Market Spotlight: Fragrance Makers

Amid a difficult retail environment, fragrance makers could provide investors with a breath of fresh air.

Consumers are cutting back on discretionary spending as home values decline and food and gas prices remain high. But earlier this month, as retailers reported May sales in stores open at least one year, fragrances were strong sellers. Luxury retailer Saks Inc., for example, said fragrance was among its top performing categories.

But it's not just a luxury retail trend. Fragrances sell well in mass channels such as Wal-Mart Stores Inc. and drugstores, analysts say, particularly as the holiday season approaches.

"In whatever environment, consumers have to buy something for the holidays," said Buckingham Research group Alice Beebe Longley in a note to investors on June 10. "Mass fragrance is an affordable luxury, a good contender to gain share of holiday gifts in tough economies."

Wedbush Morgan Securities analyst Rommel T. Dionisio, for one, recommends fragrance maker Inter Parfums Inc. to investors.

The New York company makes perfume under mostly apparel brand names, including Gap and Burberry.

Last month, Inter Parfums reported first-quarter profit rose 50 percent, while revenue jumped 45 percent, as it launched a new fragrance from apparel label Burberry. Shares are up 23 percent from the beginning of the year, excluding a stock split.

Parlux Fragrances Inc., meanwhile, earlier this month reported that profit for the fiscal year ended March 31 rose 75 percent, while revenue rose 14 percent to $153.7 million.

Dionisio rates Inter Parfums' rival "Hold." The company last week said it was experiencing inventory shortages that will hurt fiscal first-quarter sales, but said fiscal-year sales overall should not be affected.

The Ft. Lauderdale, Fla.-based company added sales of its Guess? and Paris Hilton fragrances have been very strong. Since the beginning of the year, Parlux shares have risen 22 percent.

Other notable fragrance makers include Miramar, Fla.-based Elizabeth Arden Inc., which also makes beauty products and cosmetics.

The company makes fragrances for Elizabeth Taylor, Mariah Carey and Britney Spears, and just inked a deal with Liz Claiborne to distribute its fragrances, including Juicy Couture, Usher and Lucky Brand.

While shares are down 25 percent for the year, mainly due to a disappointing third-quarter earnings report in early May, on Tuesday Oppenheimer & Co. analyst Joseph Altobello upgraded the stock to "Outperform."

He said the share price doesn't reflect gains from a licensing agreement or a restructuring plan. Altobello expects revenue to improve in coming quarters.

While no company is immune to a weak environment, fragrance makers with a compelling product can weather the environment, analysts say.

"Fragrance is just viewed often as somewhat of a non-discretionary purchase," Dionisio said. "People use makeup and fragrances and don't stop doing that when times are tough."