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Elizabeth Arden

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EXECUTIVE MEMORANDUM

Company Name: Elizabeth Arden, Inc. Analyst: Katy Hernandez
SIC: 2844 Date: September 22, 2011
Business: Perfumes, Cosmetics & Other Toilet Preparations Established: 1960
TAX ID: 59-0914138
______________________________________________________________________________

Company Overview

Elizabeth Arden, Inc. was founded in 1960 and is headquartered in Miramar, Florida. It’s a beauty products company, engages in the manufacture, distribution, marketing, and sale of fragrances, skin care, and cosmetic products to retailers and other outlets worldwide. The company sells its fragrance products under the Red Door, Elizabeth Arden 5th Avenue, Elizabeth Arden green tea, Pretty Elizabeth Arden, Curve, Giorgio Beverly Hills, PS Fine Cologne, White Shoulders, Juicy Couture, Kate Spade New York, John Varvatos, Rocawear, Alberta Ferretti, Halston, Geoffrey Beene, Alfred Sung, Bob Mackie, and Lucky. Its skin care products comprise moisturizers, creams, lotions, and cleansers under the Ceramide, Prevage, Eight Hour Cream, and Visible Difference. The company’s cosmetic products consist of foundations, lipsticks, mascaras, eye shadows, and powders in various shades and colors under the Elizabeth Arden brand name. Elizabeth Arden, Inc. sells its products primarily to department and specialty stores, mass retailers, perfumeries, boutiques, distributors, and travel retail outlets, as well as to independent fragrance, cosmetic, gift, and other stores. It also markets and sells its products through its e-commerce site at elizabetharden.com.

Corporate Structure

Ownership: Publicly owned company that is traded on the New York Stock Exchange under the trading symbol RDEN.

Major Share Holders: # of Shares Reported:
|MAURAN RICHARD C W |1,720,583 |Feb 17, 2011 |
|BEATTIE E SCOTT |1,129,537 |Aug 30, 2011 |
|BERENS FRED |806,810 |Aug 16, 2011 |
|RONKIN JOEL B |130,811 |Aug 16, 2011 |
|WEST PAUL |111,146 |Sep 30, 2010 |

Mr. Mauran, age 76, is a private equity investor. Over the course of his career, Mr. Mauran founded two successful Canadian companies (FoodCorp and Industrial Growth Fund, which became Mackenzie Financial Corporation, one of Canada's largest mutual fund management companies). In addition, he served as a director of several publicly-traded companies (including Microbix Biosystems, Inc., Premcor, Inc. , and US Physical Therapy, Inc.

Key management figures:

|Name | |Age | |Position with the Company |
| | | | | |
|E. Scott Beattie | |52 | |Chairman, President and Chief Executive Officer |
| | | | | |
|Stephen J. Smith | |51 | |Executive Vice President and Chief Financial Officer |
| | | | | |
|Joel B. Ronkin | |43 | |Executive Vice President, General Manager — North America |
| | | | | |

E. Scott Beattie has served as Chairman of their Board of Directors since April 2000, as their Chief Executive Officer since March 1998, and as one of their directors since January 1995. Mr. Beattie also has served as their President since August 2006, a position he also held from April 1997 to March 2003. In addition, Mr. Beattie served as their Chief Operating Officer from April 1997 to March 1998, and as Vice Chairman of the Board of Directors from November 1995 to April 1997. Stephen J. Smith has served as their Executive Vice President and Chief Financial Officer since May 2001. Previously, Mr. Smith was with PricewaterhouseCoopers LLP, an international professional services firm, as partner from October 1993 until May 2001, and as manager from July 1987 until October 1993. Joel B. Ronkin has served as their Executive Vice President, General Manager- North America since July 2010, as their Executive Vice President, General Manager — North America Fragrances from July 2006 to July 2010, as their Executive Vice President and Chief Administrative Officer from April 2004 to June 2006, as their Senior Vice President and Chief Administrative Officer from February 2001 through March 2004, and as their Vice President, Associate General Counsel and Assistant Secretary from March 1999 through January 2001. From June 1997 through March 1999, Mr. Ronkin served as the Vice President, Secretary and General Counsel of National Auto Finance Company, Inc., an automobile finance company. From May 1992 to June 1997, Mr. Ronkin was an attorney with the law firm of Steel Hector & Davis L.L.P. in Miami, Florida.

Business

Elizabeth Arden, Inc. is a global prestige beauty products company with an extensive portfolio of prestige fragrance, skin care and cosmetics brands. In addition to their owned and licensed fragrance brands, they distribute approximately 300 additional prestige fragrance brands, primarily in the United States, through distribution agreements and other purchasing arrangements. In the United States, they sell their Elizabeth Arden skin care and cosmetics products primarily in prestige department stores and their fragrances in department stores and mass retailers. They also sell their Elizabeth Arden fragrances, skin care and cosmetics products and other fragrance lines in approximately 100 countries worldwide through perfumeries, boutiques, department stores and travel retail outlets, such as duty free shops and airport boutiques, and on the internet.

Chronology of Events

2010: Elizabeth Arden introduced a number of new Elizabeth Arden branded products, including PREVAGE® Day SPF 30, a new Ceramide Ultra Moisture Cream and Lotion, and flanker fragrances for their classic Elizabeth Arden 5th Avenue and Elizabeth Arden green tea fragrances. They will continue to focus on their core Elizabeth Arden branded skin care and color cosmetics products by investing in new product innovation and technologies and increased advertising. In addition, during fiscal 2010 this company launched a number of fragrances, including a new Juicy Couture fragrance, Couture Couture, as well as new fragrances under their Britney Spears, Mariah Carey, Elizabeth Taylor, Alberta Ferretti, Halston and Usher licenses.

2009: In addition, as a result of the Liz Claiborne license, during fiscal 2009 they launched new Juicy Couture fragrances, Viva la Juicy and Dirty English, and a new fragrance under the Usher license. They also launched a new fragrance under their Rocawear fragrance license, 9IX Rocawear, and new fragrances under their Mariah Carey, Giorgio Beverly Hills, Badgley Mischka, and GANT licenses.

2008: They became the exclusive, global licensee for the manufacture, distribution, marketing and sale of the Liz Claiborne fragrance brands under a long-term license agreement with Liz Claiborne, Inc. and certain of its affiliates. The Liz Claiborne fragrance portfolio includes the Juicy Couture, Curve and, Lucky fragrances. In connection with the Liz Claiborne license agreement they also assumed a license for the Usher celebrity fragrances.

Industry

The beauty industry is highly competitive and can change rapidly due to consumer preferences and industry trends. This industry’s success depends on brand strength, pricing and assortment of products, innovation, perceived value, product availability and order fulfillment, service to the consumer, promotional activities, advertising, special events, new product introductions, e-commerce initiatives and other activities in order to survive in the market.

Competition (Three (3) main competitors): 1. Coty, Inc. (It is the world's leading maker of mass-market fragrances for men and women. Its boudoir includes moderately priced fragrances and colognes sold by mass retailers and prestige brands found in department stores. 2. Estee Lauder Companies Inc 3. Revlon, Inc.
Business Strategy

In fiscal 2011 they introduced several new products. Within the Elizabeth Arden brand, they launched Prevage Clarity and Prevage Eye, and re-introduced the classic Red Door fragrance. Within their fragrance portfolio, they introduced several new products including Peace Love & Juicy Couture, radiance Britney Spears, Violet Eyes Elizabeth Taylor, John Varvatos 10th Anniversary Limited Edition, Kate Spade Twirl, and Mariah Carey Lollipop Bling. In fiscal 2012, they plan to launch a comprehensive brand repositioning for the Elizabeth Arden brand, designed to modernize the brand’s image and increase its relevance among target consumers. During fiscal 2012, they will also continue to innovate in the Elizabeth Arden brand with several new introductions planned for fiscal 2012 across the skincare, fragrance, and color categories, in addition to continued innovation planned for several fragrance brands, including Britney Spears, Juicy Couture, Curve, Rocawear, and John Varvatos. They will also premiere the first fragrance launch under their new license agreement with Taylor Swift in fall 2011.

The Elizabeth Arden brand is one of the most widely recognized beauty brands in the world and is associated with high quality products, and they intend to continue to invest behind and grow this brand on a global basis through: (a) Continued expansion in high-growth markets, such as Asia and developing markets, (b) Innovation in skin care and color products based on new technologies, (c) Focusing on their classic products such as their Eight Hour Cream, Ceramide skin care products and Red Door fragrance, (d) Leveraging the 100th anniversary of the Elizabeth Arden brand during 2010 and 2011, as well as the marketing opportunities provided by the Red Door Spa heritage, which they believe affords them a competitive advantage, and (e) Continuing to cultivate strong partnerships with key global retailers.

2008 Their business strategy was to increase net sales, operating margins and earnings by:
(a) Growing the sales of their existing brand portfolio, including the Elizabeth Arden brand, through new product 13 innovation and targeting additional demographics and geographic markets,
(b) Acquiring prestige beauty brands through licensing opportunities and acquisitions,
(c) Expanding the prestige fragrance category at mass retail customers in the U.S., and
(d) Implementing initiatives to improve their cost structure and working capital efficiencies.

2009 Their business strategy was to increase net sales, operating margins and earnings by:
(a) Increasing the sales of the Elizabeth Arden brand through new product innovation, targeting fast-growing geographical markets and leveraging their strength in skin care,
(b) Increasing the sales of their prestige fragrance portfolio internationally and through licensing opportunities and acquisitions,
(c) Expanding the prestige fragrance category at mass retail customers in North America, and
(d) Implementing initiatives to improve their gross margin, cost structure, working capital efficiency and return on invested capital, as well as improving the effectiveness of their marketing and selling expenditures.

2010 Their business strategy was to increase net sales, operating margins and earnings by:
(a) Increasing the sales of the Elizabeth Arden brand through leveraging the global awareness of the Elizabeth Arden brand name and the Red Door spa heritage, targeting fast-growing geographical markets, and focusing on their skin care expertise and classic products, such as their Eight Hour cream, Ceramide skin care products and Red Door fragrance,
(b) Increasing the size and sales of their prestige fragrance portfolio internationally, particularly in the large European fragrance market, and through licensing opportunities and acquisitions,
(c) Expanding the prestige fragrance category at mass retail customers in North America and expanding their market share in both prestige and mass retail channels,
(d) Continuing to expand operating margins, working capital efficiency and return on invested capital, and
(e) Capitalizing on the growth potential of their global brands by focusing on both organic growth opportunities as well as those achieved through new product innovation.

Income Statement Analysis

| |2009 | |2010 | |2011 |
|Sales | $ 1,070,225.00 | | $1,103,777.00 | | $1,175,500.00 |
|% of Sales | |3% | |6% | |
|Gross Profit | $ 433,155.00 | | $ 495,974.00 | | $ 556,277.00 |
|G P M |40% |15% |45% |12% |47% |
|Operating | $ 422,820.00 | | $ 451,181.00 | | $ 478,702.00 |
|Expenses | | | | | |
|Operating |40% |7% |41% |6% |41% |
|Expenses | | | | | |
|Net Income | $ (6,163.00)| | $ 19,533.00 | | $ 40,989.00 |
|Net Income |-1% |-4% |2% |1% |3% |

Net Sales: The Company’s net sales have been increasing during the last three years, reflecting how the beauty’s industry as well as others markets have been recuperated from the recession. During fiscal 2011, the net sales were $1,175.5 million, an increase of 6% from year 2010 and 3% compared to fiscal 2009 due to higher sales of skin care products and fragrances including: the Juicy Couture fragrances, the recently licensed fragrance brands of John Varvatos and Kate Spade, and Britney Spears fragrances due to the launch of radiance Britney Spears.

Gross Profit: The Company’s gross profit has been improving during the last three years. During fiscal 2011, the gross profit was 556.3 million, compared to 495.9 million in 2010 and 433.1 million in 2009 due to higher proportion of basic sales of Elizabeth Arden products and licensed brands, which reflect higher gross margins as compared to distributed brands and promotional product sales, as well as improved operating efficiencies due to the Initiative.

Operating Expenses: In fiscal 2011, operating expenses were $478.7 million compared to $451.2 million for fiscal 2010 and 422.8 million in fiscal 2009. The increase was due to higher marketing and sales expenses of $15.9 million and higher general and administrative expenses of $10.3 million. The increase in marketing and sales expenses was primarily due to higher media expenses of $7.4 million, higher marketing and sales overhead expenses of $5.2 million, and higher royalty expenses of $3.4 million due to higher sales of licensed brands. The increase in general and administrative expenses was principally due to higher payroll and incentive compensation costs of $15.0 million, and higher professional services costs, partially offset by lower restructuring expenses and Initiative-related one-time costs and $3.1 million of higher losses in the prior year period related to the impact of foreign currency translation of their affiliates’ balance sheets.

Net Income: In fiscal 2011, net income was $40.9 million compared to $19.5 million for fiscal 2010 and -6.2 million in fiscal 2009 as a result of higher net income from operations, partially offset by the $6.5 million in debt extinguishment charges and a higher effective tax rate in the current year period.

Balance Sheet Analysis

|Financial Data Date |2009 |2010 |2011 |
|Current Ratio |1.92 |2.21 |3.35 |
|Quick Ratio |0.90 |1.14 |1.86 |
|A/R DOH (Avg. Collection Period) |64.89 |78.56 |56.24 |
|Inventory DOH |182.50 |162.78 |145.31 |
|Accounts Payable (DOH) |69.56 |59.12 |28.26 |
|Leverage Ratio |1.63 |1.63 |1.39 |

Liquidity: During fiscal 2011, the liquidity of the Company improved. Cash provided by their operating activities is driven by net income adjusted for non-cash expenses and debt extinguishment charges, and changes in working capital. For the year ended June 30, 2011, net cash provided by operating activities was $97.7 million, as compared to $114.0 million for the year ended June 30, 2010. Net income adjusted for non-cash items and debt extinguishment charges increased by $33.3 million as compared to the prior year. Working capital changes provided cash of $12.1 million in the current year period as compared to $61.7 million in the prior year. This decrease in cash provided by working capital changes primarily related to inventory as the prior year period included significant reductions in inventory levels, and continued reductions in accounts payable.

Asset Efficiency: The Company’s Inventory is composed of finished merchandise and is stated at a market value. The cost of the inventory is based on the cost of the item at the time when it is received in the warehouse using vendor invoices, as well as the cost of warehousing and transportation of merchandise to the stores. Additionally, the Company maintains a reserve for estimated shrinkage due to losses, shortages and damages. Inventory levels at the end of fiscal 2011 were $246,514, a decrease of $24,544 million from the end of fiscal 2010 that was $271,058 million. The Company monitors inventory levels and merchandise purchases to maintain in line with consumer demands.

Leverage: The Company’s leverage is good and it reflected a positive net worth of $417,765 million which increase significantly since 2010 ($352,617) and 2009 ($336,778).

Cash Flow Analysis

| |Sources 2011 |% |Uses 2011 |% |
|Operating activities |97,746 |26.4% | | |
|Investing activities | | |25,608 |7.6% |
| | | |13,864 |4.1% |
|Financial activities |243,996 |66.0% |59,000 |17.5% |
| |20,432 |5.5% |223,332 |66.1% |
| |1,754 |0.5% |13,758 |4.1% |
| |3,734 |1.0% |2,345 |0.7% |
| |2,214 |0.6% | | |
|Totals |369,876 | |337,907 | |
| | | |31,969 |8.6% |
| | | |369,876 | |

Cash provided by their operating activities is driven by net income adjusted for non-cash expenses and debt extinguishment charges, and changes in working capital. The company’s decrease in cash provided by working capital changes primarily related to inventory as the prior year period included significant reductions in inventory levels, and continued reductions in accounts payable. For the year ended June 30, 2011, net cash used in investing activities was composed primarily for in-store counters and displays, leasehold improvements and computer hardware and software. Second, $13.9 million of payments related to the acquisition of the Prevage trademarks and related patents and the global license agreement with John Varvatos Apparel Corp. for the manufacture, distribution and marketing of John Varvatos fragrances. The decrease in net cash used in financing activities resulted primarily from the refinancing of their senior notes in January 2011, including using the proceeds to pay down borrowings under their credit facility. For the year ended June 30, 2011, borrowings under their credit facility decreased by $59.0 million. There were no borrowings outstanding under their credit facility at June 30, 2011. Proceeds from the exercise of stock options were $20.4 million for the current year period compared to $1.6 million for the prior year period. Repurchases of common stock for both the years ended June 30, 2011 and 2010 were $13.8 million. The repurchases of common stock for the current year period, include approximately $1.2 million for the settlement of shares that were repurchased at the end of fiscal 2010 under our repurchase program and approximately $3.4 million for shares withheld by them upon the March 2011 vesting of certain market-based restricted stock granted in 2005 to satisfy minimum statutory tax withholding obligations resulting from such vesting.

Collateral Analysis

|Net Valuation |Book Value |% Shrinkage |Net realized value in liquidation |
|Accounts receivable |165622 |80% |132,498 |
|Inventory |246514 |50% |123,257 |
|Equipment |16975 |30% |5,093 |
|Total Net Liquidation Proceeds (A) | | |260,847 |
|Less Projected Credit Exposure (B) | | |437,072 |
|Net Loss or Collateral Cushion | | |-176,225 |
|Collateral Coverage A/B | | |0.60% |

Risk Factors:

1. Factors affecting their relationships with the customers or their customers’ businesses 2. Risks of international operations, including foreign currency fluctuations, hedging activities, economic and political consequences of terrorist attacks, disruptions in travel, unfavorable changes in U.S. or international laws or regulations, diseases and pandemics, and political instability in certain regions of the world 3. Reliance on license agreements with third parties for the rights to sell many of their prestige fragrance brands 4. The quality, safety and efficacy of their products, 5. Ability and strategy in order to satisfy their customer 6. The success, or changes in the timing or scope, of new product launches, advertising and merchandising programs 7. Ability in order to satisfy current customers and attract new customers

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