Bare Escentuals feels effects of economy even as it posts successful Q2

SAN FRANCISCO Bare Escentuals, a maker of mineral makeup, posted double-digit gains in second quarter sales and earnings but, according to at least one industry observer, is being impacted by the weak economy and lower-priced options available in the mass market.

Net sales for the second quarter ended June 29 were $138.5 million, an increase of approximately 12 percent from $124.1 million in the year-ago period.

Net income for the quarter was $24.7 million, or 26 cents per diluted share, an increase of 22 percent compared with $20.2 million, or 22 cents per diluted share, in the second quarter of fiscal 2007.

“The overall business is seeing pressure from the weak macro environment. Not only are Bare customers choosing lower priced kits and ‘open box’ products, the company is also seeing less success in attracting new customers who typically shop at the mass channel,” stated William Chappell, SunTrust Robinson Humphrey analyst, in a recent research note. “This second issue has been exacerbated by the high number of lower priced products which have hit mass shelves in the past six months.”

For fiscal 2008, the company now expects sales growth to be in the range of 15 percent to 20 percent compared to the prior year. This compares with it original guidance of between 20 percent and 25 percent growth. The company continues to expect diluted earnings per share for fiscal 2008 to be in the range of $1.13 to $1.18.

“We are clearly frustrated by the quarter and guidance. It feels like the company realized all the investor concerns (economic slowdown, increased competition, uncertainty of the Infomercial channel) in just one quarter,” added Chappell. “The tempered growth outlook will raise more questions as to whether the company is adequately supporting the brand versus competition (Bare doesn’t do traditional advertising) and the health of the infomercial channel. That said, we are not yet ready to throw in the towel on the stock.”

Chappell noted that, on the bright side, margins were better than expected (operating margin was 32.5 percent versus his 29.8 percent estimate) as the mix shift to smaller kits and open boxes provided a gross margin lift. Furthermore, the company continued to see solid growth internationally and management indicated that the sell through growth rates in the United States remain above 20 percent.

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