A Decade of Good Hair Days for VO5 Maker Alberto-Culver

It’s notable that Alberto-Culver Co., a mid-size player in the cutthroat consumer products field, is still independent while many of its rivals have been merged out of existence. More notable is that Alberto-Culver not only survives, it prospers.

Alberto-Culver has quietly delivered 10 straight years of higher sales and profit, after excluding one-time gains, and expects to make it 11 this year. By sticking to its stalwart VO5 hair dressings, St. Ives lotions and Sally Beauty Supply stores, the company also has been the perfect defensive play for investors during the recession.

Alberto-Culver’s two classes of stock have more than doubled in price over the last two years while the broader market, as measured by the Standard & Poor’s 500 index, has tumbled 23%. Yet the shares “still strike us as a good value,” analyst William Steele of Banc of America Securities said in a recent report.

Though not as big or splashy as Revlon Inc. or Procter & Gamble Co., Alberto-Culver remains a household name to many, thanks to its steady TV advertising over the last four decades. Besides producing a variety of affordably priced V05 and St. Ives products, Alberto-Culver today also makes TRESemme and Consort shampoos, FDS deodorant, Static Guard spray, Sugar Twin artificial sweetener and Molly McButter butter-flavored sprinkles.

The company, based in the Chicago suburb of Melrose Park, also is now the world’s second-largest producer of hair-care products for African Americans (behind cosmetics giant L’Oreal) after buying Pro-Line Corp. two years ago. Its brands in that market include TCB, Soft & Beautiful and Motions.

But Alberto-Culver--with sales of $2.5 billion in its fiscal year ended Sept. 30 and profit of $110 million--these days is more retailer than manufacturer. Nearly 60% of its sales and 70% of its profit come from its Sally Beauty Co. division, “the world’s largest distributor of professional salon products,” which has nearly 2,500 stores, Alberto-Culver Chief Executive Howard Bernick told an investors conference this month.

The stores (including more than 180 in California) mainly sell other suppliers’ goods, are open to the public and have nearly 3 million visitors a week. The division also includes the Beauty Systems Group, which sells exclusively licensed hair-care goods such as Paul Mitchell and Redken to professionals through 417 stores and a 900-person sales force. Alberto-Culver “has been growing that [group] very aggressively,” said Sally Wallick, a retail analyst with Legg Mason Wood Walker Inc.

The stores help Alberto-Culver maintain its growth and avoid having to rely solely on its personal-care products in the face of brutal competition from behemoths such as P&G; (Head & Shoulders) and Unilever (Suave, Finesse). Indeed, it’s a key reason Alberto-Culver has avoided the fate of other mid-size players in hair care such as Helene Curtis Industries, which was acquired by Unilever in 1996.

Alberto-Culver cannot battle the enormous marketing clout of those giants, so it focuses instead on niche sellers in hair- and skin-care products while expanding Sally Beauty, analysts have observed. Sally Beauty faces its own competition from mass merchandisers and grocery chains. But much of the salon supply industry comprises mom-and-pop outfits, and Alberto-Culver has steadily been buying those small firms to expand its market leadership.

In its fiscal second quarter ended March 31, Sally Beauty’s same-store sales--those of stores open at least a year, a key gauge of retail growth--rose a stout 6% from those a year earlier.

The stores give the company a balance to its consumer products and thrive regardless of economic cycles or the seasons, Bernick said. Sally also provides a competitive edge: It tips off Alberto-Culver to consumers’ changing tastes so the company can adjust its own brands. For example, Sally Beauty noticed growing demand for hot-oil hair treatments, which led to a hot-oil version of VO5, Bernick said.

Alberto-Culver concentrates on extending its tried-and-true lines instead of spending a fortune on new brands. The company also keeps a close eye on costs--it has no choice, because its industry’s profit margins are so slim--and it makes periodic acquisitions to bolster its market segments.

Case in point: In 1996 it paid $120 million for St. Ives Laboratories, a Chatsworth-based maker of shampoos, lotions and other skin-care products marketed with the Swiss Formula label. Alberto- Culver kept St. Ives’ plant and manufactures St. Ives, VO5 and other products at the site.

Alberto-Culver traces its roots to a Los Angeles beauty supply firm that was bought in 1955 by Leonard and Bernice Lavin, who moved the company to Chicago and focused on the VO5 line. According to company lore, the Lavins bought the company from a man named Blain Culver, whose chemist was named Alberto--so the Lavins combined the names. (The VO5 label supposedly once stood for its “five vital oils,” and one can find multiple other uses for the product, even fixing squeaky door hinges, on some Web sites.)

Leonard Lavin, 82, still is chairman. The Lavins’ son-in-law Bernick, 50, is president and CEO, and his wife, Carol Bernick, runs Alberto-Culver North America. Together the four own about 9% of Alberto-Culver’s Class A stock and more than 40% of its Class B shares, which have superior voting rights to the Class A stock.

The family’s big stake is another reason Alberto-Culver remains independent. But analysts say that’s also why Alberto-Culver’s stocks don’t command price-to-earnings multiples as high as those of its rivals. The Class B stock--which closed Friday at $54.16 a share, down 43 cents, on the New York Stock Exchange--now trades for 21 times the $2.55 a share that Banc of America’s Steele expects the company to earn in fiscal 2003.

The Class A shares were issued in the 1980s mainly to give the company another currency for making acquisitions without diluting the family’s voting power. But the two classes turn off some investors because they don’t know which is a better buy, analysts said. The Class A tend to cost less, but the Class B have the better voting rights and trade more often.

Wall Street too seems divided on Alberto-Culver, which could be damping its price gains. Legg Mason’s Wallick questioned whether Sally Beauty is getting its full due.

“It very well may be that those people covering the company, most of whom are consumer products analysts, don’t realize that retailers like this don’t come along every day,” she said.

Alberto-Culver plans to keep expanding Sally Beauty, especially its role in supplying salons, by continuing to acquire small operators in the fragmented industry.

Bernick seeks another skin-care brand to complement St. Ives but said that “we’re not going to buy for the sake of buying”--the company stumbled in the 1970s and ‘80s by trying also to sell handbags and other unrelated goods.

“At Alberto-Culver,” he said, “we know who we are--and even more important, we know who we are not.”