PARL Net Net but Business Stinks

The Perfume Business

Parlux Fragances (PARL) obtains exclusive rights to use celebrity names to create fragrances. The list of celebrities include Jessica Simpson, Paris Hilton, Queen Latifah, Andy Roddick, Rihanna, Kayne West and others listed in the reports.

The company relies on the brand of the celebrity to profit but keeping your status in hollywood can be very tricky. For example, take a look at how Kayne West ruined his image and now PARL is losing money by not being able to sell the Kayne name. The business is built around fragile intangibles, who’s hot trends and subjectivity.

It’s impossible to have a competitive advantage by selling perfume. After all, it’s just sweet smelling water in a fancy package, which is why the margins are high and sales dependent on the advertising. But, it’s a luxury item that everyone is capable of living without.

Cheap Stock Valuation

PARL has been a net net over the past couple of years and the company just released their 3rd quarterly report.

For several years, the company has underperformed on all accounts, consistently plagued with management and inventory issues but from a valuation standpoint, PARL is a cheap stock.

Until the previous quarter, their net net value was at $1.59 but in the most recent period, the company has surprising done a very good job of converting receivables and inventory to cash. This helped increase the net net value to $2.03. The current stock price at $1.68 is now at a 17% discount to NNWC and 72% to NCAV.

Keep in mind that outdated perfume or fragrances at a fire sale will sell for much less than 50% of its value. If inventory is calculated at 35% then the net net value comes down to $1.68.

The quality of assets is the key factor with a net net and PARL is made up of receivables and inventories where value can differ substantially in different scenarios whereas cash is always king.

There is also the risk that the inventory of Guess fragrances must be thrown out or sold at huge discounts back to Guess due to a breach in contract. If this is to occur, expect the net net value to plummet.

Buying the stock on numbers alone can be profitable, and at the current price of $1.68, the risk reward is attractive but the business turns me off like sour grapes. Allocating capital properly can prove to be a good idea, but time will have to be your friend on this one and with the way the US and world’s economy is looking, I much rather keep my cash for another day.


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