Orders Evaporate for Celebrity Perfumes

August 8, 2013, 8:16 p.m. ET

Orders Evaporate for Celebrity Perfumes

SERENA NG and SHELLY BANJO

Wall Street smells trouble in the fragrance business. Shares of perfume makers tumbled Thursday, after Elizabeth Arden Inc.RDEN +0.30% —the producer of fragrances including Justin Bieber’s “Girlfriend,” Taylor Swift’s “Wonderstruck Enchanted” and Nicki Minaj’s “Pink Friday”—said orders from one of its biggest customers, a major U.S. mass-market retailer, had been cut sharply in recent months. Executives at the company didn’t name the retailer, but Wal-Mart Stores Inc.WMT -0.45% is its biggest customer, according to Elizabeth Arden securities filings, accounting for 13% of its $1.24 billion sales in the year to June 2012 and about a fifth of its sales in North America. The cutback in so-called replenishment orders, Elizabeth Arden said, effectively reduced the retailer’s inventory on hand “with orders significantly below their pace of their retail sales.”

Due to that sharp drop in orders, as well as pockets of weakness for its business in Europe, Elizabeth Arden posted a $5 million loss for the quarter ended June 30, compared with a profit of $3.6 million a year ago. Its overall sales in the year to June 2013 edged up 2% to $1.34 billion.

Shares of Elizabeth Arden, which also sells cosmetics and perfumes under its namesake brand, were down nearly 25% at their low Thursday before rebounding to $33.56, off 17% on the day. Shares of another fragrance maker, Inter Parfums Inc.,IPAR -5.10% fell nearly 14% before climbing back to $31, down more than 5% on the day.

The question is, why the cut in orders?

Overall, fragrance sales are posting steady growth world-wide, but mass-market perfume has struggled in the U.S., with annual sales shrinking over the past half decade, according to data from Euromonitor International. The 2011 blockbuster launch of Justin Bieber’s first fragrance, “Someday,” helped sales that year, but in 2012 “there was no must-have celebrity fragrance to entice consumers,” Euromonitor said.

Another theory is that Wal-Mart is trying to order closer to the holiday season to better manage its inventory. Sales of celebrity fragrances are typically higher during the year-end holiday season.

Bill Chappell, an analyst at SunTrust Robinson Humphrey, said he recently saw “out of stock” signs for celebrity fragrances at several Wal-Mart stores across the country, indicating it is holding off for now.

But Elizabeth Arden executives said the decline in replenishment orders affected makers of other consumer goods, too.

“This is not a unique situation to us, or to our category. This is not a brand issue, it’s not a fragrance category issue, as we’ve actually built market share,” E. Scott Beattie, Elizabeth Arden’s chief executive, said on a conference call Thursday.

Still, he said the sharp drop in orders “was a surprise,” and the company is working to address the issue.

Wal-Mart declined to comment on the matter. Earlier this year, executives refuted criticism from customers and suppliers over its failure to restock empty shelves and replenish items when they are sold out.

“Our in-stock levels today are in the low 90%,” Wal-Mart U.S. President Bill Simonsaid at the shareholder meeting in June. “We have issues as every retailer does and are always trying to get better but there is nothing systemically wrong here.”

Executives at Inter Parfums on Thursday told analysts that their sales to mass retailers are mostly through dollar stores, indicating it doesn’t have a significant exposure to Wal-Mart.

Shares of Coty Inc., COTY +0.77% which sells a number of celebrity fragrances at Wal-Mart, were down nearly 3% at $16.81. Coty declined to comment. The company recently said 6% of its total sales come from celebrity fragrances.

During the recession Wal-Mart drastically curtailed its vast selection of products, but reversed course after sales failed to improve and shoppers complained that their preferred brands weren’t on the shelves. More recently, it has started to tailor its assortment, winnowing out poor sellers and adding items that are more relevant to local customers. For instance, it segmented the country’s ice cream tastes by region, carrying brands like Blue Bell Creameries in Texas and Friendly’s in New York.

The retailer’s moves may be hurting some suppliers more than others, analysts say, including those whose sales trends are seasonal.