The latest trend to hit the cosmetics counter is mineral-based makeup, providing women with a more natural looking and less irritating skin-care product when compared to chemical products. A sign these one-time niche items may become a permanent fixture on the cosmetics scene: Wal-Mart (NYSE:WMT) and other mass-market retailers are now stocking their wide shelves with mineral-based makeup.
Natural is Beautiful
In 2005, mass-market stores sold $4.5 million in mineral-based cosmetics. Within two years that number jumped to $149 million according to tracker Information Resources. That's a tremendous amount of growth, and this figure doesn't even take into account department stores, high-end boutiques, spas and online/infomercial sales. The true number is significantly higher. In 2007, the industry introduced 451 products that were mineral-based, up from 132 in 2005.
In a survey by market research firm Mintel, it found that one-third of women want to own mineral-based products. Everyone is getting in on the action including Revlon (NYSE:REV), Avon Products (NYSE:AVP). Liberty Media Interactive's (Nasdaq:LINTA) QVC televised home shopping channel markets the two biggest brands in mineral makeup, Bare Escentuals (Nasdaq:BARE) and Sheer Cover, owned by privately owned Guthy-Renker Corporation.
Leader of the Pack
Bare Escentuals is the leading mineral-based cosmetics companies in sales and brand awareness in the U.S. according to the company website. Its brands include bareMinerals, bareVitamins, RareMinerals, as well as Bare Escentuals. The comapny has been in business since 1976, and growth took hold in 2004 when Berkshire Partners LLC, a Boston-based private equity firm provided funding to recapitalize the business, along with 20-plus years experience growing small brands into larger ones. This relationship culminated with an IPO. Priced at $22 per share, the stock closed its first day of trading at $27.15, up 23.4%. Over the next eight months, its stock moved to $42.99, in mid 2007, an all-time high. Then, Berkshire Partners began a gradual reduction of its ownership and Mr. Market didn't approve. The stock began a decline to the low $20s where it sits today, underwater from its IPO price 20 months earlier. (For five tips on IPO investing, check out The Murky Waters Of The IPO Market.)
The Q2 2007 gross margins weren't up to snuff according to Lawrence Rothman over at the Motley Fool, who accurately pointed out that both gross and operating margins were down considerably from the year prior. The next quarter the same result. Unfortunately, two consecutive quarters does not a trend make; the final quarter in 2007 showed an improvement in gross margins of 210 basis points and operating margins were up 140 basis points.
Fast-forward to this year's first quarter and it was a mixed improvement, gross margins up 140 basis points and operating margins down 170 basis points. What is going on? In my opinion, you have a growing business with an extremely popular product line that's doing its best to deal with issues related to expanding beyond its borders. The ,U.K., Canada, France, China, and other countries are on the horizon with international sales now 10% of its total revenue and climbing. When growth like this occurs, sometimes you overspend to meet the demands of new and potentially lucrative partners. That's business. (To learn why international companies can be beneficial, see Going International.)
What's In Store In 2008?
It will continue to roll out its RareMinerals skincare line. The Blemish Therapy product was the winner of the 2008 Cosmetic Executive Women's award for most innovative facial skincare product. Chosen from a list of 135 finalists, it shows the company is a player in the cosmetics industry. Currently there are 616 domestic locations including 83 company boutiques as well as 220 Sephora stores in France. New locations will include Selfridges in the U.K. and the Home Shopping Network in Canada.
By the end of the second quarter, a new infomercial will air to boost the segments sales, which dropped 10% in the first quarter. Overall, company guidance calls for an increase in revenues of 20-25% with net income between $106-110 million. If it's able to meet its targets this year and in 2009 and 2010, it will be a billion dollar company.
According to Berkshire Partners web site, its investors have made 30% annually since 1984. It owned 37% of the stock prior to the IPO. After selling 5.4 million shares in the offering, its ownership position fell to under 31%. Today, it sits at 19.9%. As someone who tends to look at the glass as half-full, I see their present ownership as an endorsement of the company. Sometimes, beauty is more than skin deep.