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Friday, August 21, 1998
Allou Health & Beauty
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Phone: 516-273-4000
Website: www.fragrancecounter.com
Price (8/20/98): $6
HOW DID IT FIND TROUBLE?
If Allou could bottle investor indifference, its stock would be soaring. The sleepy yet dependable distributor makes scents and cents. But there is also a wild side to this steady profitmaker: its online Fragrance Counter.
The company started Fragrance Counter in 1995, selling direct to America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> users and then launching its own website.
The makeover has made the distributor cum e-tailer alluring, sexy, but ultimately nothing but trouble. By landing exclusive advertising agreements with top Internet sites like Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> and Excite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %>, it has given shareholders the volatility of a second-tier Internet stock.
While that has meant some great runs that would never had been possible without the virtual storefront, it has also given the stock lows after the Internet highs wear thin -- as has been the case since the last ride in late April.
BUSINESS DESCRIPTION
Allou, which hails from New Jersey, is a distributor of fragrances, cosmetics, and non-perishable food items to independent drug and convenience stores. The company also owns a pair of e-tail sites at fragrancecounter.com and the recently launched cosmeticscounter.com.
FINANCIAL FACTS
Income Statement
12-month sales: $305.6 million
12-month income: $4.6 million*
12-month EPS: $0.75*
Profit Margin: 1.5%
Market Cap: $39.6 million (on 6.6 million shares)
(*Excluding charges)
Balance Sheet
Cash: $0.05 million
Current Assets: $168.4 million
Current Liabilities: $124.4 million
Long-term Debt: $1.4 million
Ratios
Price-to-earnings: 8
Price-to-sales: 0.13
HOW COULD YOU HAVE SEEN IT COMING?
Allou's sweet-scented spring rally came on the heels of a never-ending string of sponsorship deals. First it became the exclusive fragrance vendor on America Online, knocking online competitor and discounter FragranceNet out in the cold. Then came the search engines with Excite, Lycos <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> and Yahoo! all coming to terms with Allou to promote Fragrance Counter.
While logic would dictate that these are non-events, that the e-tailers are naturally paying more than a fair price for exclusive advertising rights, the market has a habit of moving the vendors higher on deal announcements -- as was the case last year every time Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> found a new source for its marketing funds.
The afterglow was in the numbers. Over the past year, Allou's efforts, mostly through America Online's link, had produced 2 million visitors purchasing $0.9 million in perfume bottles. Once the company had lined up the four heavies, it announced that it expected that number to catapult to about 14 million browsers a year. That may sound impressive, but if last year's trends were to continue, that would only translate into annual sales of $6.3 million. That's not much considering that America Online alone is getting $3 million of that for each of the next four years.
With the economics pretty much ruling out online profitability in the near term, and considering that those $6.3 million in revenues paled in comparison to the more than $300 million in trailing sales for Allou, it was easy to see that the stock's April scamper to $16 was over ambitious and destined to smear.
WHERE TO FROM HERE?
If beauty is skin deep, then maybe this is nothing more than a flesh wound. As a distributor, Allou's valuation smells pretty good here. One whiff and you find a company with a market cap that is just a fifth of trailing revenues and a P/E multiple cheapie at 8 times trailing 12-month earnings.
Naturally, with a slow growth, low margin business you wouldn't expect significantly higher valuations. But there is still some room for stock price appreciation -- even before considering the online sector that Wall Street finds so alluring one week and then so rank the next.
But it is also Fragrance Counter and Cosmetics Counter that offer an unusual upside. Sure, we've gone over the dire extrapolations of the advertising expenses relative to sales generated. However, while both sites are amazingly slick, they are nothing more than online shops right now. Eventually, they could become content destinations, drawing surfers searching for everything from fashion show news to makeover pointers, increasing sales and leading to the possibility of outside ad revenues. After all, 14 million visitors a year are too many eyeballs to waste on trying to maintain a paltry $0.45 sale per capita.
Calvin Klein, the maker of Obsession, has the perfect scented water for Allou -- Contradiction. This is the plain and the sexy all in one. For the Foolish investor who is patient enough to buy low and avoid chasing Allou during its brief popularity spells, this could turn out to be a beautiful investment in the long run.
-Rick Aristotle Munarriz
([email protected])
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