By  on August 20, 2014

It’s not only the Biebs — it’s Taylor, too.

Not only are some celebrity fragrances such as Justin Bieber and Taylor Swift losing their whiff with consumers, but Wall Street also doesn’t understand what Elizabeth Arden Inc.’s new investor — Rhône Group LLC — brings to the table.

Both issues, plus a significantly widened fourth-quarter loss, had investors fleeing Arden stock, sending shares down 23.3 percent to close at $15.05 in Nasdaq trading. Nearly 9 million shares changed hands Tuesday, compared with a three-month average of just 445,416 shares.

Rhône Capital, the private equity arm of Rhône Group, agreed to purchase $50 million of redeemable preferred stock of Arden, which have a dividend rate of 5 percent annually, and also receive warrants to purchase 2.5 million shares of Arden’s common stock at an exercise price of $20.39 a share, or 7.6 percent of the beauty group’s outstanding common stock.

The private equity company intends to increase its shareholding in Arden, with Rhône and Arden signing a standstill agreement that caps Rhône’s stake at 30 percent after giving effect to the exercise of the warrants. Rhône also has the right to designate a member to Arden’s board, as well as add a second member under certain conditions.

Rhône Capital, along with Berkshire Partners and the Reimann family, helped take Coty Inc. public in that beauty company’s initial public offering in June last year, although Rhône and Berkshire each held what were deemed minority stakes. The IPO raised $1 billion, and proceeds went to the selling shareholders. The offering included a new share class that gave investors one vote for every 10 held by the existing shareholders. All three still control 97.7 percent of the voting rights. Rhône also owns a sizeable stake in Quiksilver Inc. Rhône was founded by Robert Agostinelli and M. Steven Langman in 1995.

Langman said, “Having assessed the opportunity, and focused on the market positioning of Elizabeth Arden, the quality and potential of Elizabeth Arden’s brand portfolio, and the quality of the company’s management team, we firmly believe that this represents a unique investment opportunity to partner with a proven entrepreneurial organization and help them achieve their ambition to be a leader in the global beauty industry.”

E. Scott Beattie, Arden’s chairman and chief executive officer, said on a conference call that a strategic review process is completed with the Rhône investment. “Rhône has extensive experience with other consumer product companies, including being a strategic investor with Coty. I’m personally very excited to have Rhône as an equity partner. They will help us and assist us in the development of many products and market initiatives before us and to work with me to attract the talents to the company to realize on these opportunities,” Beattie said.

He added that Rhône has a “deep understanding of the global beauty industry and are confident that the brands and capabilities of the Elizabeth Arden organization that has built the business very successfully over the past, supplemented with the additional management and board expertise, can build from this restructured base to become a much stronger, more sustainable beauty business.”

But the investment was a sticking point on the conference call to Wall Street after the earnings release.

While Beattie said Rhône as a strategic investor will help Arden scale the business and assist with the turnaround process, he acknowledged the equity firm was not involved in developing the new business plan.

The chairman was also asked the rationale for diluting existing shareholders with preferred stock having a 5 percent coupon when the company said it didn’t need financing. Another analyst queried what Rhône brought to the table that the company wasn’t already doing behind the scenes, trying to drill down a little more on Arden’s rationale.

Beattie said, “They understand the challenges and the opportunities of both the fragrance business, as well as the Elizabeth Arden brand. They have a global reach and global platform, and clearly one of our key objectives here, as I stated, is that we are in the process of initiating a number of strategic partnerships with regional distributors and potentially other organizations to help us commercialize and capitalize on our brand portfolio around the world. They also have the ability to assist in that.”

The chairman added that a strong consideration was in having a partner that can support the firm at the board level, as well as “be in the position to take advantage of opportunities that arise in terms of acquisitions and so on.” He also emphasized that the dilution is “relatively modest,” about 7 percent in terms of capital.

But the company’s fourth-quarter results indicated how much work lies ahead. For the three months ended June 30, the net loss widened to $155.9 million, or $5.24 a diluted share, from $5 million, or 17 cents, a year ago. Excluding non-recurring costs, the adjusted net loss was $30.8 million, or $1.04 a diluted share, against net income of $3.1 million, or 10 cents, a year ago. Net sales fell 28.4 percent to $191.7 million from $267.6 million.

For the year, the loss was $145.7 million, or $4.90 a diluted share, on a 13.4 percent decline in sales to $1.16 billion.

On the call to Wall Street analysts, Beattie said the decline in revenues and gross margins, which the company noted in its second and third quarter conference calls, “were driven primarily through a decline in retail performance of our celebrity fragrance portfolio primarily in our North American business.” He noted that the “weakness in consumer demand and retail traffic for most of last year was far greater than we anticipated.”

Half of the 13 percent drop in sales was connected to a slowdown in demand for celebrity fragrances and half connected with destocking of retail inventories or a tightening of distribution globally.

Joel B. Ronkin, executive vice president of Arden’s North American business, cited the Bieber and Swift fragrances as contributors to the steep drop in its celebrity fragrance business. Other celebrity fragrances in its portfolio include Britney Spears, Jennifer Aniston, Mariah Carey and Nicki Minaj.

The company in general has taken some costs out of its operational structure to improve profitability, even at a lower revenue volume. It has reduced sales to distributors and retailers, reduced sales allowances and discounts and cut 175 jobs in June. Rod R. Little, chief financial officer, said the changes will help expand gross margins as pricing improves and the company realizes supply chain benefits. He said the company will begin to see improve beginning in the second half of fiscal 2015.

RELATED STORY: Elizabeth Arden Unveils Restructuring Plan >>

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