Sales Rise, Profits Fall at Bare Escentuals

2006-11-09 | 07:37

Bare Escentuals Inc., which develops and sells natural cosmetics, reported ower third-quarter profit, and a Bank of America analyst warned that Wall Street's 2007 profit target is too high. The news sent shares of the company down 6.5%.

The company, which went public in September, reported a 5% decrease in net income to $8.9 million. But revenue jumped 45% to $97.9 million from $67.6 million ago.

Looking ahead to the fourth quarter of fiscal 2006, the company expects sales to increase in the range of 28-33% over the year-ago quarter's level. The company anticipates sales for fiscal 2007 to increase between 18-22%.

Bank of America analyst April Scee initiated coverage of the company with a "Neutral" rating and $30 target price, saying the stock has quickly risen since its IPO. The company priced 18.4 million shares at $22 -- well above its proposed offering price of $15 to $17 -- and saw the stock close at $27.15 on the first day of trading, Scee said.

"Today the stock trades at over $30, more than 100 percent above the low-end of the original pricing range," Scee wrote in a client note.

Scee also said Wall Street expectations are much higher than the company's targets. The Street expects $1 in earnings per share in 2007, compared with the company's guidance of 81 cents to 86 cents per share.

"While not unobtainable, this expectation does require a newly public company to execute near perfectly while moving quickly in a tough competitive environment and to produce upside in most channels where it does business," Scee said.

SunTrust Robinson Humphrey analyst William Chappell initiated coverage of the company with a "Buy" rating and a $40 price target.

Chappell expects the company to gain from the all-natural, organic product movement, as its cosmetics are made of natural, crushed minerals without preservatives, oils or fragrances.

The analyst noted there have been several new entrants into the market including Johnson & Johnson's Neutrogena Corp., Physician's Formula, Avon Products Inc., and even Whole Foods Market Inc. Chappell said this may appear to inhibit Bare's near term growth potential, but he views new entrants as a positive for the company.

"We believe new players will energize the market, creating expanded consumer awareness for mineral-based products," Chappell said.