SOUTHERN CALIFORNIA ENTERPRISE : Dep’s Bottom Line Takes a Real Lather
Talk about bad hair days.
Dep Corp., a Los Angeles-based maker of beauty products, has been losing money virtually since it bought the Agree and Halsa hair-care lines from S. C. Johnson & Son in August, 1993.
Dep has sued Johnson, alleging that the Racine, Wis., company not only misrepresented sales figures, but also wrongfully altered its marketing and sales practices before the deal was closed and thereby reduced potential sales of the shampoo products.
Slumping sales of Agree and Halsa and soaring interest expenses related to their purchase have prompted Dep to predict a loss for its second quarter, which ended Jan. 31. The loss, estimated at between 10 cents and 15 cents a share, or about $623,000 to $935,000, follows a brief flirtation with profit in the first quarter and a $3.6-million loss for the fiscal year ended July 31, 1994.
Dep’s second-quarter loss also will put the company in technical default of a bank loan Dep executives are trying to renegotiate.
Shareholders have watched the price of Dep’s two classes of stock fall precipitously, from $15 a share in 1993 to Friday’s over-the-counter close of $2.13 a share for its voting common stock. And Dep was perhaps less than adept even before its most recent financial bath, according to a spotty earnings history.
“If it’s not one thing it’s another,” said Michael E. Shonstrom, senior vice president of Neidiger, Tucker, Bruner Inc., a Denver-based investment research firm that tracks Dep stock. “You’re growing a business with dying brands.”
For its part, Dep points proudly to its dominance of the styling gel and mousse markets with its Dep and L.A. Looks products. Company officials admit to an uneven earnings track record but insist that they are managing for the long haul amid intense competition.
Robert Berglass, Dep’s chairman, president, chief executive and largest shareholder, was not available to be interviewed for this article after several requests. His wife, Judy Berglass, who is corporate secretary and vice president, said he was busy trying to fix Dep’s problems.
“Our first priority is to keep the business running,” she said.
Dep employs more than 350 people in a nondescript factory in an industrial part of the Los Angeles suburb Rancho Dominguez. It is one of those quiet companies laboring diligently in its niche of an industry dominated by huge consumer-products companies.
Dep started in 1955 and went public in 1983 on the basis of one product of the same name: a gooey concoction designed to hold hair very firmly in place.
Over the years, Dep added a shelf full of other items devoted to making customers more attractive: Lilt home hair permanents, Lavoris breath-sweetening mouthwash, Topol for whitening teeth, Porcelana blemish-fading cream and Natures Family and Cuticura skin care products. All were acquired, some with the help of junk bonds floated by financier Michael Milken.
The company also introduced a youth-oriented line of hair styling gels and mousses, L.A. Looks. It and Dep became the leading styling gels, together commanding 40% of that market last year.
On those bottles of day-glo-colored gel Dep proclaims its corporate responsibility in small print that reads: “No Animal Testing. No Animal Proteins. Please recycle where facilities exist. Complies with clean air standards.”
Dep’s successes have come through what Berglass has called “guerrilla marketing.” It means finding innovative ways to promote products in corners of the business neglected by the big competitors.
Company revenue grew steadily from $15 million in 1983 to $138 million in 1994, but earnings fluctuated from year to year. Berglass acknowledged the firm’s inconsistent earnings history in Dep’s 1993 annual report, noting that “nothing would please us more than to increase earnings every year.”
Berglass added: “We view our mission as building a business, not delivering short-term results. Dep Corp. is not managed on a quarter-to-quarter basis. We simply don’t think that’s a viable strategy for a growth company.”
But Berglass, who has reigned over Dep since 1969, was in a lather over its failure to crack the $2.3-billion shampoo and conditioner market that sat only a few inches from Dep’s products on supermarket and drugstore shelves. Each run at the shampoo business--first with Dep Shampoo, then with L.A. Looks Shampoo--has fizzled.
Dep seemed to have gotten its break in 1993, when it bought the Agree and Halsa lines from S. C. Johnson & Son for $45 million. The purchase left Dep owing more than $60 million, most of it lent by a bank group headed by Citicorp.
Berglass at the time spoke of growth potential and synergies. S. C. Johnson said it had tallied $65 million in revenue from the two product lines in the previous 12 months. Dep would take over manufacturing, and was devising new marketing strategies and packaging.
But the expected gains turned out to be as elusive as a soap bubble.
In the six months after the transaction, Dep said it managed only $12 million in sales from Agree and Halsa.
The big dream had turned into a nightmare. A year ago, Dep sued S. C. Johnson in U.S. District Court in Los Angeles, seeking damages and cancellation of the sale.
In essence, Dep said it wants to give Agree and Halsa back to Johnson because of alleged misdeeds. The lawsuit is vague about what S. C. Johnson supposedly did, but it mentions product dumping and a lack of marketing after December, 1992.
S. C. Johnson said the allegations are untrue.
“We deny all of the charges in the complaint,” S. C. Johnson spokesman Jim May said. “We feel they are without merit, and we will do everything necessary to defend our interests.” Trial is scheduled for September.
Meanwhile, Dep has been losing money.
The $3.6-million loss in fiscal 1994 followed a difficult 1993, in which income tumbled 80% to $1.2 million because of sluggish sales of Dep’s core products amid heavy advertising and promotion.
In predicting a second-quarter loss, Berglass said that Dep’s “major problem is that we are still plagued by the pre-acquisition marketing practices of S. C. Johnson, and to date, we have been unable to reverse the downward trend in sales of the Agree and Halsa brands.
“Management is reviewing strategic and operational plans which address both the revenue and profitability issues, and is developing an action plan to improve our results,” he said.
Stock analyst Shonstrom said Dep lacks the muscle that enables larger companies to get their products space on crowded store shelves.
“The company outside of its hair styling products is in weak markets, with declining profit margins,” Shonstrom said. “They have thrown themselves at the shampoo market since time immemorial, and they will continue to throw themselves at the shampoo market until they blow up.”
Dep has managed to make its debt payments on time, despite the impending technical default that the second-quarter loss represents, and banks figure to be patient rather than force a bankruptcy and asset sale, Dep watchers say.
Asked to predict Dep’s future, Berglass said in the 1993 report that he expects Dep to become “a significant player in the personal care products business” by using innovative and aggressive marketing tactics, developing or acquiring new products and broadening distribution of its brands.
“We’re going to be a major company in an industry of giants,” Berglass said.
