Alberto-Culver: More Than a Pretty Face


The stalling economy has investors looking to havens like consumer-products companies. Alberto-Culver (ACV) is a small player among such giants as Proctor & Gamble (PG) and Johnson & Johnson (JNJ), but it's showing up on Wall Street's radar as a consistent performer. The Melrose Park (Ill.) company, founded in 1955, has a stable of name-brand, bargain-price products -- notably its V05 shampoo line -- that do well with value-conscious shoppers in both good and bad economic times.

For the past several years, family-run Alberto-Culver has turned in consistent profits. And the company's fiscal year ended Sept. 30 was a showstopper: Sales totaled $2.49 billion, up 11% from fiscal 2000's $2.25 billion. Net earnings jumped 13.6%, to $110.4 million, or $1.91 per share.

"I think 2002 will be a slightly tougher year," says CEO Howard Bernick, son-in-law of Chairman and founder Leonard Lavin. "We're certainly not immune to tough times, but we're resistant because of the nature of the company and the segments we're in." Analysts estimate the company's earnings per share for fiscal 2002 will be up about 12%, to $2.14, according to Thomson Financial/First Call.

"HITTING SINGLES." A key factor in Alberto-Culver's success is diversification. In addition to making and selling hair- and skin-care products, the company also runs Sally Beauty, the world's largest distributor of supplies to salons. Sally stores contribute the biggest pieces of Alberto-Culver's sales and profits, accounting for 60% and 70%, respectively. The company also is the world's second-largest marketer of hair-care products aimed at African Americans, and it sells such niche products as Static Guard antistatic spray and Mrs. Dash food seasoning.

Investors usually flock to shares in consumer-products companies that sell category leaders, but Alberto-Culver, which is No. 6 in the hair-care market, has been proving it can succeed with smaller names, says William Steele, an analyst at Banc of America. "For [consumer-products] companies to really execute for a long time, they need to keep hitting singles," he says. "If Alberto-Culver can do in the next three years what they did in the past three, their shares will be rewarded." Steele believes the company's lower voting class stock (ACVA

, each of these shares gets one-tenth of a vote), now trading at $38 a share, will able to hit his 12-month price target of $45.

BusinessWeek Online Reporter Amy Tsao interviewed Bernick on Nov. 12 to get his view on the company's direction amid the current slowdown in the economy. Here are edited excerpts of their conversation:

Q: Why has the V05 line remained such a strong brand?

A: Rather than spending $100 million on a new brand name, which we see so many companies doing, we have shown an ability to keep mature brands fresh and alive and thriving with new packaging, line extensions, and new formulations. V05 was advertised heavily in the U.S. for many years, and it is an established [brand]. Now, new add-on products and "flankers" are brought out all the time. We have recently restarted a print-ad campaign for Alberto V05 here. And our herbal V05 has led to strong growth over the last several years.

Q: You've been with the company since 1986. What have you learned in other recessions, and how are you applying those lessons now?

A: Historically, we've done well during recessions. One thing we've learned and have been doing is taking advantage of lower media rates [to buy more ads] while other companies are pulling back. This is a great year for us as an advertiser -- there are no dot-com ads, no Olympics. We are increasing the ad impressions that we are buying.

Our company has endured because it's structured to be more resistant to downturns in the economy, primarily because of the categories in which we participate. We are not at the high end, [like] department-store brands, so we are impacted less by downturns.

Q: What is your advertising strategy?

A: We spent more than $300 million in our most recent year in advertising and promotions behind our brands, which represents close to 30% of revenues of our consumer-products and beauty-care business. We're strong believers in television advertising, but we've been using increasing amounts of print advertising.

We keep increasing our ad and promotion spending every year. But our budgets are smaller [than bigger companies], and we want to be careful that we don't slice the apple too thinly by trying to be meaningful in too many ad vehicles. That 30% of revenues that we spend on advertising is a somewhat higher percentage than some giants spend. If we were to [advertise using too many media], we wouldn't have enough impact.

Q: How do you plan to grow the company?

A: Our growth has been both organic and through acquisition. Our plan is to continue to grow primarily organically [but] also with acquisitions. We acquired St. Ives skin and hair care in 1996. We're looking for another skin-care brand to add.

We're much more international than most of our peers. Over half of our volume is outside of the U.S. And we've made certain geographic acquisitions to expand our international infrastructure. We bought on-the-ground, operating capacity in Argentina and Poland over the past several years.

Q: What kinds of acquisitions would you be interested in?

A: We would like to stay in the same channels [hair care and skin care] we're dealing in now. We have our eye on a couple of targets. These might become available, as we see large pharmaceutical companies divesting personal-care products. We're very particular in what we want to add. A number of brands on our wish list previously are no longer on our list. We want to add brands that go after slightly different categories than what we have. And we want to focus on growing the brands we have.

Q: What is your outlook for next year and beyond?

A: We anticipate in fiscal 2002 that our profits will grow in the 10% to 15% range. Sales will be up in the high single digits to the 10% range. And we plan to expand margins and reach 10% pretax profits on sales by 2006. That would give us 2006 profits triple those of 1999 profits. As we get larger, we will be able to slightly reduce our marketing investment and build our profit margins. We're not chasing small brands and small countries and small categories.


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