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A Scent of Trouble
As Luria patriarch Leonard Luria, 73, retires, the Lekach brothers find themselves in command of a trio of South Florida public companies with combined sales of more than $370 million annually. Rachmil Lekach is chairman and CEO of L. Luria. The Russian immigrant brothers, who came to the U.S. in 1970 after 14 years in Chile and Argentina, are major stockholders in Parlux Fragrances and Perfumania Inc. Ilia Lekach is chairman and CEO of Parlux and the Lekaches' brother-in-law, Simon Falic, runs Perfumania.
It all looks like a fantastic immigrant success story, except that two of the three companies, L. Luria and Parlux, are in rocky financial condition, while Perfumania is a former high-flying stock that crashed four years ago amid allegations the company was selling counterfeit perfumes.
A look at all three companies suggests the Lekaches and Simon Falic will need a lot of skill and perhaps a little luck if they are to avoid a financial meltdown of their fledgling empire.
First of all, in Luria's they have acquired a well-known but deeply troubled chain of stores that the Luria family no longer seemed able to manage. In fact, the family's sale on August 9 of its 25% stake in L. Luria for $7.9 million to the Lekaches' Ocean Reef Management has the whiff of desperation about it. Why? Well, L. Luria's books show it had stockholders equity on May 4 of $62 million, meaning the family sold its 25% share for roughly half its book value. Luria President Peter Luria says his family sold because his father wanted to retire. "He's not one to let go, so there's no way he could retire and have the stock," Luria says. "It's not his mindset. And there's no way he could sell the stock to a group unless the group gets control. So it became a family decision."
As for the low price, Luria says the family had little choice. The Lekaches paid $6 per share for stock that recently traded at $4. "Sure, it would be nice to sell at a higher price," says Peter Luria. "The reality is, this was the price and this was the circumstance."
By buying the retailer with its 43 stores, the Lekaches acquire new outlets for their perfumes. Currently, Parlux manufactures and distributes fragrances, including Perry Ellis and Fred Hayman Beverly Hills brands, while Perfumania operates a chain of discount retail perfume shops and also acts as a wholesaler to other retailers.
A women's store
Luria's will install perfume counters in all its stores by October, and Rachmil Lekach says he envisions the company doing a brisk business in fragrances. "If done properly, immediately we can pick up $20 million or $30 million of excellent sales at incredible margins," he says.
Some observers wonder, however, whether Luria's foundation is strong enough to build upon. Its performance recently has been awful. For the quarter ended May 4, Luria's lost $2.7 million on sales of $29.4 million, a 22.5% drop from sales in the same quarter in 1995. Comparable store sales - which reflect year-to-year traffic at existing stores - decreased by 16.4%. This comes after the company posted a loss of $19 million on sales of $173.3 million last year.
Miami retailing consultant Herbert Leeds says the Luria family mismanaged the chain in recent years. When Luria's moved away from its format as a catalog store, where customers ordered goods from displays and received them from a warehouse in back, to a more conventional format as a mass merchandiser, it failed to upgrade its product lines or to offer a broad selection of products, Leeds says. As a result, he contends, the stores are "woefully undermerchandised."
Luria's will sharpen its focus in the future, Peter Luria counters, by adding perfume and cosmetics, more kitchenware and kitchen furniture and by discontinuing stereos, TVs and VCRs, where it couldn't compete with big electronics stores. The new Luria's, with heavy emphasis on jewelry, perfume and gifts, will try to appeal especially to women.
Bring in the perfume
"We had to make a change. It should have been done a few years ago. We started a few years ago with the superstores. We just didn't go far enough," Luria says. "The fundamental format is right. Some of the merchandising needs to be changed and the way we market and advertise needs to be changed. Service levels need to change. But the structure is right."
Leeds agrees that putting perfume and cosmetics in Luria's stores is a step in the right direction, but doesn't expect it to turn the chain around. "I think the suggestion of bringing perfume into the stores is not one that is going to alter the future of Luria's," Leeds says. Two other stock analysts who once followed Luria's both say they believe the chain will be lucky to avoid a trip to bankruptcy court. Rachmil Lekach argues that his experience at specialty retailer Perfumania, which his family built from nothing into a chain with 195 stores and annual sales of nearly $130 million, has prepared him well for the Luria's challenge. Yet investors have shied away from Perfumania stock for four years, and the company has been a mediocre performer recently.
The Lekaches came to the U.S. and worked as watch distributors before getting into the perfume business. They first made a splash in South Florida five years ago with Perfumania. In 1991, the company went public, selling shares for $8.50 apiece. Within four months, the shares were trading at $25.50, as investors fell in love with the idea of a discount perfume retailer.
But the following year, Perfumania was accused by the French manufacturer and U.S. distributor of Drakkar Noir fragrances of selling "non-genuine" Drakkar Noir in its stores. The scandal triggered a collapse in Perfumania's stock price. While Perfumania eventually settled the lawsuit by destroying $3.7 million worth of perfume, the company's image never recovered. On September 3, Perfumania stock traded at $4.50 per share and Perfumania's market value was roughly $30 million. The company's stores posted a $2 million profit on $129 million of sales in 1995, but Perfumania lost $1 million in the first six months of 1996 and comparable store sales have been flat.
A few months ago, the Lekaches and management contemplated taking Perfumania private at $6 per share. But Ilia Lekach, who controls 37% of the company's stock, opted not to participate in the buyout, killing it. Perfumania CEO Simon Falic says there is no chance the buyout will be revived.
Meanwhile, Parlux has been posting impressive earnings and sales growth. Last year, sales reached $67.7 million and net income $7.8 million. But the company, on closer inspection, appears to be in questionable health.
Products it can't sell
First, Parlux sells a large amount of its products to Perfumania, booking sales before collecting for them. In the fiscal year ended March 31, 1996, Parlux sold $26.2 million of product to Perfumania, or about 39% of total sales. But Perfumania doesn't pay in timely fashion for its purchases. At the end of the year, it owed Parlux $13.5 million. By June 30, the figure had climbed to $15.9 million. In effect, Parlux is recording sales to Perfumania - and profits - before actually getting paid. Worse, according to recent filings with the Securities & Exchange Commission, Parlux "is dependent on sales to Perfumania of its excess inventory at discount prices and peaked or matured products," which includes at least three lines of perfume.
That disclosure raises questions about how much of Parlux's sales to Perfumania are actually products it can't sell to non-affiliated customers. But Perfumania's Simon Falic says the company is not having any trouble paying Parlux and isn't buying second-rate merchandise. "There are no doubts about that receivable, and that receivable is being paid down," he says.
Another worry for Parlux investors is its growing level of perfume inventory. Parlux had $42.9 million worth of inventory on hand at the end of June. How much is that? Based on what it charges retailers, that inventory has a market value of about $127 million.
At Parlux's present rate of sales, that $42.9 million in inventory would support 20 months' worth of sales. That is too much, concedes Parlux CEO Ilia Lekach, who attributes inflated inventory to recent acquisitions. Six to twelve months' worth is more acceptable, he says.
This double whammy of customers taking a long time to pay for perfume and bulging inventory has led to huge cash flow deficits.
For the quarter ended June 30, Parlux reported net income of $1.9 million. But because its accounts receivable and inventory levels ballooned, Parlux had an operating cash flow deficit of $13.8 million for the quarter.
This comes on top of an operating cash flow deficit of $12.3 million during the prior fiscal year. So in the past five quarters, Parlux's operations have used up more than $26 million. "The cash flow is what you have to focus on," says J. Carlo Cannell, a California money manager who recommends selling Parlux stock. "They are not making any money."
Rachmil Lekach says this is nonsense. "The cash flow (at Parlux) is good," he says flatly. "The reality is, the company has never done better than now." Yet Parlux recently has been raising money on extremely disadvantageous terms. Between November 1995 and March of this year, it issued $18.7 million worth of bonds that were convertible into stock at below-market prices. By the end of June, virtually all of the debt had been converted into 2.7 million shares of stock. Parlux's SEC filings concede that because lenders have been able to convert bonds into stock at below-market prices, existing stockholders suffered "substantial dilution" of their holdings recently. And despite the inflow of dollars, at the end of Parlux's June 30 quarter, it had less than $1 million in cash on hand. In July, Parlux issued another $10 million worth of convertible bonds.
Juggling three balls
Parlux had hoped to do an even bigger deal, however. This spring, the Dallas investment firm Haas Wheat & Partners agreed to invest $40 million into Parlux by buying a note convertible into 3.6 million shares of stock. After the deal was announced, Parlux stock soared up to $15, meaning Haas Wheat could convert the note into 3.6 million shares worth $54 million, for a quick $14 million paper profit. But the deal fell apart in early June. Rachmil Lekach says Parlux backed out of the deal because Haas Wheat wanted to control the business. "We weren't ready to give up Parlux," he says. Andy Stern, a spokesman for Haas Wheat & Partners, would say only that the decision was mutual. "There was not anything nefarious about it," he says. Dean McQuiddy, who runs Barnett Capital Advisor's Small Cap Equity Fund in Jacksonville, suggests Parlux backed out of the deal because management got overconfident when the stock soared to $15 per share and believed it could negotiate better terms with Haas Wheat.
If so, the move backfired. After Haas Wheat backed out, Parlux shares entered into a free fall. By late August, they were down to $6.00. McQuiddy's fund sold its Parlux shares along the way. "This is one that hasn't worked out the way I had hoped that it would," he says.
Given the 1992 collapse of Perfumania's stock and subsequent lackluster results, the current deep slide at Parlux and the restructuring required at Luria's, investors might wonder about the Lekaches' ability to juggle three balls at once. But Rachmil Lekach dismisses any doubts, saying his relatives have Perfumania and Parlux on the right track and he'll turn Luria's around. "We will not be satisfied with success. We want major success," he says. "To Ocean Reef as a company, this is our first deal. We have to be successful. It's our credibility."
Business Beat - Week of May 3rd
