Is Mold-Busting Cosmetics Maker About to Go Bust Itself?

Bare Escentuals Soared by Avoiding Biggest Channels; Now Its Stock Is Plunging

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A company that wowed Wall Street by defying the rules of beauty marketing is suddenly unable to defy the laws of gravity.
On June 22, key executives sold big piles of stock. Bare Escentuals CEO Leslie Blodgett sold 500,000 shares for $17.9 million.
On June 22, key executives sold big piles of stock. Bare Escentuals CEO Leslie Blodgett sold 500,000 shares for $17.9 million.

Bare Escentuals, purveyor of additive and irritant-free cosmetics, has ridden the wave of popularity for natural beauty products in recent years. It built a business approaching annual sales of $500 million by sidestepping the biggest beauty channels -- department stores and mass merchandisers -- in favor of the QVC home-shopping network, its own infomercials and specialty retailers such as Sephora, along with its own Bare Escentuals boutiques.

Along the way, it became the hottest stock in package goods. After its initial public offering last year, Bare Escentuals soared to lofty multiples topping 60 times price and more than 10 times sales -- a trajectory reminiscent of former consumer darlings such as Krispy Kreme, Boston Market and Snapple.

Hard hits
Lately, those analogies to upstart marketing successes gone bust haven't been lost on Wall Street. The company's stock has plunged more than 40% since June 5 to less than $25 after Bare Escentuals indicated one of the marketing pillars holding it aloft was wobbly -- its latest infomercial didn't perform up to expectations. Then on Aug. 1, it told investors sales from infomercials might fall as much as 10% in the second half, causing the stock to tumble more than 12% the next day.

(It also didn't help when, on June 22, key executives sold big piles of stock. CEO Leslie Blodgett sold 500,000 shares for $17.9 million, and Chairman Ross M. Jones, who is also managing director of the private-equity firm Berkshire Partners, which took Bare Escentuals public last year, sold 3.9 million shares for $139 million.)

Even so, Bare Escentuals is beating analyst projections for the second quarter, with sales up 29% to $124.1 million and earnings per share up 47% to 22¢. "Our other retail and wholesale channels performed ahead of expectations as we continue to be the leader in mineral-based cosmetics," Ms. Blodgett said on an Aug. 1 earnings conference call.

Expansion hopes
Investors had been betting Bare Escentuals' strong double-digit growth could last as the company expands into Western Europe, U.S. department stores and new product lines. But some industry watchers doubt prospects for those expansion plans, too.
Lessons learned
Infomercials aren't a sure thing.
Direct-response TV may be accountable, but it doesn't always work as planned.

Hot products always get knocked off.
Most of Bare Escentuals' rivals have versions of its signature foundation.

Once you've defied the old model, you can't necessarily rely on it.
Bare Escentuals didn't need department stores at first. Now that its products are widely knocked off at mass, it's not certain department stores need it.

Timing is everything.
It's best not to announce execs have sold more than $150 million in stock days after springing bad marketing news.

Suzanne Grayson, principal with the beauty marketing consulting firm Grayson Associates, notes that QVC and infomercials either don't exist or aren't nearly the force in Western European countries that they are in the U.S. "Without QVC," she said, "we wouldn't be talking about Bare Escentuals."

Initial concentration on QVC, Sephora, Ulta, infomercial and its own boutiques let Bare Escentuals build its brand without having to take on the industry's major players directly, while also putting its products in faster-growing outlets. But as the business has reached a more substantial size, it has had to look to the bigger distribution potential offered by department stores as well.

Fixing infomercials
But mass marketers are pumping out look-alikes, including Jane & Co., Johnson & Johnson's Neutrogena, P&G's Cover Girl and L'Oréal, the last making its Bare Naturale a major focus this summer. Ms. Grayson said all the products appear to be at least fairly good performers priced below Bare Escentuals. Not only could mass competition eat into Bare Escentuals' business, but it could also make department stores and their consumers more likely to resist its products. But the company remains undaunted and is working to fix its infomercials, hiring Karen Barner, a 13-year veteran of Guthy-Renker Corp., marketer of Proactiv, to the new post of senior VP-direct to consumer.

Bare Escentuals President Diane Miles on the Aug. 1 call said the company has been conducting extensive consumer testing to improve its disappointing infomercial, going back to its old ad before launching a revised version of the newer one later this month.

The company is now in 37 JC Penney, Nordstrom and Macy's stores and expects to open 65 more department-store doors overall this year, Ms. Blodgett said. It also expects to open 19 more company-owned boutiques and piggyback on stepped-up expansion by Sephora and Ulta, reaching 545 doors overall by year end, up 45% from December 2006.
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