A Scary Halloween for Bare Escentuals

Well, I hate to say "I told you so," but … well let's just say I was very bearish on Bare Escentuals (Nasdaq: BARE  ) in July, and the company's third-quarter results today seem to bear out the concerns I lined up.

True, the company did manage to grow net income by 12% to $22.9 million, or $0.25 per share. But its revenue grew a measly 3% to $130.2 million. That's a major deceleration from last quarter, when it grew revenue by 11.6%.

Given my bearishness in July, I suspected analysts might suffer overconfidence on Bare Escentuals. What I find more significant -- and disturbing – is that its inventory continues to far outpace sales, surging 53% in the quarter. And of course, it still has what many might consider an onerous amount of debt, which can be dangerous when sales slow down considerably.  

Striking even more fear into investors, Bare slashed its guidance, saying it now only expects 10% sales and earnings growth in 2008. That sounds like the growth rate for a fairly mature company, not the fast grower many expected Bare Escentuals to be.

Personally, I don't buy the argument that Bare can keep growing at a heady pace over the long term (and I mean even after consumer spending revives). It may have carved out a niche with mineral makeup, but the rest of the industry has absolutely caught on. Estee Lauder (NYSE: EL  ) , Avon (NYSE: AVP  ) , Mary Kay, Johnson & Johnson's (NYSE: JNJ  ) Neutrogena, and many, many more have mineral makeup now, available in a variety of locations with price points for every budget. (I wouldn't underestimate Avon or Mary Kay, either, especially in a down economy in which many women may try selling those cosmetics to friends to make some extra cash.)

Meanwhile, although Bare Escentuals does enjoy distribution through cosmetic retailers Sephora and Ulta (Nasdaq: ULTA  ) , it's worthwhile to note that both also have their own brands of mineral makeup available, too.   

That's my biggest concern about Bare Escentuals: what I perceive as a major lack of a competitive moat. Come on, at the very least, some of those competitors -- many quite formidable -- can do mineral makeup just as well as Bare Escentuals can. And with the consumer suffering, I don't believe it's a sure thing that women will stay very brand loyal when they're on a budget. There are plenty of cheap stocks out there; Bare Escentuals still strikes me as way too risky despite its battered stock price. And last, I need to get this off my chest: Um, "Escentuals" is not a word.   

Buff on some related Foolishness:

Bare Escentuals has been recommended by both Motley Fool Hidden Gems and Motley Fool Rule Breakers. Johnson & Johnson is a Motley Fool Income Investor pick. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (10)

Comments from our Foolish Readers

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  • Report this Comment On October 31, 2008, at 11:39 PM, disaster2008 wrote:

    Ms. Lomax:

    You seem to be forgetting about current share price. With that in mind, it doesn't really look that bad at all. In fact, it looks good. Business is down a bit as can be expected given the economy and people delaying purchases when they can, but earnings and revenue are still strong and they are generating cash. The stock is selling at an all-time low at about 4.00 at the close today, off a 52-week high of about $30. Seems way oversold, but it's up 8.5% in after hours - so someone get's it!. Plus, management is effective (high ROA) and they are already working on leaning up the company to deal with the downturn to maintain profitability. It could also be a possible acquisition target with its established brand and distribution channels. Besides, I don't know much about makeup, but the women I know tend to stick with their brands, and take care of themselves no matter how much it costs. Seems like a real bargain to me - could easily quadruple your money in 1-2 years with little downside risk. All this makes me bullish on this. I bought in today a $4.00. We''ll see where it is in two years: $15-25/share, I bet. Buy some shares here and and relax for a couple years.

    cK

  • Report this Comment On November 02, 2008, at 12:54 AM, disaster2008 wrote:

    Dear Ms. Lomax,

    I would like to add that it seems to be an unfortunate trend that, in general, Motley Fool articles are very limited in scope. Typically only a fraction of the relevant parameters are taken into consideration when assessing a company's prospects and analyzing its stock.. For example, concerning BARE, with the current economic trends, who really cares about your past prediction concerning the company's high--growth prospects, given that few companies are experiencing high growth at this point, and that BARE is now a huge value opportunity? In other words, what really matters to investors are the opportunities that present themselves at this time, and not what expectations were in the past.

    cK

  • Report this Comment On November 02, 2008, at 10:20 AM, scott0807 wrote:

    These pop-up articles do not show indepth analyses, although i have no doubt that Ms Lomax did due diligence before publishing her opinion. there will always be opposing views on particular stocks. TMFBent recommended this stock in HG recently, while at the same time TMFLomax was bearish. so...who to listen to? i say both. clearly, two of the brightest minds around (Alyce and Seth) both of whom have made their respective cases. fact is, you won't know who is correct for another 3-5 yrs. :) scott (no position in BARE, but plenty of other positions down >40%).

  • Report this Comment On November 02, 2008, at 11:58 AM, TMFLomax wrote:

    Hi guys -- thanks for the feedback. cK -- it's true, one could argue it's cheap at this level, even with the lower expected growth in the near term, and you're also right, many companies are feeling the macro pain. But I believe it's particularly risky, which is why I said at the end that I feel there are other cheap stocks that aren't quite as risky. That's because I personally just don't buy the long-term growth story with all that competition to boot. That's why I felt compelled to mention my concerns last quarter (I felt very strongly about them) and how they seem to be borne out... they seem very pertinent.

    Which brings us to Scott's post, which is very much the essence of Foolishness -- take in the different opinions and weigh them and decide which side you come down on and whether the particular stock is right for your portfolio. It's true, the real offing is the long term, 3-5 years, maybe even more for some of us, for some stocks. I don't labor under the assumption I'm always right, particularly in the near term (there are plenty of stocks I've stayed bullish on that certainly, so far I have not been correct!). And I have utmost respect for Foolish colleagues like Seth who have liked this stock. Seth has great investing acumen. I just don't happen to agree on this one. Basically I just find the competitive landscape almost overwhelming for it, and don't even buy the "customer loyalty" aspect, especially in a downturn. But bottom line, weighing opposing views makes us all better investors.

    Thanks for the comments, and Fool on!

    Alyce

  • Report this Comment On November 03, 2008, at 12:27 PM, disaster2008 wrote:

    What? Seth is bullish on BARE? Then I am taking my over-the- weekend 10 percent gain and getting out of this one! Well, maybe I will chance it and wait until I make 20 percent near the end of this week. : ) Since the bottom is going to fall out of the market again in the next several months, I will probably have a chance to repeat the purchase and hold.

    P.S. I see that some of the illiterate hacks and quacks from the Yahoo message boards have made their way over here.

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