Elizabeth Arden's Growing Allure

Investors bid shares of the cosmetics company higher Friday following an analyst upgrade

Elizabeth Arden (RDEN) had a rough time selling its cosmetics in recent months. Customers like the retailer Wal-Mart (WMT) cut down on inventory in early 2006. Federated Department Stores (FD) stopped making orders too, as the owner of Macy's and Bloomingdale's integrated its business with May Department Stores. Meanwhile Elizabeth Arden was dealing with its own acquisitions. But now the New York company is seeing light at the end of the tunnel. Investors bought Elizabeth Arden shares on Feb. 2 after news of its better than expected quarterly results.

Net income for the three months ended December 31 fell 21.8% to $25.9 million. But sales gained 18.8% year over year to $410.8 million during the quarter. "We are pleased with our second quarter results and the general execution of our business," said CEO E. Scott Beattie in a press release late Feb. 1. "Overall, the recent acquisitions are performing ahead of our original expectations."

After acquiring the fragrance maker Riviera Concepts in June 2006, Elizabeth Arden started selling more new brands to its retail customers. Meanwhile skin care and color products sales grew in places like China and Taiwan. The company also bought the fragrance distributor Sovereign Sales in August. Elizabeth Arden now expects net sales in fiscal 2007 to rise by around 15% to 18%. It says fiscal 2007 earnings per share will range between $1.15 to $1.20, compared to previous guidance of $1.10 to $1.20.

In one example of how analysts responded to the news, Standard & Poor's Equity Research hiked its forecast on the company's earnings for 2007, bringing a 12-month target price up by $2 to $21 per share. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.) Investors bid up the stock 5.9% to $20.50 per share on the Nasdaq Feb. 2.

"The worst is behind them," said SunTrust Robinson Humphrey analyst William B. Chappell, Jr., CFA. He raised his rating on the stock to buy from neutral on Feb. 2, explaining that the Wal-Mart de-stock and Federated transition are both complete now.

Meanwhile Elizabeth Arden's integration of Riviera Concepts and Sovereign Sales appear to be moving ahead of schedule. The company consolidated its distribution warehouses in the second quarter and should complete the integration of finance and information technology in the third, leading to earnings growth by the fourth. "Looking forward to FY08, the company will not only be lapping the integration charges, it should also see the synergy benefits of the acquisitions," Chappell said in a research note Feb. 2.

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