Description
This year Parlux (PARL) stock is down over 58% on accounting issues and slower sales. Yet, Ecom Ventures (ECMV) stock is up about 21% this year and up over 100% in the last 60+ days. ECMV is PARL’s largest customer ECMV was originally written up by cherb405 in December 2004 as a short. I think it could be a timely trading short now after some recent developments. For disclosure, I was short PARL earlier year and now have a position in ECMV (relatively small due to the liquidity).
First, let me give a quick snap shot of Parlux. Parl is in the business of distributing fragrances, and beauty–related products such as soap, shower gels, facial cream, etc., for the brand names of Paris Hilton, Perry Ellis, Andy Roddick, Fred Hayman, and others.
PARL is run by Ilia Lekach who use to be the CEO Perfumania (ECMV)! ECMV represents 35% and 40% of PARL’s sales in 2004 and 2005. PARL, the company, was a large shareholder of ECMV (13% as of July 29th, 2006). Public filings show that that Parlux has sold all their stock in the last 90 days under $9.25 in ECMV. In addition, Ilia owned a 13% personal stake in ECMV (PARL’s DEF 14A filed Oct. 2005) and he has sold 80,000 shares this calendar year from $16 to $22 a share. Filings indicate his holdings are down to 220k direct shares or just fewer than 9%.
E Com Ventures operates 243 retail stores that distribute fragrances at prices discounted up to 75%.
The fundamentals concerns for ECMV:
1.) ECMV has had erratic sales patterns over the years. It typically loses money in the first three quarters and is dependent on a blow out fourth quarter to make money for the year.
2.) The ECMV carries too much inventory risk. Inventories at July 29th were $82mm vs. $82mm in current liabilities on $9.5mm in working capital. If PARL business is tough, how can that be good for ECMV’s inventory?
3.) In the last few years, sales have grown modestly yet ECMV’s inventories are up from $69mm in 2003 on sales of $203mm to $82mm in inventory at end last quarter on twelve month trailing sales of $231mm. Over the last three years inventories are up 26% vs. 14% increase in sales. (See point #5 below).
4.) E Com has had liquidity problems in the past. Although it has $13mm available under its current credit agreement, ECMV did an expensive $5mm subordinated convertible note as recent as December 2004 to a related party that owned 39% of the company (Nussdorf’s).
5.) Last quarter, 80% of ECMV’s inventory was purchased from related parties (29% from PARL and 51% from another related entity called Quality King).
6.) At July 29th , working capital was down to $9.5mm in from $12.5mm at January 29th.
7.) Due to the seasonal nature of the business, cash flow is highly unpredictable . Last year on an annual basis it appears that operating cash flow negative $4mm+ with an $18mm change in inventories.
Recent Developments
On November 2, E Com reported that sales for the latest period were $47.9mm vs. $45.4mm a year ago. Year to date sales are up 3.6% to $138.9mm with same store sales up a meager 1.8% (vs. +6.3 in prior year). On November 17th, the two largest shareholders ( the convert buyers in December 2004) have proposed a 6.4mm share merger w/ MODEL (diversified wholesale & retail fragrance company owned by the Glenn & Stephen Nussdorf). The Nussdorf’s will then own 80% of the merged company. I failed to mention that Stephen Nussdorf is the CEO of ECMV.
On October 17th, the Nussdorf's expressed interest in a possible acquisition of PARL and have disclosed a 12% ownership stake in PARL. Parlux’s current enterprise value is $149mm (3 year low) vs. $103mm for ECMV (all time high).
What is strange is that on April 7th Rachmil Lekach (Ilia’s brother..<I am told>) sent an unsolicited letter to take ECMV private. Yet, nothing happened. ECMV was trading near $19+ at the time and then dropped 50% and Ilia while selling stock. Where was Rachmil two months ago when ECMV was trading below $10. Oh yeah, his brother just got through selling all of Parlux’s stock in ECMV.
There is a possible risk of stock manipulation. Last night it was disclosed that Jeff Feinberg has purchased 223k from 17+ to 19+ a share in the last week to bring his holdings to 17%. It will be interesting to see what develops.
Follow the thread of an interesting article that was written by Jesse Eisinger of the WSJ a year ago in September, 2005:
http://www.post-gazette.com/pg/05250/567185.stm .
On November 17th, ECMV stock traded to $14 to close back at $19 on the day on Nussdorf’s announcement.
Catalyst
On several occasions, Parlux has floated the same type of press releases, take Parlux private, or hot air balloons to see nothing ever happen. ECMV and Parlux have always appeared to have a lot of self dealing, inventory shuffling, and stock manipulation. My bet is that it all comes unraveled on some kind of year end mark in early January. At over $19 share there looks to be little upside risk in ECMV relative to PARL’s current problems.