Does the recession mean women are going au naturale?

Posted Jan 21st 2009 1:00PM by Jamie Dlugosch
Filed under: Earnings Reports, Estee Lauder (EL), Avon Products (AVP), Recession

Elizabeth Arden's (NASDAQ: RDEN) stock has been shellacked in the last couple of days, continuing a decline that began shortly after it reached a 52-week high of $21.79 in September 2008. RDEN has reached a nine-year low in price at $5.95.

The recent action in the stock should come as no surprise. With retail sales continuing to sour and mall traffic becoming more like Sunday services attendance on a beautiful summer day, it could hardly come as news that Elizabeth Arden would issue a negative earnings alert ahead of the company's second-quarter release of financial results scheduled for Friday.

Cosmetics and fragrances are some of the most discretionary of purchases with the widest range of price points. Consumers have the option of purchasing a less expensive brand or delaying the purchase until a better time. As a result, cosmetic products have reached a historically peak inventory level.

For Elizabeth Arden, those inventory numbers are further evidence of the earnings stress facing the company.

While cosmetics still are among the highest mark-up items in department and drug stores, the overhanging inventory will result in price slashing and production cutbacks. Earnings will suffer additional blows at Arden, as well as other cosmetic companies such as Estee Lauder (NYSE: EL) and Avon (NYSE: AVP).

Particularly disappointing at Elizabeth Arden this past season were the travel retail and distribution markets, which weakened considerably as a result of business and personal travel cutbacks. Additionally, Arden's prestige department store sales were severely reduced due to the combination of consumer reluctance and general reductions in mall traffic.

Along with the negative earnings alert issued by the company, research analysts at several firms lowered their forecasts for the company's earnings for the coming year. The adjustments in expectations came after Elizabeth Arden revised its second-quarter earnings outlook to 72 cents to 76 cents from $1 to $1.10, and reduced its forecast for the second half of the year to 1 cent to 13 cents per share.

Given the company's history of profitable operations and strong leadership from management, it is tempting to view the current price of the stock as a bargain. Caution should prevail, however.

There should be no rush to buy RDEN, as it is unlikely that there will be a turnaround in price until later this year, especially since historically the cosmetics industry generates well over 50% of its sales and an even higher percentage of its profits during the holiday season.

Jamie Dlugosch is a contributor to OptionsZone.com.

Tags: AVP, consumer spending, ConsumerSpending, cosmetics, dlugosch, EL, elizabeth arden, ElizabethArden, featured, rden

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Reader Comments (Page 1 of 1)

1-21-2009 @ 1:46PM

Mike O said...

I have noticed my sister wearing little or no makeup lately. This is surprising since she used to put on so much that you could mistake her for an ICP clown.