A story in the Business section on March 19 may have been unclear about Cosmetic Center Inc.'s pricing of professional hair-care products. Cosmetic Center does not plan to sell Redken-brand products at markdowns from the manufacturer's suggested retail prices.
It's Saturday night in Reisterstown, and Karen Partee is getting ready to go out.
Her shampoo is from the Hair Cuttery. Her facial cleansers and foundation are from Mary Kay. Her perfume is from the Cosmetic Center. One-stop beauty shopping is not catching on with this woman.
"Where you go a lot of times," she says, "depends on what you need."
That's a problem for Cosmetic Center Inc. The Savage-based company wants to rule the makeup and perfume business the way Toys 'R' Us dominates the toy trade.
But instead of verging into a few powerful streams, the flow of beauty products from manufacturer to customer keeps breaking into new rivulets.
Cable-TV pitchwomen like Cher and natural-product chains like the Body Shop and Garden Botanika account for two rapidly growing pieces.
Specialty perfume shops are springing up. Cosmetics manufacturers such as Estee Lauder are opening their own stores.
They join a crowded fray of drug stores, department stores, supermarkets, expanding discounters such as Wal-Mart and direct-sales outfits like Mary Kay.
"There is a growing body of alternative ways to sell cosmetics that is hurting the rest of the market," said Donald Davis, editor of Drug & Cosmetic Industry, a New York-based trade magazine.
The fact that Cosmetic Center itself is part of the new wave doesn't diminish the challenge it faces.
The chain wants to triple the size of its store roster to 200 by the end of the decade and build sales from $123.6 million last fiscal year to $500 million, said Chairman Louis Weinstein.
That's a tough enough order even in a growing, healthy industry.
But sellers of cosmetics and perfume have struggled lately, suffering an especially spotty 1994.
Some analysts worry that the same women who are dressing down to slacks and T-shirts in the increasingly casual workplace are wearing less-formal faces, too.
Cosmetic Center raised an ugly blemish in the October-December period, usually its biggest quarter. After rising by a modest 4.2 percent for the 12 months ending in September, sales in stores open for at least a year dropped by 9 percent during the remainder of 1994.
Company profits declined by 38.3 percent to $1.3 million in the December quarter.
The price of Cosmetic Center's nonvoting A shares fell as low as $7 apiece last month after selling for more than $20 at one point last year.
Recently the stock has recovered a bit, closing last week at $9.50.
"The company has had greater than expected expansion problems and had a merchandising miscue" in December, said Steven Saltzman, a financial analyst for investment house Chicago Corp. "While we like the business, we would rather stay on the sidelines for now until we feel more certain as to what the near-term earnings outlook holds."
Can Cosmetic Center quickly fix its smudged image?
Company managers, blaming the beauty slump on a surge in auto, jewelry and furniture sales that siphoned off consumer spending last year, said they are optimistic.
"We certainly agree from our perspective that the first quarter was disappointing," said Mark Weinstein, Cosmetic Center's chief executive officer.
But, he added, "The fragrance business had a very down year, and it's a result of people using their disposable income on all these high-ticket items. All retailing has cycles, and this is a major contributing factor to what happened in our first quarter."
Cosmetic Center has Wall Street's attention. Ever since Toys 'R' corraled the Barbie and Fisher-Price market, investors have loved "category" discounters that focus on one kind of product, buy in huge quantities, offer matchless selection and undercut prices of established stores.
The trend has swept home-improvement products, office supplies, electronics, sheets and towels, sports equipment and, lately, pet supplies.
The pancake and eyeliner trade, however, differs from some of the best-known category successes.
The $25 billion industry isn't as big as, say, home improvement. The items aren't as expensive as stereos and computers, which makes the company work harder for a profit. And they're available at dozens of other stores.
When Hechinger Co. built itself into a Baltimore-Washington home improvement powerhouse, its competition was limited to the corner hardware store and mass merchandisers such as Sears, Roebuck & Co. By contrast, the field arrayed against Cosmetic Center is bigger and more diverse.
But the chain has three strong marketing suits.
Its prices generally are 10 percent to 20 percent lower than those of competitors, analysts said. Its 6,500-square-foot stores offer unrivaled selection. And Cosmetic Center sells "prestige," department-store brands such as Clinique and Estee Lauder next to less expensive lines like Cover Girl and Revlon.
"I think they provide a convenient, one-stop shopping experience," said Michael Mead, a financial analyst with Baltimore investment house Legg Mason.
"A lot of women use what works for them, rather than buying all prestige or all mass-market cosmetics. A place where they can pick up what works for them makes a lot of sense."
Not so long ago, prestige brands, particularly perfumes, weren't supposed to be sold outside department stores.
But the late 1980s introduced a large gray market of middlemen who were happy to resell overstocks to less-swanky retailers like Cosmetic Center.
Such "product diversion" makes department stores unhappy, but there's little they can do about it. Sometimes department stores themselves even secretly stock the diversion pipeline.
"It's sort of like sex between consenting adults," said Allan Mottus, publisher of the Informationist, a health and beauty trade newsletter. "Everybody makes a major issue of this."
Cosmetic Center's clout is such these days that it buys many prestige lines directly from the manufacturers, improving its merchandise mix as well as its profit margin.
"They have pretty good sourcing in getting top-line merchandise," Mr. Mottus said.
Founded as wholesaler
The chain was founded in 1957 as a cosmetics wholesaler by Chairman Louis Weinstein, father of Mark.
It opened its first retail store in 1973 and had nine outlets when it first sold stock to the public, in 1986.
The Weinsteins own 51 percent of Cosmetic Center's voting "B" stock and 26 percent of its nonvoting "A" stock. The stake is worth about $15 million.
The company's most ambitious growth has come since 1989, when the Weinsteins engineered a management make-over by hiring executives experienced in retail expansion from the Trak Auto chain.
The group was headed by Ben Kovalsky, now Cosmetic Center's president and chief operating officer.
"It was unusual to see that big and experienced a management team at such a small company," said Legg Mason's Mr. Mead. "A lot of times a company grows and gets too big and then runs
around and looks for people. The Weinsteins brought in good people to prepare for growth."
Results were impressive through the fiscal year that ended last September.
Earnings per share grew from 52 cents in fiscal 1990 to 95 cents. Sales went from $76.0 million to $123.6 million, and Cosmetic Center's A shares jumped from $4 in late 1990 to a high of $21 last year.
For a quickly growing concern, its balance sheet is "spectacular," said Chicago Corp.'s Mr. Saltzman. The company has no long-term debt, although managers said they'll probably approach the debt or equity markets again to pay for new stores.
"Out of cash flow we do roughly seven or eight stores a year, and the rest of it will come out of some other facility," Mr. Kovalsky said.
Cosmetic Center now has 69 stores, 17 of them in Maryland.
Recently it has entered Philadelphia, Atlanta, Chicago and the Carolinas, leasing sites in good strip centers or "power centers" next to other category stores.
"We're only taking what we call class-A sites," Mr. Kovalsky said. "If we can't get a class-A site, we'll wait until they become available."
Cosmetic Center managers blame their October-December problems on temporarily distracted consumers and on advertising flubs. The company recently fired its ad agency, Baltimore's Freed & Associates, and hired Goldberg, Marchesano Kohlman, of Washington. One change: more electronic spots to supplement the retailer's staple of print ads.
Mr. Mead also thinks Cosmetic Center trimmed its inventories too far, pointing out that average inventory per store -- including warehouse stock -- was 15 percent less at the end of 1994 than a year earlier.
Company managers disagree. "For the most part, if we take the total universe of what we sell, we had a very good in-stock BTC position," Mr. Kovalsky said. "We had plenty of product."
So far this year sales are healthier: up 16 percent overall in February and up 27 percent in January after a flat December.
Much of those increases reflect new stores; Cosmetic Center doesn't disclose monthly same-store sales.
Mr. Mead expects earnings of 65 cents per share this fiscal year, down from 95 cents last year.
Looking forward, executives expect not only continued sales growth through new stores but also the chance for better profit margins.
Most stores will have hair salons by summer, which will draw customers and also allow the purchase of "professional" hair products such as Redken at big markdowns.
Because the retailer carries deep and broad selections, Cosmetic Center's inventory turns over only 2.2 times a year -- far less than the brisk, 10-turn rate typical of a drugstore. Executives hope new software will improve their turn performance and reduce stock costs.
Of less certain effect are long-term beauty-trade trends.
"A couple years ago, somebody noticed that a lot of the women who write about cosmetics in the women's magazines don't wear cosmetics. A little problem there," said Mr. Davis, of Drug & Cosmetic Industry. "The workplace is getting less formal. There is concern about the future growth of the industry . . . because of the less frequent use of makeup."
Cosmetic Center executives don't expect bare faces to become fashionable -- even if apparel trends change radically.
"I cannot envision a woman getting up in the morning and getting dressed and going to work without putting on makeup or whatever it is that makes her feel comfortable about herself," Mr. Kovalsky said.
Growth of competition
Even if demand stays steady, though, cosmetic supply lines seem to keep growing.
Revlon has 200 factory outlet stores now. Cable-TV beauty product sales now account for $800 million in annual sales, Mr. Davis said.
Beauty and perfume boutiques like Garden Botanika and Perfumania are multiplying so fast that "it's one of our hottest areas all over the country," said Mark Millman, president of Millman Search Group Inc., an executive-placement firm for retailers. "To dominate this industry is very hard."
Unless, that is, Cosmetic Center can keep drawing customers like Bonnie Wasserman.
"I find that their prices are very competitive," the Reisterstown woman said last week, standing outside Cosmetic Center's Owings Mills store. "They're usually at least $5 less on big items than department stores. On small items they're a dollar or $2 less. . . .
"I'd say 90 percent of what I need or what I look for, they have."