than products sold in domestic department stores like Macy's (NYSE: M  ) and J.C. Penney (NYSE: JCP  ) .

In the question-and-answer session of the call, management commented on the gross margin situation and indicated that one way the company will try to rectify the situation is by increasing sales in U.S. department stores. Unfortunately, management did not offer any specific guidance on the company's gross margins for the upcoming year or on whether it can come back near its historical range of almost 60%.

Selling, general, and administrative expenses were also hit hard. There are a number of reasons for this, including increased costs associated with a new distribution center in New Jersey and substantial litigation fees that accrued over the past year.

If there's good news to be found here, it's that the litigation costs are one-time in nature, and Parlux should begin to see some stabilization in its cost structure. For that reason, in the call, management indicated that they believe the company will return to "moderate" profitability by the end of the year, with its best-performing period coming in the second quarter ending in September. No earnings projection was provided, though.

One of the biggest challenges that Parlux faces is how it will replace the sales it lost when it sold its Perry Ellis (Nasdaq: PERY  ) business. Perry Ellis represented "one-third of sales volume," so it's evident that Parlux has a lot of ground to make up. According to its 10-K filing, Paris Hilton currently represents 56% of net sales and Guess? (NYSE: GES  ) is 37%. These two brands should continue to dominate, as new concepts are being released for each in the coming months. But the company does have high expectations for other licensed brands like Jessica Simpson and Maria Sharapova.

Parlux has definitely hit a rough patch over the past couple of years, but the worst appears to be behind it. As it attempts to build on core brands and stabilize costs, this may provide just the opportunity to take a closer look at this stock, particularly with its historically best-performing quarter just around the corner.

Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool's disclosure policy is a heady floral with Oriental undertones.


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