The Cosmetic Center, Inc.

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The Cosmetic Center, Inc.

8839 Greenwood Place
Savage, Maryland 20763
U.S.A.
(301) 497-6800
Fax: (301) 497-6632
Web site: http://www.revlon.com

Public Subsidiary of Rev Ion Consumer Products Corporation
Incorporated: 1957 as Cosmetic & Fragrance Concepts, Inc.
Employees: 1,630
Sales: $133.8 million (1996)
Stock Exchanges: NASDAQ
SICs: 5912 Drugstores & Proprietary Stores; 5999 Miscellaneous Retail Stores, Not Elsewhere Classified; 7231 Beauty Shops

The Cosmetic Center, Inc. is a retail chain selling a wide range of brand-name cosmetics, fragrances, beauty aids, and related items. Company headquarters, a warehouse, and a distribution center all are located in Savage, Maryland. Cosmetic Center has expanded since its founding to metropolitan areas throughout the eastern United States, with 69 stores operating as of early 1997. Each store stocks more than 25,000 items and sells them at a substantial discount from manufacturers’ suggested prices. The company fills a gap between high-end department stores and discount stores and drugstores. The Cosmetic Center also operates hair salons in most of its stores. Its wholesale division markets cosmetic products to independent drugstores and regional retail chains throughout the United States; and its distribution division markets the company’s own product line.

Origin and Founders

Cosmetic Center was founded as a home-based business, Cosmetic & Fragrance Concepts, Inc., in 1957. Louis Weinstein and his wife, Anita, began operating a wholesale cosmetics distribution operation, dealing with independent drugstores from their Maryland apartment. The business soon required a warehouse, and eventually a retail store (Susan Kay Cosmetics, no relation to Mary Kay Cosmetics) was opened in 1973, at the urging of the founders’ son, Mark Weinstein. During the early years the Weinstein company was privately owned and had limited operations in the Washington, D.C., area. By the mid-1980s, the business had grown to eight retail stores, and Louis Weinstein decided to begin offering stock to the public. Soon afterward he also replaced the company’s management with a new team that concentrated on expanding the company, and in 1991 it was renamed The Cosmetic Center, Inc. Although Mark Weinstein became CEO, Louis Weinstein remained chairman of the company, and his death in 1995 was one of several events that threw the company into turmoil.

Rapid Expansion in the 1980s and Early 1990s

After its initial public stock offering in 1986, Cosmetic Center began to record a profit in every quarter. Company management, encouraged by the chain’s success, began to focus on expanding both the number of retail stores and the geographic areas in which stores were located. Cosmetic Center targeted major Eastern metropolitan areas for expansion, and the number of stores operating increased every year through 1995. From the original ten stores operating in Washington, D.C., and Maryland in 1986, the company then opened several stores in the Chicago area, followed by stores in Richmond, Virginia; Charlotte/Raleigh/Durham, North Carolina; Philadelphia; and Atlanta. Cosmetic Center also developed its own cosmetic line, including a line of fragrance-free cosmetics added in 1994. The company began to report sales averaging $2.5 million per store.

The opening of eight stores in the Atlanta area in 1994 and early 1995 was viewed as part of a major expansion effort by Cosmetic Center’s management. Senior Vice-President Allen D. Nehman explained that the company was hoping to draw professional working women who wanted one-stop shopping. ’ The reason we’ve been successful,” he told Drug Store News, “is because we make the stores fun to shop. Everything we do, we do for the customer.” While many products were still offered at a discount price, the approach was to offer more upscale products, as in major department stores, and to expand the line of men’s products. Plans were announced to make Cosmetic Center a national chain with 200 stores by the year 2000, with hopes of increasing sales from 1994’s $124 million to $500 million within the same time period.

Death of the Founder and Takeover Attempts

Unfortunately, Cosmetic Center’s plans for the remainder of the 1990s went awry when several unforeseen events converged in 1995. The first and perhaps the most devastating was the death of the company’s founder, Louis Weinstein, on July 8, 1995. Only a month later, his widow, Anita (a major stockholder), and son, Mark (CEO of the company), were faced with a surprise hostile takeover attempt by Perfumania, Inc., a large Miami-based retail chain store selling fragrances. Perfumania initially offered stockholders more than 40 percent above the stock’s value on the NASDAQ exchange. Cosmetic Center repeatedly rejected Perfumania’s proposals, particularly concerned because Perfumania could not show any commitment from a financial institution that would give it funds to purchase Cosmetic Center.

Cosmetic Center’s rejection of Perfumania did not end the takeover attempts. In November 1995, Regis Corporation (owner of a national chain of beauty salons) submitted its own proposal for buying Cosmetic Center. Although there were initial discussions about this possibility, Regis soon withdrew its proposal. In December 1995, Cosmetic Center once again was approached by a potential buyer, this time Phar-Mor, Inc., a national chain of drugstores. Under this proposal, Cosmetic Center would become a wholly owned subsidiary of Phar-Mor. However, Phar-Mor and Cosmetic Center could not come to an agreement on the purchase price or on the amount of Phar-Mor stock that would be given to Cosmetic Center stockholders, and so this proposal also fell through. This marked the end of takeover attempts, opening the way for a merger with a branch of Revlon Cosmetics that was finalized in 1997.

Atlanta Stores Closed

In 1996 Cosmetic Center received more bad news. Its Atlanta stores, a new market opened with such great hope just two years earlier, were financial disappointments. Costs were high, competition from department stores was unexpectedly strong, and sales were slow. After the stores rang up a $1 million loss during the 1996 fiscal year, Cosmetic Center decided to immediately close all eight Atlanta stores effective August 4, 1996. The closings resulted in an initial loss of over $4 million to the company, including payoffs of lease obligations (which would extend over the next several years), severance payments for almost 150 workers in the stores, and writeoffs of assets in the stores.

Financial Performance in the 1990s

The early 1990s were years of great growth and profit for Cosmetic Center. Net sales rose steadily, from $101.2 million in fiscal 1992 to $109.5 million in 1993 and $123.6 million in 1994. Net earnings soared during the same fiscal years, from $2.4 million in 1992 to almost $3.6 million in 1993 and $4.2 million in 1994. The number of stores also grew rapidly, from 39 in 1992 to 47 in 1993 and 61 in 1994 (with eight more stores opened in Atlanta during the fiscal 1995). Cosmetic Center began to market its own product line of cosmetics and opened hair salons in most of its stores, and all looked rosy.

Unfortunately, fiscal 1995 brought this trend to a crashing halt. With the Atlanta stores, Cosmetic Center now had 73 stores operating. The huge losses run up at the Atlanta stores and the death of founder Louis Weinstein (which involved a payroll expense of $0.8 million given to Weinstein’s estate) were only part of the bad financial news. Retail sales in general were slow, attributed by some experts to the more casual approach taken by working women (with “casual Fridays” creeping into earlier parts of the week) and the increased competition from department stores. Cosmetic Center itself also noted the adverse effects of the shrinking independent drug store market on its wholesale division’s sales. A further problem was the company’s inability to reach a direct agreement with the manufacturers of major professional hair care products, allowing it to sell these products in its hair salons. Cosmetic Center had cancelled its agreements with secondary sources of hair care products in anticipation of reaching such an agreement, and so it found itself with extremely limited sources for these profitable products.

Consequently, Cosmetic Center had mediocre results in fiscal 1995 and gloomy results in fiscal 1996. Net sales in fiscal 1995 rose about seven percent, to $132.3 million. However, while retail sales rose about eight percent, wholesale sales fell almost 28 percent from the previous year, and net earnings plummeted to only $279,000. Fiscal 1996 brought no relief. Net sales overall rose only 1.1 percent, to $133.8 million. Retail sales rose almost two percent, but wholesale sales fell another 34.6 percent from the already-poor record of the previous year. With the closing of the Atlanta stores at the end of fiscal 1996, Cosmetic Center found itself facing a year of losses instead of its traditional earnings. The year brought a net loss of almost $4.8 million. Drops in sales and continued losses continued into the early part of the next fiscal year.

Company Perspectives:

Historically, the primary retailers of cosmetic products have been department stores, drugstores and discount stores. Department stores offer primarily higher priced prestige items, usually at the manufacturers’ suggested retail price. Traditional drugstores generally offer lower priced, mass-merchandised items and a limited selection of prestige items typically at the manufacturers’ suggested retail price. Discount stores feature lower prices, but generally only offer mass-merchandised cosmetic products. The Company believes that the traditional industry marketing practices present an opportunity for a specialty retailer and that its distinctive combination of value pricing, breadth and depth of product selection, customer service, strategic store concentration and aggressive marketing creates a competitive advantage over other cosmetic product retailers.

This crisis within the company led management to drastically reduce its plans for future expansion, given that an estimated $725,000 was required for each new store opening. It also helped Cosmetic Center reach the decision to merge with one of its major product sources, Revlon Consumer Products Corporation, in late 1996.

Revlon Merger

In October 1996, Cosmetic Center announced its plan to merge with a chain of discount cosmetic stores owned by the Revlon Consumer Products Corporation. The chain, a wholly owned subsidiary of Revlon operating under the name Prestige Fragrance & Cosmetics, Inc. (PFC), sold brand-name cosmetics, fragrances, and health and beauty products in almost 200 stores located in 41 states. Several of these stores were operated by Prestige under separate names: Colours & Scents, Visage, and The Cosmetic Warehouse. With this merger (formally termed a reverse acquisition), Revlon was initiating its own withdrawal from the retail cosmetics business, which it had been operating at a loss, in order to concentrate on its manufacturing operations. By the following month, Cosmetic Center and Revlon had already reached an agreement under which Cosmetic Center would remain as the surviving corporation.

According to materials submitted in early 1997 to its stockholders (who had to approve the merger in order for it to be completed), Cosmetic Center hoped that the merger would reverse its poor record of recent years. It believed that the combination of the two companies would “create an opportunity to achieve accelerated earnings growth through cost savings, synergies, and critical mass,” according to an April 3, 1997 “Notice to Stockholders.” Certainly the merger would give Cosmetic Center an entry into a wider national market, plus a solid link to a supplier of cosmetic products. In addition, it was hoped that this approach would avoid a repetition of the sort of dilemma caused by the company’s loss of hair care product suppliers. PFC also brought along its office, warehouse, and distribution facilities in New Jersey, plus about 850 full-time employees.

It was anticipated that Cosmetic Center’s current management would remain in place, but the board would be heavily occupied by persons with ties to PFC and Revlon, as well as notables such as former New York City mayor David N. Dinkins. The merger was officially approved by Cosmetic Center stockholders at the annual meeting of April 24, 1997. Although Cosmetic Center was the surviving corporation, for accounting purposes future financial reports would be made under the name of PFC.