Parlux Fragrances is in the business of manufacturing and distributing prestige products, mostly perfume and cologne. The company signs license agreements with celebrities that give the company the right to sell products endorsed by the celebrity and that use the celebrity’s image and brand. The company currently has license agreements with Queen Latifah, Jessica Simpson, Rihanna, Paris Hilton and Kayne West, among others. Parlux releases full year results for 2010 on June 29th after the market closes.

Why Is It Cheap?

The company has been having operational issues lately. The licensing agreement with GUESS expired in December of 2009 and was not renewed. GUESS accounted for 23% of the company’s sales in 2009. The company currently carries 10.7M worth of Guess inventory on the balance sheet, and are negotiating with Guess on a sale price.

The company named a new Chairman and CEO due to the old one resigning due to differences regarding the future of the company. Even though there are only 20M shares outstanding, that number has been increasing over the past couple years. The company also recently increased the number of shares it was authorized to issue from 30M to 40M.

Industry Outlook

The beauty product industry is a tough place to be. In Parlux’s own words, “a significant number of new prestige fragrance products continue to be introduced on a worldwide basis.” While retailers were busy marking down everything in 2008-09, perfume stayed at regular price, which is an industry norm. The popularity of the celebrities for consumers is extremely fickle; what may be cool one quarter suddenly isn’t the next.

Dividend

None. The company isn’t making money at this point, so there is little hope of any coming anytime soon.

Balance Sheet

The balance sheet looks great. The company is debt free, however is looking to enter into a revolving loan agreement to ensure operations are funded. As of December 31st, Parlux is sitting on 127M worth of assets compared to just 17.5M in liabilities. There are currently 30M shares outstanding, along with 8M warrants that have a strike price of $5.00. The company has a book value currently of 3.65. This puts the company at basically half book value. I don’t even have to look at their competitors, I know that from a price to book perspective, Parlux is cheap.

Earnings

2009- (0.21)

2008- 0.24

2007- 0.16

2006- 1.07

2005- 0.61

Four out of the last five years have been profitable. After 3 quarters of fiscal 2010, the company has lost 24 cents per share. Websites still have the estimates for fiscal 2010 earnings at 0.14 cents per share. I have a feeling that isn’t very likely.

Insider Activity

Insiders are not buying the stock at these levels. Insiders are selling a bit, but the activity is basically nothing to speak of.

Price Appreciation

The stock has spent some time at much higher levels, however for a good part of the last decade it has traded at levels very similar to where it is now. With improved earnings, a price increase to the $4-5 range isn’t unreasonable.

Summary

Much like Transworld, Parlux is a company with a immaculate balance sheet that needs a turnaround. The company isn’t currently profitable and needs to make some changes to return to profitability. The company is also very dependent on Paris Hilton branded products for sales. (accounting for a full 68% of sales for fiscal 09) The company is launching new products featuring Jay-Z and a “prominent female artist” for the next fiscal year. If those launches go well and the company returns to profitability, there could be significant price increases in the company’s future.

I do not own shares in Parlux at the moment of this writing.

Tell everyone, yo!