Will Elizabeth Arden Keep Going Downhill?

Does the second quarter suggest there's no hope for Elizabeth Arden?

Zahid Waheed
Zahid Waheed
Apr 20, 2014 at 11:00AM
Consumer Goods

There is no denying that intense competition and a slowdown in consumer spending have negatively affected the key players in the retail industry. Nevertheless, a few companies, like Nu Skin Enterprises (NYSE:NUS), successfully cushioned the blow and posted impressive results. On the flip side, Elizabeth Arden (NASDAQ:RDEN) and Coty (NYSE:COTY) weren't able to report healthy performances. Let's analyze Elizabeth Arden in detail before we take a look at its peers.

Second-quarter results
Elizabeth Arden posted a disappointing second-quarter performance as a result of declining sales from both its U.S. and international business. On an adjusted basis, excluding a one-time gain and costs related to repositioning and restructuring, earnings per share dropped by 32% to $1.08 per share. However, according to Bloomberg's data, the company beat analysts' expectations of $1.07 a share. Revenue tumbled 10.6% to $418.1 million.

North America: Net sales for North America dipped 13%. This was mainly attributed to weaker than expected retail sales in the holiday season, decreased traffic, and a higher volume of fragrances launched last year. Prestige retailers' performance was satisfactory and in-line with the expectations, while retail sales for Elizabeth Arden branded products grew by 4%.

International: Net sales at the company's International segment fell 5%; the decline was largely driven by weak performance in the European markets, where high discounts from peers kept the customers away from the company's stores. In contrast to Europe, Greater China performed pretty well.

What's cooking at Elizabeth Arden?
Last year, Elizabeth Arden got fragrance licenses for famous fashion brands like True Religion, BCBGMAXAZRIA, Nicki Minaj, and Justin Bieber. This was part of the company's long-term strategy to change its image to a more upscale cosmetics company. The initiatives are gradually starting to pay off as the company's retail sales at its flagship counter grew by 24% in North America, while it jumped 9% internationally. Many analysts are of the view that Elizabeth Arden's brand repositioning should be seen as an encouraging sign. Connie Maneaty from BMO Capital Markets said, "The Elizabeth Arden brand repositioning, the largest opportunity in RDEN's history, remains on track, and is gaining momentum."

After posting weak results in the quarter, Elizabeth Arden is trying to revamp its sales. Recently, the company launched its Elizabeth Arden Rx skincare line that will be available only in physician offices. This launch is in line with the company's strategy of growing through selling its products across professional skincare market, spa, and prestige retail.

US CosmeceuTechs, a skin care company that develops products for professional dermatologists, has designed the new Elizabeth Arden Rx skincare line. In 2005, Elizabeth Arden partnered with Joe Lewis (the CEO of US CosmeceuTechs) to launch Prevage, which won more than 160 international beauty awards. Lewis is renowned for introducing some of the world's most famous skincare ingredients like Idebenone, Alpha-Hydroxy, and CoffeeBerry. Regarding the partnership, Joe Lewis said that USC's R&D technology combined with Elizabeth Arden's aesthetic formulation expertise will not only prove fruitful for physicians and skincare professionals, but for patients as well.

Elizabeth Arden has lowered its full-year EPS guidance from $2.55-$2.70 per share to $2.30-$2.50 a share. Analysts at Thomson Reuters anticipate per-share earnings of $2.66.

Industry peers
Beauty care manufacturer Coty reported awful earnings in its most recent quarter. Besides high promotional activities from peers, prevailing softness in the U.S. market -- especially in mass fragrances and nail categories -- contributed to anemic sales for the company. Earnings tumbled 33% to $0.21 per share, missing analysts' forecast of $0.29 a share. Revenue also slipped to $1.32 billion; color-cosmetics declined by 9%, while sales for Fragrances and Skin & Body Care dropped by 2% and 1%, respectively. Coty has recently announced a partnership with Piaggio Group to develop and distribute a new line of fragrances for both men and women under the brand name Vespa.

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Nu Skin, unlike its rival Coty, posted a spectacular $2.02 per share in earnings, compared to $0.97 a share in the year-ago quarter. The company's sales grew by a whopping 82% year over year to $1.06 billion. Analysts at Thomson Reuters forecasted earnings per share of $1.99 on sales of $1.07 billion. Earlier this year, the company was accused of illegally selling and making unjustifiable claims about its products in China. However, it managed to settle the probe by agreeing to pay $540,000 in fines to the government. With this, the company is expected to resume its normal business activities in the country and reap healthy returns from a profitable Chinese market that accounts for 32% of the company's total sales.

Final thoughts
Elizabeth Arden's latest quarterly result wasn't up to the mark. The only bright spot during the quarter was the company's retail sales at its flagship counters, which is why many analysts are still hopeful about the company's recovery. Altering the company's brand image will work, but it needs more time before having a real impact on earnings. The company's latest deal with US CosmeceuTechs will prove to be fruitful, but it will also take time before generating sizable income. 

The company's share price has gone down by more than 30% during the last 52 weeks. However, from the recent retail sales' data, it can be said that the worst is over for the company. Considering that the company needs more time to recover, I remain neutral on Elizabeth Arden at this point.