 Fred Purches took the reins at Parlux in January after former CEO Neil Katz resigned. Katz had been named CEO as part of the settlement of a lawsuit that ousted former chairman Ilia Lekach. The company’s Paris Hilton line of fragrances has become its primary source of income, accounting for 42% of its gross sales in 2010. • Fred Purches, 72 President and CEO, Parlux Fragrances Resume: President and CEO of Helena Rubinstein/Armani Fragrances before founding Parlux Fragrances in 1984 Fragrance Math: The launch of a new fragrance eats up 100% of the sales the first year it’s introduced, Purches says. “In the second year, you should start to make money.” [Photo: Eileen Escarda] |
In 2004, Ilia Lekach, then chairman and CEO of Parlux Fragrances, called vice chairman Fred Purches with an idea to pay Paris Hilton for the rights to market perfume under her name. Purches response? "I said, ‘Go.' "
Parlux (No. 90 on Florida Trend's 150 biggest public companies list) had begun life in 1984 as the distributor of Giorgio Armani in America and Canada before moving on to create, manufacture and market perfume and other beauty products worldwide. The firm had successfully marketed high-profile names before, selling designer fragrances it created in the 1990s under licenses to use names like Fred Hayman and Perry Ellis.
Celebrity scents weren't new ["Fame Game"]. But the Fort Lauderdale-based company hadn't achieved success in the personality-tagged fragrances market that was just beginning to take off.
The Hilton license proved to be a bonanza. The introduction of Paris Hilton for Women — Parlux now markets eight Paris Hilton perfumes — boosted the company's gross sales by more than $70 million during fiscal year 2006.
| Parlux does a lot of business with companies that own its stock — sales to those "related parties," including perfume retailer Perfumania, amounted to more than a third of Parlux's net sales in 2010. Perfumania owns more than 10% of Parlux's stock. |
Parlux's stock price, which had edged up from around $1 to about $2.50 between 2000 and 2004, skyrocketed, hitting more than $18 in February 2006. Since the 2004 license, the Paris Hilton name has generated $450 million in gross sales for Parlux. "Paris was probably the best thing that ever happened to the company," says Purches.
Now 72, he's trying to make sure it's not the last good thing. After peaking in February 2006, the value of Parlux shares fell by half before the close of that year. Since a 2-for-1 stock split in June 2006, the share price has drifted between $2 and $6, recently trading at around $2.75.
Meanwhile, analysts have questioned the company's management and its "related party" transactions — business relationships with distributors and others who own shares in the company. More than a third of the company's net sales in 2010 were to related parties.
In the company's third-quarter conference call, Purches responded to a comment about selling the company by saying that a "reasonable, legitimate" offer would get "intense scrutiny." But he went on to say that the company wants to impress its banks and shareholders by improving financial results.
Purches faces several big challenges in trying to boost Parlux's share price.
» First, the company needs a new big hit, whether from a celebrity line or a designer name. With the 2009 expiration of Parlux's Guess license after what Purches calls a "number of disagreements," the Paris Hilton line has become the company's primary source of income, accounting for 42% of its $148 million revenue in 2010. For the 2010 fiscal year, Parlux reported a $14.8 million loss, the second consecutive year of losses. The company's fragrance license with Hilton expires in June 2014.
Since 2006, Parlux has signed license deals with Jessica Simpson and Queen Latifah. Both have been profitable, with Simpson fragrances bringing in more than $30 million a year and Latifah's generating about $14 million. But neither is likely to generate the blockbuster results provided by the Paris Hilton branded products.
» Second, Purches will have to monitor a web of related party business relationships — doing business with companies that own an interest in Parlux. According to Parlux's 2010 annual report, "net sales to related parties, which represented 34% of our total net sales for fiscal year 2010, increased 20% to $49.6 million, as compared to $41.5 million for the prior year."
One related party is Perfumania Holdings, which owns Quality King, a wholesale distributor of pharmaceuticals and beauty products, and Perfumania, a publicly held chain of more than 300 outlets that sells fragrances. Perfumania is Parlux's biggest customer, accounting for 25% of Parlux's sales during 2010.
In 2006, Glenn Nussdorf, one of the principals of Perfumania Holdings, took issue with Lekach over Lekach's management and tried to buy a large piece of Parlux. The suit was settled by allowing Nussdorf to name three members of Parlux's board. Under the settlement, Lekach resigned, receiving $2.4 million, and Neil Katz, a former Liz Claiborne CEO, was named to run Parlux.
As of March 2010, majority shareholders of Perfumania Holdings owned more than 10% of Parlux, which extends millions in credit to Perfumania in the course of business. Three months after the close of Parlux's fiscal year in March, Perfumania still owed Parlux some $10.5 million on $37.6 million worth of goods Perfumania had bought during the year.
Meanwhile, another related party relationship emerged. In 2009, Parlux signed licensing deals with recording artists Rihanna and Kanye West through a firm called Artistic Brands Development. The principals in Artistic Brands are Shawn "Jay-Z" Carter and Rene Garcia, who was previously associated with Elizabeth Arden.
Garcia holds 9% of Perfumania Holdings stock and is also the managing member of a fragrance distributor called Jacavi Beauty Supply. In 2010, Parlux began doing business — $3 million worth — with Jacavi. Meanwhile, in June 2010, relatives of Garcia operating as the Garcia Group, acquired nearly 15% of Parlux shares and warrants to buy at least 4 million more shares at $5 apiece. The company, with 20.5 million shares of stock outstanding, also agreed that if it sells itself before April 2012 for less than $15 a share, Artistic Brands will get a payout of up to $40 million — which some investors have called a "poison pill." During the third quarter conference call, Purches promised he wouldn't allow any further such provisions.
» Third, Purches also must contend with trends in the overall fragrance market, which has been saturated with celebrity fragrances and hit hard by the recession. Sales of women's fragrances declined 23% between 2005 and 2010, according to a recent report by market researcher Mintel.
And while three-quarters of consumers still use fragrances, survey research says they're not purchasing purfume as frequently or using it as often. Women Baby Boomers, for instance, are less likely to use fragrances or try new products, reports Mintel. Alternatives to perfumes, such as fragranced body lotions, are also cutting into fragrance company's market shares.
Consumer concerns about the chemicals contained in fragrances have also affected the industry and fueled the growth of the "natural perfuming movement," bringing a new competitor into an already crowded and highly competitive marketplace.
Purches says he doesn't think there is anything fundamentally wrong with the fragrance industry. He hopes Rihanna, with her broad international appeal in key markets in the U.K., Australia and the Middle East, will rebuild the company's international strength.
Seeking to "rebalance" the business to include more designer fragrances, Parlux will also launch a new Vince Camuto line of fragrances next September. The company is hoping to pull in about $30 million with Camuto, the women's footwear designer who acquired the rights to Jessica Simpson's name and built a half-billion dollar retail empire, and $30 million more from Rihanna.
Purches says the company is on solid financial footing, with no debt, a $20-million credit line that it hasn't needed to tap and plenty of cash in the bank. He predicts $125 million in sales in the 2011 fiscal year and $150 million in 2012. "This company is, if nothing else, resilient. If you think of the many, many fragrances and names we've had over the past 26 years, it's like an encyclopedia in many ways."
One road he won't travel again is licensing fragrances involving sports figures. Parlux struck out with scents it launched in 2005 for tennis pros Maria Sharapova and Andy Roddick. "I wouldn't do it again. Anybody who sweats for a living, we cannot use."