NEW YORK — Beauty retailers have become larger and mightier, but consumers, and lately investors, have increasingly taken a shinning to niche cosmetics brands.
In the last few months two such beauty firms, Physicians Formula and Bare Escentuals, have attempted to gauge just how interested the investment community is in their businesses by both filing initial public offerings.
On Aug. 29, Physicians Formula, based in Azusa, Calif., filed a registration statement with the Securities and Exchange Commission to sell $115 million in stock in an IPO. Six weeks earlier, the San Francisco-based Bare Escentuals filed a registration statement for an IPO of its common stock that’s expected to generate net proceeds of about $231 million.
It’s been nearly a decade since the beauty industry saw a string of players of any size go public. In the mid-Nineties, both Revlon (1996) and the Estée Lauder Cos. (1995) went public, but shortly after, IPO fanfare in the beauty industry came to a standstill.
Several industry watchers said Physicians Formula’s and Bare Escentuals’ IPO attempts come after both companies tried to pique the interest of potential buyers, and noted that a public offering would reap a larger financial reward for both firms.
Bare Escentuals is the larger of the two, with $186 million in sales. The company’s products are sold via infomercials, in Sephora and Ulta doors and through its 30 retail boutiques, which averaged net sales of $1,400 per square foot for the fiscal year ended Jan. 1, 2006. What’s more, over the last five fiscal years, Bare Escentuals’ net sales have grown approximately 87.5 percent on a compound annual basis.
For its part, Physicians Formula’s filing states that in 2005, the mass market cosmetics brand generated sales of $78.7 million, representing a compound annual growth rate of 22 percent. Industry sources estimate its 2005 net retail volume at $120 million, and project it could reach $150 million in 2007.
The two beauty firms have garnered attention in recent years for their successes in their respective retail channels, particularly with mineral makeup products. Physicians Formula, which is sold in more than 23,000 doors across the mass market, has steadily increased its footprint across food, drug and big-box stores with a full slate of product launches each spring.
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In fact, with more than 100 new products in the pipeline for spring 2007, Physicians Formula is asking retailers for another two feet of display space, which would bump its average real estate to 6 feet.
“Physicians Formula is a little company on fire. It has so much growth potential,” said a beauty buyer for a national drugstore chain, which plans to allot another foot of space to the brand next year. “Its display space keeps growing because the sales warrant it,” the buyer added.
As noted in its SEC filing, Physicians Formula’s growth strategy will expand to new retail channels, including home shopping television. One source close to the situation said that the company — taking its cues from Bare Escentuals’ frontwoman and president and chief executive officer Leslie Blodgett — will rely on its marketing powerhouse and newly named ceo, Ingrid Jackel, as its TV pitchwoman.
Several capital investors nodded to Physicians Formula’s planned channel expansion, given the increasingly consolidated mass market offers slim growth prospects.
“There were a lot of people who thought that Physicians Formula was a sleepy little niche brand,” said Wendy Liebmann, president of WSL Strategic Retail, adding that its IPO attempt shows that the company has been able to build a viable business in the wake of giants L’Oréal and Procter & Gamble. “Now Physicians Formula is playing with the big guys. It’s no longer under the radar.”
There was also much speculation that Bare Escentuals was on the hunt for a buyer, but many in the financial community expect the company will go public.
Bare Escentuals stated in its SEC filing that it intends to use the bulk of the expected $231 million in net proceeds from the offering to repay a portion of its debt. It plans to apply to list its common stock on the Nasdaq Global Select Market under the symbol BARE. Physicians Formula plans to use its net proceeds to repay some debt and for general corporate purposes, which several industry experts noted could include advertising and updated display fixtures. The beauty firm plans to list its common stock on the Nasdaq under PHYS.
Both firms helped carve out the mineral makeup category, and retailers and capital investors alike expect the trend to continue to gain steam. “I see minerals as a long-term trend because of the overall movement toward natural products and wellness,” noted one beauty buyer, who added that should sales of mineral makeup fizzle, Physicians Formula’s Jackel will be “ahead of the curve and onto the next big thing.”
Liebmann noted that both Physicians Formula and Bare Escentuals appeal to consumers’ fondness for niche brands. She said, “There’s a growing interest in both the mass market and prestige sector in smaller brands that can add some flavor and texture to the mix.”