Description

Parlux (PARL) is: (1) A fragrance manufacturer of the Perry Ellis, Animale and Ocean Pacific brands; (2) A broken deal stock, which has just seen a $4.00 per share offer get pulled for reasons unrelated to the fundamentals of the company; (3) A company whose management team has repurchased greater than 50% of its outstanding shares in the past 5 years, including in March 2003 acquiring 15% of the shares at prices north of 3.00, and is continuing to buy its stock back presently; and (4) An exceptionally cheap stock, trading at 3.1x LTM EBITDA, 2.0x LTM free cash flow, 0.62x working capital, and 0.5x book, for a company with debt/EBITDA of < 1.0x.

(1) PARL makes & sells perfume. 67% of sales are derived from the Perry Ellis brand. The Perry license is an extremely important asset for PARL. It was granted by Perry himself, at a below market (3-5% range) royalty rate, has an eternal timeframe, and carries other favorable covenants. Perry management has told me it is the worst license they have outstanding, by far, and likely represents 10mm in cash flow for PARL. PARL will not break the number out explicitly. It is clear, however, that the Perry brand generates a disproportionate amount of the profitability of PARL. PARL also sells product under the Animale & Ocean Pacific brands.

PARL sells its product into 2000 doors. 25% of sales goes to a company called Perfumania, which is an perfume oriented e-commerce site, which is publicly traded (Ticker: ECMV). PARL is run by Ilia Lekach. Lekach owns 15% of PARL, and 10% of ECMV. PARL owns 15% of ECMV. ECMV runs a small, stable, cash flow positive business, has modest leverage (debt/ebitda is 1.1x), and is viable. Lekach is a retail entreprenuer, scrappy, not very sophisticated, but we believe ethical and honest.

(2) PARL received a bid to be acquired for $4.00 per share in April 2003 from Lekach and Quality King Distributors. Quality King is a perfume distributor who had been in talks with PARL for approximately 6 months prior to April. Lekach was reluctant to sell his interest in PARL anywhere close to the trading price, and got Quality King to include his equity in their bid. At $4.00, QK was stealing the company, in our view. More on that below. Last night, QK sent Lekach and PARL a letter, stating that QK's lender refused to consent to QK's doing the deal. We think QK's bank group got nervous due to the bankruptcy of Allue, a fragrance company unrelated to QK or PARL. It is clear that there has been no development at PARL that would have caused any discomfort for any lender. The business fundamentals are solid. March is the fiscal year end, March quarter numbers get reported in 10 days, and our checks on the quarter are good.

(3) and (4). On LTM numbers as of 12/31, PARL has grown revenue & EBITDA by 10%. The Perry license substantially facilitates PARL's ability to make money. For fiscal years 1999, 2000, 2001 and for LTM as of 12/31/02, PARL's revenues have been: 56mm, 66mm, 69mm and 73mm. EBITDA has been: 7.7mm, 10.1mm, 9.8mm, and 11.5mm. Free cash flow for fiscal year 2000, 2001 and LTM: 13.6mm, 4.1mm, and 12.1mm. PARL has repurchased greater than 9mm shares over the past 5 years. It bought back 1.5mm in March 2003 (just prior to Lekach announcing his bid with QK) for 3.03 per share. There are now 8.6mm shares outstanding, and 9.8mm fully diluted. The market cap is 27.4mm. Working capital less total liabilities is 37.2mm. There is 11.8mm of net debt, or an EV of 39.2mm, versus 11.5m of LTM EBITDA and 12.1mm of FCF. The fundamentals are sound. Also, at last sale, PARL's ECMV stake is worth 2.6mm. This is a cheap stock.

What happens next? The buyback recommences. Management puts out numbers for March, and starts to talk about the stock. We feel guidance for FY03 will be solid. And, it makes a lot of sense for someone else to make a bid for the company. Lekach did not shop his $4.00 offer for the company. The offer was in the initial stages of being market tested when QK dropped their bid. Perry Ellis could buy this company for a song, pay for it with the working capital, and get back the worst license it has outstanding. Perry's license revenues support its debt, which support its capacity to buy companies, which support its capacity to grow. Point being, Perry cares a lot about its licenses, and can double its fragerance license revenues by buying PARL and re-licensing. Why didn't Perry bid to begin with? They were not given the chance, and might have as the process unfurled. They still can.

Catalyst

Significant buyback. Another deal. Earnings report in June.