Department Store Weakness Hinders Arden

Cosmetics and perfume company Elizabeth Arden Inc. on Wednesday said fiscal year sales would linger around the low end of previous estimates, as weak department store sales take a toll on results. The weaker-than-expected sales were mainly a result of the dismal performance of beauty products in U.S. department stores, the company said on a conference call. Department stores have struggled to hold on to market share as consumers defect to lower-priced retailers in the slumping economy.

For fiscal 2003, which ends in January, the company said it now expects net sales of $735 million to $745 million, down from its previous estimate of $735 million to $775 million. Earnings before interest, taxes, depreciation, and amortization expectations should be in the range of $95 million to $100 million, the company said, lowering its previous high-end estimate by $5 million.

Third quarter earnings increased, however, helped by an “open sell” format, which allows consumers to purchase makeup and fragrances without sales assistance. For its third quarter ended Oct. 26, Elizabeth Arden reported earnings of $37.7 million, or $1.64 per diluted share, compared with $33.4 million, or $1.48 per share, a year ago.

“If the department store business is weak, Elizabeth Arden loses market share, but that’s been more than offset by strength in mass and mid-tier retailers,” said Gary Giblen, research director at C.L. King and Associates.

Miami-based Elizabeth Arden markets fragrances such as Elizabeth Taylor’s White Diamonds, White Shoulders and Halston, and the Elizabeth Arden skin care line. It sells its products at high-end department store cosmetic counters and lower-prices locations like Wal-Mart Stores Inc. and J.C. Penney.

Ultimately, cosmetics are seen as an affordable luxury, and fairly recession resistant.

“It’s a small-ticket indulgence,” Giblen said. “You may cancel a trip to Europe but you can make yourself feel better with a new fragrance…and things like lipstick and makeup are basic to appearance and maintenance.”

Net sales for the third quarter rose 10 percent to $314.8 million, while EBITDA rose to $75.5 million, up from $70.1 million a year earlier.

The key Thanksgiving shopping weekend was “positive,” but the company said it’s too early to predict the overall performance of the Christmas season. A lot of the holiday gift sets tend to be “impulse buys” purchased closer to Christmas, Elizabeth Arden said. Elizabeth Arden said its more cautious expectations reflect continuing weakness in the global economy and a challenging retail environment.

The company’s travel retail business had higher sales over the prior-year period, which was hurt by a fall-off in travel after the Sept. 11 attacks. But the increase was partially offset by weak sales across the beauty category in U.S. department stores and selling in fewer high-end U.S. department stores.

Selling, general and administrative expenses rose to $61.5 million, or 20 percent of net sales in the third quarter, reflecting increased spending in advertising and promotion to support the Elizabeth Arden “Open for Beauty” campaign with Catherine Zeta Jones and fragrance launches.