Strong IPOs for Bare Escentuals and Shutterfly

Both companies saw big first-day trading gains. But analysts question whether one of the two can continue to boost profits consistently

A strong week for initial public stock offerings closed Friday with strong first-day trading gains for Silicon Valley–based online photo service Shutterfly (SFLY) and cosmetics company Bare Escentuals (BARE), as investors placed bets that the fast-growing companies can sustain profitability.

Shutterfly, which lets consumers upload digital photos and buy prints and photo-themed merchandise, traded late Friday at $15.55 a share, up 55 cents from the $15 per share offer price. The JPMorgan-led deal had priced at the high end of its pre-IPO range and traded as high as $16.73 during the day.


  But the real star of the day was San Francisco–based Bare Escentuals, whose 88% a year revenue growth since 2001 and 30% operating margins sparked much higher interest. The Goldman Sachs–led deal priced at $22 a share, well above the expected $16 price, and traded as high as $29.10 before settling 23% higher at $27.15 late in the day.

"It's kind of a hypergrowth story, similar to UnderArmour," said Sam Snyder, an analyst at Renaissance Capital in Greenwich, Conn., a boutique firm that follows the IPO market. Athletic apparel maker UnderArmour (UARM) has seen its stock soar since its November, 2005, IPO and now has a market cap approaching $2 billion.

The offering price valued Bare Escentuals at about $1.9 billion. In the first half of 2006, the company had $186 million in sales and net income of $25 million. Snyder says the company has held down its operating expenses by selling heavily through infomercials and on cable-shopping channels in addition to selling through more than 300 stores including 30 company-owned boutiques, as the company reported in filings with the Securities & Exchange Commission. "It's phenomenal for an early-stage company," Snyder says.


  Shutterfly's relatively high offering price and first-day trading success was more surprising. The company has been growing rapidly, reporting $36 million of revenue for the first half of the year and $83.9 million for all of 2005. The problem with Shutterfly is that cash flow has been rising only about as fast as the company's sales, hampered by heavy investment in new production machinery, Snyder says.

The Redwood City (Calif.) company is shifting much of its emphasis to selling merchandise like mugs and sweatshirts with pictures on them, as the business of selling 4- by 6-inch prints gets ever more competitive. "If they can continue to compete well on the merchandise side of the business, they can have some good growth here," Snyder added.

But the investment led some investors to question whether Shutterfly can boost profits consistently, especially as it confronts stiff competition from rivals Eastman Kodak (EK), Yahoo! (YHOO), and Hewlett-Packard (HPQ), who run competing online photo services to complement their businesses selling digital cameras and printers (see, 6/29/06, "Shutterfly's IPO Isn't Picture Perfect"). "They all offer the same things, and Shutterfly (merchandise) is priced at a bit of a premium," Snyder says. "I don't know how defensible it is."

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