The hot cosmetics brand no one wants

Physicians Formula racks up $100M in sales, but big buyers show little interest

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The u.s. cosmetics business is so tough that a hot little brand with $100 million in sales and extraordinarily fat profit margins can't find a buyer.

Summit Partners, the private-equity owner of Physicians Formula, began looking for a buyer about a year ago, according to people familiar with the matter. But strategic purchasers such as L'Oreal, Johnson & Johnson, Alberto-Culver Co., Kao Brands and Henkel have balked at the asking price or not been interested, and neither have other private-equity companies, they said.

As a result, Summit could opt to take Physicians Formula public, though at sales of around $100 million, it would be fairly small.

Executives at Physicians Formula and Summit did not return calls for comment.

That a strategic buyer wouldn't jump at the chance to buy Physicians Formula seems puzzling on the surface. The brand has sales of $78 million, up 18.6%, in the 52 weeks ended June 18, according to Information Resources Inc. Those figures don't include Wal-Mart Stores, which likely push sales above $100 million and growth over 20%.

What's more, those sales are extremely profitable. Physicians Formula has cash-flow margins of 25%-well ahead of most mass cosmetics or personal-care brands-according to people familiar with the company.

The profitability stems in large part from Physicians Formula's ability to build a substantial brand in drug and discount chains, largely avoiding food stores and their slotting fees.

It also has been able to build a brand on very little advertising. The brand spent $6.1 million last year, mainly in magazines. Independent Mandelbaum Mooney Ashley, San Francisco, handles Physicians Formula.

Certainly Summit is likely to want a rich payday for a brand it has nearly doubled since acquiring it from French beauty concern Pierre Fabre three years ago. But Kao, Henkel and L'Oreal, among others, have been willing to pay dearly for other brands of similar size in recent years.

One explanation may lie in how brutal the mass-cosmetics business has become of late. Physicians Formula this year likely will surpass Procter & Gamble Co.'s decades-old Max Factor in U.S. sales, after the P&G brand lost distribution in Target and the top three drug chains.
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