Perfumania Holdings Inc. wants to vault itself into the big leagues, but the path there involves some growing pains -- including a toll on the company's stock price.
The Bellport-based manufacturer, distributor and retailer of designer perfumes is launching new fragrances and bringing aboard big-name brands through its acquisition of Parlux Fragrances Inc., the maker of perfumes for the likes of singer Rihanna, designers Vince Camuto and Kenneth Cole, and the brand Tommy Bahama.
When Perfumania announced the $152-million deal in December 2011, its shares plunged, and they have yet to recover. Perfumania's stock, which traded at $19.70 before the purchase, closed Friday at $5.80.
The Parlux purchase and the expansion of its products and brands are weighing down Perfumania's financial results. Its loss widened to $5.4 million in the third quarter, which ended Oct. 27, from $832,000 a year earlier.
Perfumania chief executive Michael Katz is unbowed. "We knew from a financial performance perspective it would be a difficult one to two years to give us the ability to accomplish our goals," Katz said. "This is a longer-term play."
Perfumania had revenues of $518 million in the 12 months through its third quarter. It employs about 2,200 people, 400 of them on Long Island. The stock market value of the company, which is 57 percent owned by the family of executive chairman Stephen Nussdorf, is $88.9 million. The Nussdorfs also own Quality King Distributors Inc., a large Bellport-based private distributor of pharmaceuticals, health and beauty products.
Perfumania operates a retail chain of 341 Perfumania stores nationwide and an online shop, Perfumania.com, both selling perfumes at discounted prices. The company already licensed and manufactured designer brands, though on a smaller scale than Parlux. Perfumania also owns a fragrance consignment business and a distribution operation.
With its acquisition of Parlux, Perfumania is trying to deepen its position as a vertically integrated company -- playing the manufacturer, wholesaler, distributor and retailer.
In the U.S. perfume market sales for "prestige" fragrances -- sold in department stores -- increased 5 percent in 2012 from the prior year, to $2.9 billion, according to the NPD Group, the Port Washington retail research and analysis firm. In contrast, sales of mass fragrances sold in retail chains like Walmart and in drugstores declined 4.4 percent in 2012, falling to $883.3 million.
Perfumania is small compared with giants like Estée Lauder Companies Inc. -- which has a big research presence on Long Island -- L'Oreal and Procter & Gamble Co. But its acquisition of Parlux opens an avenue for the company to "create demand" with department store launches and the international recognition of Parlux's superstar and designer names, Katz said.
"The recognition and demand has been driven by the initial success [of the fragrances] in the department stores," Katz said. "If a brand does well in Macy's, then Kohl's wants it, and then the people in Brazil want it."
The process of creating designer perfumes relies on technical skill, artistry and marketing.
Ultimately, a scent's success and longevity rest on the quality of the perfume -- or the "juice," as it's known in the industry, said Linda Levy, Perfumania's chief marketing officer. But equally essential are the bottle design and packaging, the advertising campaign and the designer or celebrity's story.
"The most important thing is the scent itself, but you're not going to buy it unless the packaging is attractive," Levy said.
To introduce a new celebrity perfume, she and her team begin by delving deep into the personality and style of the celebrity. Diana Espino, Parlux vice president of marketing and brand development, has worked closely with Rihanna and her team, becoming a Rihanna expert. Parlux, which has produced and launched three of Rihanna's fragrances, is "building the House of Rihanna," Espino said.
Espino listened to Rihanna's music and followed her shifts in hairstyle and fashions from ripped jeans to couture gowns.
The relationship between the celebrity and the Parlux team is a close one, Espino said.
"I worked with a celebrity one time who said, 'I want a fragrance to smell like a crisp white shirt,' " Espino said. "Sometimes they're in a hotel and there's something in the bubble bath they like. They are constantly thinking as they travel what they want that fragrance to smell like."
That is where the evaluator, or "nose" -- in this case, Jennifer Mullarkey -- steps in. With her years of training with perfumers, she is able to identify the various ingredients in a scent and gauge what to remove or add to create the desired fragrance.
With the celebrity, they can go through as many as 50 different fragrances before finding the one that works, said Mullarkey, Perfumania's vice president of fragrance and product development. During that process, the team conducts tests to see how consumers respond. They measure how much consumers like the scent and its strength. And they try to get a sense of how consumers perceive the perfume using a list of adjectives.
CREATING A SCENT
"The big thing about fragrance, in general, is it's very subjective, and it is really linked to emotion and how it makes you feel," Mullarkey said.
She describes the patchouli, vanilla, musk and woody notes in Reb'l Fleur by Rihanna as evoking a "dark mysterious quality." But the idea behind Nude by Rihanna, another of her scents, is to convey a "stripped-down effect" and "that basic simplistic pleasure of bare skin," she said. "It's like being wrapped in a cashmere blanket."
Marketing closely involves the celebrity. Multiple versions of the bottle and packaging design are considered and tweaked and related production expenses calculated.
Espino and others on the team are constantly looking for ways that Rihanna can establish ties to her perfume. And there's ample opportunity to do so with millions of Rihanna Twitter followers and Facebook fans.
On Rihanna's current Diamonds World Tour, for example, the team has planned to have women dressed like the singer hand out scented tattoos -- another Rihanna hallmark -- at tour stops.
PRESTIGE PERFUMES GROW
The business of selling a product as intangible as a scent designed to evoke a feeling is a tricky endeavor, experts say. The overall personal fragrance industry has had a spotty performance over the past decade, but the prestige market appears to have turned a corner, said Karen Grant, beauty industry analyst with the NPD Group.
"In 2011 we saw the launch of [Justin] Bieber's Someday, and then Taylor Swift introduced Wonderstruck. Those two fragrances were machines, and they helped the entire fragrance market in the U.S."
Perfumania is building its operations so it can take its share of that growth.
At the moment, the company will see losses, which Katz says he expects, as it invests in pumping up its stable of brands and launching new products.
"Over time, we believe that we should be able to produce more revenues and bigger profits for our shareholders," Katz said.
Once that happens, he anticipates the company's stock price will rise. As the company's performance improves, Katz also envisions Perfumania making a secondary stock offering -- that is, selling more stock to the public.
Because the company's shares are thinly traded, trading in a small number of shares can drive the price up or down, Katz said. More shares in the market will both raise money and reduce the stock's volatility.
The company also is in discussions with a financial public relations firm to get its story out to potential investors, Katz said.
"We're never going to become" Procter & Gamble, Katz said, "but I truly believe we can grow to be a dominant player in the designer fragrance industry."