Natural-cosmetics maker Bare Escentuals
Inventory has been a consistent problem for Bare Escentuals over the past year, as consumers cut back on their purchases. Management contends that it was at last able to get a handle on the problem, and that it now has the appropriate levels on hand with its partners. Thus, while inventory is some 26% above last year's level, it's down more than 5% from year-end numbers. I'd still like to see it fall even more.
If we look at the growth rates of inventory and sales, it's easy to see that the two are still widely divergent. That should caution investors not to become too enthusiastic about results:
Growth Rates, Y-O-Y
Metric |
Q1 09 |
Q4 08 |
Q3 08 |
Q2 08 |
Q1 08 |
---|---|---|---|---|---|
Sales |
(11.5%) |
1.7% |
2.8% |
11.6% |
21.4% |
Inventory |
26.1% |
55.2% |
53.2% |
45.4% |
17.4% |
Receivables |
(14.2%) |
2.5% |
25.3% |
31.3% |
0.3% |
Source: Capital IQ, a division of Standard & Poor's, and company filings.
So, yes, inventory management is moving in the right direction, but not enough to be consistent with sales. Management notes that "good inventory" -- work in progress -- is actually up, while "bad inventory" -- finished goods -- is down, and growth in Bare's receivables has been arrested. I'll still need to see more evidence before I'm convinced.
Part of the sales problem relates to the company's relationship with TV marketer QVC, a segment of Bare Escentuals' business that accounts for about a third of its revenue. This direct-to-consumer segment saw sales drop 27% in the quarter, primarily because it had half the hours on air that it did the year before. The firm has shifted programming hours later into the year, where it hopes for a better result.
Yet Bare Escentuals can't get past the decline of its North American retail segment. While revenue here dropped 6% in the quarter, rival Revlon
If Bare Escentuals can continue de-stocking its inventory to more appropriate levels, while introducing value products that might be more in line with economic conditions, it might at least provide a foundation on which to build sales. At less than 10 times trailing earnings, Bare Escentuals is way cheaper than Revlon, L'Oreal, and Estee Lauder
Although the firm didn't provide a cash-flow statement with its earnings release (we'll find out the details when it files its quarterly report with the SEC), management says it produced $17 million in free cash flow -- just greater than reported net income. If it can post another quarter where its cash flow exceeds its net income, and if the economy continues to slowly bottom out -- or so they say -- Bare Escentuals may yet be an essential investment again.