Spa DietConsider Elizabeth Arden ( RDEN), a leading fragrance maker that sells products such as Elizabeth Taylor's Passion and that recently secured Catherine Zeta-Jones as its spokeswoman. It's an interesting turnaround stock with a lot of potential pop. It's a $200 million company that could be worth $600 million or more with a successful turnaround. However, two significant problems make it a nonstarter. First, long-term debt is too high at $317 million on a revenue run rate of about $750 million. This ups the stakes considerably for the owners of Elizabeth Arden equity. With such a weak balance sheet, the company doesn't have a lot of time to get it right with consumers. Second, this company appears to be run for the benefit of management. Management's grab for shareholder property is excessive by any measure. In fiscal 2001, the company granted options representing 16.4% of shares outstanding, with one-quarter of that going to the CEO. When the stock rallied in fiscal 2002, the number of options granted dropped considerably to about 1.3% of shares. But in fiscal 2003, the stock slid back to fiscal 2001 levels, and there was another big grant -- this time representing slightly less than 6% of shares. The grab for shareholder property at Elizabeth Arden -- of roughly 25% of shares outstanding over the past three years (including some restricted stock grants) -- can be summarized easily enough: It's all about what management thinks it can get away with.
FASB Will Carry the DayThe Financial Accounting Standards Board's move to expense stock options is a fait accompli.
- 'Cash doesn't change': This is misleading. Either (1) cash is depleted because the company purchases stock on the open market to cover dilution due to options, or (2) if the company doesn't buy back stock, shareholders' pro rata claim on cash is diminished because there are more shares outstanding. '... revenue doesn't change': Again, either the company must use shareholder property (cash) to purchase shares on the open market to prevent dilution, or a shareholder's ratable share of revenue declines with more share issuance.