Bare Escentuals, Inc. (BARE)
According to this pitch at Motley Fool CAPS Bare Essentials, Inc. (BARE) is a TMFSarahGen favourite. I’ve known Sarah for a while know and have always admired her openness to investing styles and willingness to combine both fundamental and technical analysis. Sarah also freely combines short term trading with long term investing. Those traits are pure Fusion Investing.
Sarah recently became a fully fledged Rule Breaker analyst. Her CAPS pitch on BARE highlights
Strong repeat business from the most loyal customers in cosmetics combined with growing international sales, accelerating door openings (at Ulta, Sephora, Nordstroms) through end of year, mean that today’s price is a gift.
At first blush BARE appears to be in the bargain bins, so let’s take a closer look.
The key statistics are very attractive. High margins and an amazing return on assets and with a PEG of 0.46 it appears like few people believe in the BARE growth story. With a trailing P/E of around 11 and forward of 8.7 and expected growth of 22% for the next five years there must be some serious problems at BARE.
Reading up on the story another company come to mind. Select Comfort (SCSS) is arguably the Fool’s worst ever recommendation and the BARE story is certainly reminiscent of that inflated disaster. New product in established essential market, challenging market leaders and selling at a premium. Then sales start to decline and fingers are pointed at poor advertising. Hopes are pinned on a new advertising turning things around. Strong company leader continues to talk very positively about the future. Possible risk to skin is reminiscent of the SCSS mould scare. The big difference is BARE sell a repeat product, cosmetics. With a strong brand this is close to a subscription business, which is one of the most profitable business models around.
So is BARE a bargain? Can a new advertising campaign turn things around? Has it been unfairly sold off in the current ditch retail environment?
The BARE chart couldn’t be more bearish. Falling from a high of $43.22 in May 2007 to the current $11.72. The recent fall indicates there was a bad earnings miss or other bad news, so I’ll check that in a minute.
The attraction here is if the underlying business is strong then the turnaround profits would be huge. Investor would benefit from the twin jets of increasing earnings and expanding margins. Up until June BARE sported a P/E of over 20. Looking at the chart below you can the P/E was as high as 60 and spent some time around 30. Therefore, even a positive investor re-rating would see the share price double, with a triple coming if BARE performs well and the retail environment improves. If BARE continues to grow eps at their expected 25% rate, then you can add that annual appreciation rate on as well.
Clearly there must be downsides to an investment in BARE. In such a situation the downside is what I prefer to concentrate on.
This Piper Jaffray downgrade on BARE is worth a read. Their conclusion said,
While we acknowledge that from a valuation to growth perspective, BARE appears relatively inexpensive, we believe shares of BARE lack a meaningful catalyst. We are sticking to the sidelines until we can see the following signs: 1) stabilization in the infomercial channel; 2) favorable customer response to the new kit initiative; and 3) signs of easing macro pressures such as traffic improvements, average ticket spending etc
Of note
International sales increasing.
My daughter wants to play on Club Penguin so stayed tuned for Part Two, where I dig the dirt on this mineral cosmetic company.
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