Spinoff For Perfume Retailer

Shares of personal products distributor Allou Health & Beauty rose 8.8 percent Monday afternoon after the company said it's close to securing between $15 million and $30 million in private financing to spin off its online retailing operations into a separate company.

As reported by CBS.MarketWatch.com last week, the financing for the new company, to be called The Fragrance Counter Inc., is being handled by New York investment bank Hambro America Securities. Allou (ALU) Chief Financial Officer David Shamilzadeh said financing should be completed at the end of the year and that a public offering for The Fragrance Counter will likely be attempted sometime in 1999.

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Allou (ALU)

Although final terms will need to be negotiated, current Allou shareholders will likely own about 30 percent of the company while new investors and Allou management will hold the rest.

"We've been marketing the deal for the last month or so, and we've talked to many venture capital firms and private equity funds," said Joe Mark, president of Hambro America, a New York investment bank specializing in new media. "The interest has been dramatic ... and we expect to circle a lead investor within a month."

Allou's online operations have been both a blessing and a curse for the distributor, which went public in 1989. In April, the company announced a series of distribution deals with Internet portal players like America Online (AOL), Yahoo (YHOO) and Excite (XCIT) and the stock took off to never-before-seen levels. During the week following these deals, more Allou shares exchanged hands than during the entire nine years the company had been public, Allou CFO Shamilzadeh said.

But Allou investors interested in the long-term performance of the stock were worried about how expenses associated with the Web sites would affect Allou's bottom line. They saw the stock's meteoric rise as an opportunity to cash-in. In response, two the company's large investors, Kenneth Dart and Heartland Adviors, dumped shares to lower the stock price.

On Friday, however, an SEC filing showed that Dart has been buying back shares in Allou since late August. According to the filing, Dart has bought 76,600 shares at prices ranging from 4 1/4 to 5.

"Investors in [Allou] now don't know exactly what's going on," said Mark, noting Barnes & Noble (BKS) as another company trying to reconcile its traditional and online operations. "Allou needs to clearly define what business it's in."

Shamilzadeh agreed the spin-off will be a boost for the company's ailing stock. "It will benefit Allou's valuation immediately and investors interested in the company as a long-term investment will once again revisit Allou," he said. The company is trading at a price to earnings multiple significantly less than other distributors.

Expenses related to Allou's Internet operations chopped off about 9 cents a share for the most recent quarter. The Internet operations, which include the Fragrance Counter and Cosmetics Counter Web sites, are expected to generate about $9.5 million in sales for fiscal 1999 and $20 million in the following year, Shamilzadeh said. He hopes well-connected new investors will help increase that growth by adding "experience, expertise, and most importantly, a rolodex."

Allou still generates most of its revenue from selling health and beauty-aid products to mass-market retail outlets like Wal-Mart and drug stores on the East Coast. Allou has a market capitalization of about $37 million and a price-to-trailing earnings multiple of about 8, with sales of about $301 million in its 1998 fiscal year ending in March. In the most recent quarter, the company had sales of $68.6 million and a profit of 11 cents a share, compared to year-ago sales of $64.9 million and a 17-cent profit.

The Fragrance Counter competes with other fragrance-related Web sites, including Deer Park, N.Y.-based FragranceNet. Jason Apfel, the chief operating officer at FragranceNet.com, said his site is "neck and neck" with the Fragrance Counter in terms of sales.

Apfel said his site offers discounts on all products, while Fragrance Counter sells its goods at the full retail price, aside from a limited number of daily specials. "It's the venue. People on the Internet, granted they're looking for convenience, but they're also looking for value," said Apfel.

Apfel also disagreed with The Fragrance Counter's strategy of spending so much money to get its site featured on high-traffic Internet sites. For instance, Apfel pointed out that Allou is spending $750,000 a quarter on AOL, while its entire Internet business only generated sales of $313,000 for the first fiscal quarter. "Word-of-mouth has been our biggest advertising source," he said. FragranceNet.com had been on AOL until The Fragrance Counter took its place.

Mark argued that most of Allou's sales will likely come in the fourth quarter. "For fragranc companies, Christmas business typically represents as much as 50 percent of your business," said Mark, adding that the company's seasonal cycle will decrease somewhat next year as it ramps up its cosmetic sales.

Written By Darren Chervitz, CBS MarketWatch