Smells Like Value

While the company has been through some rocky times (its subsequently-departed president actually won the award of “Worst CEO” in 2006), the company appears to be back on track. Sales were up last quarter (year over year) in a very tough retail environment, and costs were lower. Sales are expected to be up this quarter as well, as the company has been hard at work bringing in new celebrity fragrances that augment and diversify its product portfolio.

It’s not clear that customers will embrace PARL’s new products. But what is clear is that PARL is priced such that investors don’t have to pay for these profits: the company trades for just $40 million, while it has net current assets of $100 million.

The company does, however, have some risk factors to consider. For one thing, it is owed $10 million by a related retailer that has defaulted on some payments. Furthermore, its rather large inventory of GUESS products ($20 million+) may have to be destroyed if not sold in the next six months. The company has also maxed out its current loan agreements (at $6 million) and is trying to find a new source of debt financing. Finally, while there are just 20 million shares outstanding, there are warrants outstanding for another 5 million shares.

Despite these risks, the market appears to have overpunished this stock. A reading of the notes to the financial statements reveals that 4 million of the outstanding warrants have a strike price of $5, meaning the current price would have to more than double before current shareholders are affected. Furthermore, even after writing off all moneys owed by Perfumania ($10 million) and all inventory related to GUESS ($20 million), the company still offers investors a generous margin of safety. While it’s not neccessary that the company execute successfully on its new brands in order for the current shareholder to be rewarded, such success could serve to generate outstanding returns at the current stock price.