Bare Escentuals' Makeup Runs

One brand. No moat. Tons of competition. That's why I lost interest in Bare Escentuals' (Nasdaq: BARE  ) stock awhile back. That also seems to be the conclusion some investors are coming to today, seeing how its shares have plunged more than 30% since its quarterly earnings report.

Net income increased 22% to $24.7 million, or $0.26 per share. Revenue increased 11.6% to $138.6 million. Those figures might not sound too bad, but bear in mind that Bare Escentuals gave slightly less rosy guidance for the year than Wall Street was expecting.

There may be other troubling signs. Bare Escentuals' inventory surged by 45% on a year-over-year basis, surpassing its sales increase. Accounts receivable also increased 31%. In the conference call, management said the inventory growth was because it brought kit assembly operations and fulfillment in-house, which it says will provide "greater quality and flexibility at a lower overall cost." It also said the growth in accounts receivable reflected growth in the wholesale channel.

Of course, a major inventory buildup evident at Crocs (Nasdaq: CROX  ) last fall started giving hints that turbulent times were ahead, even though management insisted everything was going according to plan. It's a situation that bears watching.

Last but not least, Bare Escentuals' significant debt load bugs me. It has nearly $250 million in debt, and just $31 million in cash.

Meanwhile, competition is stepping up at a rapid pace. I noted months ago that you could find similar products at the drugstore (such as L'Oreal's "Bare Naturale," Revlon's (NYSE: REV  ) ColorStay Mineral Foundation, and Johnson & Johnson's (NYSE: JNJ  ) Neutrogena's "Mineral Sheers"). Then I noted seeing "Sheer Cover," which also does the infomercial circuit.

I recently visited Prescriptives' website (one of Estee Lauder's (NYSE: EL  ) many brands), and noticed that it was advertising its very own version of mineral makeup ("Good for you. Good for your skin." Ahem). Do a Google search for "mineral makeup." You'll see.

Add in the rough consumer climate, and I think it's a pretty terrible time to invest in an upstart makeup brand that was born of infomercials, has attracted all manner of copycats, and may very well prove to be a makeup fad. Given all these factors, even with today's price drop, Bare Escentuals' stock doesn't look like a beautiful -- or particularly safe -- long-term stock idea to me.  

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Crocs is a Motley Fool Hidden Gems Pay Dirt pick. Johnson & Johnson is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletters today, 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 (4) | Recommend This Article (14)

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  • Report this Comment On July 31, 2008, at 5:03 PM, rlp1966 wrote:

    My wife tried their makeup and says that it clogs the pors. Apparently, glogged pors are not good.

  • Report this Comment On July 31, 2008, at 9:31 PM, MotherKrucker wrote:

    Bare Escentuals make-up differs from all of it's competitors in that it is completely natural. That is a big difference. We sell BE in our independent apothecary and it ROCKS the register. The author needs to know more about the products BE makes and what the competitors are actually selling before she jumps to any conclusions.

  • Report this Comment On August 01, 2008, at 2:43 AM, veritas102 wrote:

    Bare Escentuals is the number 1 color cosmetics line at Sephora. Sephore is the "Mecca" for Beauty product. You will notice in every store it is the first brand that you see when entering the store. This only happens when a brand not only produces high sales per square foot but is highly profitable for the retailer as well. Sephora is a growth company and brands like Bare and Philosophy will ride along and carry their weight as the brand acceptance by end users is high. This product line has one of the highest repeat business take aways that I have seen in over 30 years of retail.

    The customer gets a premium product line at an attractive price as the marketing model for this company is income producing rather than a cost center. Most cosmetic brands have a huge marketing cost to absorb in the value chain of the product. Bare uses informercials and QVC to develop customer acquisition and bolster the brand awareness.

    The stream of new products is strong and there is an enormous potential in complementary skin care items via line extension opportunities.

    Leslie Blodget is a passionate CEO who is customer and product driven and is the number one spokes person for the brand and she is well known by her user base and has built a tremendous trust for the brand as the claims are tru7thful and you do not need to be a Hollywood makeup artist to successfully apply the product properly.

    I own this stock because of the Peter Lynch investment theory. Both of my daughters are long term users and convinced me that this is the best brand available at any price for color cosmetics and it is 100% natural this is important to the thinking woman consumer. No animal testing etc.

    The debt is heavy but manageable as the debt has been paid down already by a signifcant percentage on a year to year basis. The inventory growth does not bother me this is a much different story than Crocs who sells over priced plastic fad shoes. You can buy their knock offs in discount stores around $5.The knock offs on Bare's products are not that impressive on a price quality ratio so the customer who is using Bare will not change for a knockoff that a hollywood make up artist is selling for a high personal commission. This model does notadd to the value chain but rather encumbers it.

    While there are followers in the natural minerals line it is true the first flag down is Bare and this is usually a very defendable position over the long haul as long as innovation remains a driving force and the acquisition and retention customer models are managed well and in my opinion they are and I will continue to bet on this for the future.

    Infomercial business has reduced but there are some product tweaks and a new informercial that can address that and franly as a retailer i am more interested in their other channels growth. The informercial business as I said before is important mainly from a marketing, cutomer acquisition tool.

    Therefore I am loading the boat. Only areturn to the high teens will make this a good investment this has the potential to be a 3-4 bagger in in 2years in my opinion.

  • Report this Comment On August 02, 2008, at 12:08 PM, SammyDi wrote:

    I own a few thousand shares of BARE and am not joining in the recent sharp sell-off. First of all, there is always room in the beauty industry for another brand. Second, the knock-off products that have hit the market over the past year do not compare in quality or purity to Bare Escentuals, especially if you don't have perfect skin. And isn't that the main reason women wear makeup, to cover flaws? I have tried the competition and their products don't compare to Bare.

    I also don't believe Ms. Lomax is aware of the loyalty and buying capacity of the QVC shoppers who are eager to purchase their Today's Special Values on Auto Delivery. Though BE doesn't have many stores around the country, they have started to expand internationally. They also reach millions of shoppers via QVC and various websites on the internet. QVC offers BE kits not sold anywhere else and introductory prices lower than anyone else.

    It may take some time for the fanfare of the competition to fizzle out, but I believe it will eventually. So I will continue to hold onto my shares and believe the stock will rebound.

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