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Alberto-Culver has posted ten straight years of record revenues and profits. But its two classes of stock bother some investors.

Alberto-Culver has posted ten straight years of record revenues and profits. But its two classes of stock bother some investors.

By Justin Schack
January 2002
Institutional Investor Magazine

Critics and competitors have been predicting the demise of Alberto-Culver Co. for decades, and who could blame them? Small beauty care companies struggle to survive in an increasingly low-margin, scale-driven industry. Once-legendary names like Helene Curtis Industries and Max Factor & Co. have been swallowed up by giants.

But Alberto-Culver, best known for its VO5 shampoo, has shaken off skeptics. The company, which is 30 percent-owned by the family of Leonard Lavin - who acquired Alberto-Culver in 1955 with his wife, Bernice, and remains its chairman - posted $2.5 billion in sales and $110 million in earnings for the fiscal year ended September 30. That's its tenth consecutive year of record revenues and profits. The stock has doubled in the past five years, to 43.30.

Instead of trying to battle giants like Procter & Gamble, Unilever and Johnson & Johnson, Melrose Park, Illinois-based Alberto-Culver has prospered by becoming a leader in a far more profitable, less competitive business. Nearly 60 percent of the company's sales and 70 percent of profits now come from its Sally Beauty Co. subsidiary. Meant for beauty professionals, the 2,350 stores worldwide are also open to the public. The subsidiary includes Beauty Systems Group, which supplies salons with high-end hair and skin care products for resale to their clients. BSG is now the fastest-growing part of Alberto-Culver.

Sally's success has allowed Howard Bernick, who succeeded Lavin as CEO in 1994, to focus on squeezing higher profits out of the company's better-known consumer products business like Alberto VO5, St. Ives Swiss formula skin care and FDS feminine sprays, and food flavorings like Molly McButter. Alberto-Culver must stick to its no-frills, low-price niche or risk annhilation by rivals with bigger marketing budgets and production facilities. Because Sally is now the growth engine of Alberto-Culver, Bernick is expanding the business, both in the U.S. and internationally, through acquisitions and by opening new stores.

Bernick, the son of a Toronto real-estate developer, left a lucrative career as an institutional bond salesman in 1977, taking a 70 percent pay cut to work for Lavin after marrying his daughter, Carol Lavin, who today runs Alberto-Culver's consumer business in North America. Bernick willingly admits to making the move to Culver with an eye toward running the company one day and credits his rise to "a combination of ability and nepotism."

But the latter half of that combination may be one reason why investors haven't valued Alberto-Culver as highly as some of its competitors, despite its solid performance. The Lavin family's 30 percent equity ownership and 40 percent voting control of the company leaves less stock for institutions to buy and gives them less influence.

Bernick recently discussed Alberto-Culver's prospects with Institutional Investor Senior Writer Justin Schack.

Institutional Investor: Your stock carries a multiple far lower than that of your competitors. Why?

Bernick: We have two classes of stock, which reduces liquidity and is frowned upon by institutional investors. Also, we're in two businesses, and some people don't understand the Sally business. Frankly, the quality of sell-side research is not what it used to be. It's driven much more by corporate finance than I think it should be. We're not a big corporate finance client because we're a pay-as-you-go company that generates its own cash. I've been going to these investor conferences put on by Merrill Lynch and Goldman Sachs for a number of years now. A few years ago everybody was bowing down to this fellow Henry Silverman at Cendant, to Al Dunlap at Sunbeam, Martin Grass at Rite Aid, Jill Barad at Mattel - at least she was a beautiful woman that was worth going to see - and nobody ever seems to pay attention to Alberto-Culver. Maybe we always will be undervalued, as a small cap with the two classes of stock and two businesses. But our market cap has gone from $20 million to $2.5 billion during my time here. It should be $3.5 billion, and that frustrates me. But we're marathon runners, not sprinters.

Have you thought about getting rid of the two classes of stock?

Yes. I personally am against the two classes of stock and would like to do away with it. I'm the guy who recommended having two classes in the first place back in 1985, and it's one of my major regrets. However, our board and, frankly, my wife and her parents, are not in favor of doing away with the two classes. [But] I believe managements only stay in control based on merit and performance. I don't care how many votes you have - if you screw it up, you lose it, and we see that all the time.

How has the company prospered despite experts predicting failure?

We've learned over the years who we are and, more important, who we are not. We learned to survive and thrive with smaller brands and smaller critical mass than a lot of our competitors. We don't try to imitate Procter & Gamble or Unilever and spend hundreds of millions of dollars to launch brands that disappear a few years later. Also, Sally has been a huge contributor to our growth and balances the ebbs and flows of the consumer goods side of the business, where we're a smaller player. It's great to be No. 1 in the world in something.

Why did you decide to leave the brokerage industry for Alberto-Culver?

My father ran a successful real estate development and construction business in Canada. When I graduated from the University of Toronto, he wanted me to go out and do something on my own first. I worked first for Wood Gundy in Toronto and then for First Boston in Chicago, and I did very well. I also met a young lady when I moved here by the name of Carol Lavin, whose parents were the owners of the Alberto-Culver Co. I left First Boston and joined Alberto-Culver with the thought that I would be on a fast track here to take over this company. And that is what occurred, through a combination of ability and nepotism.

How did Alberto-Culver get into the Sally stores business?

We acquired it in 1969, and it was very problematic for most of the 1970s. By 1980 we had 39 stores, sales and profits per store were growing, and the business was cash flow positive. So we said: "Hey, we figured out how to do this after ten or 12 years. Let's go out and make some acquisitions, accelerate new-store openings and so on." We bought a series of beauty supply chains that operated in areas contiguous to Sally's New Orleans headquarters in four states. And it's just been a huge success for us.

Has the recession affected the various segments of your business differently?

Our traditional consumer products businesses are the place to be in tough times, because people do not reduce the frequency with which they wash their hair or cleanse their faces or season their food. The Sally stores traditionally do even better in difficult times because we're selling products at discount prices, and consumers may decide to buy Sally products to use at home instead of going to the beauty salon. BSG is a bit different. We've never been as large in that business during a recession as we are this year. We monitor very carefully the frequency of salon visits, and it is a little bit softer during this recession so far. But we're more than making up for that with a fantastic pickup in the Sally business.

Lately you've been increasing advertising and marketing spending. Why?

We still have a lot of room for margin improvement in the packaged goods business. We've been improving the way we produce and distribute our product, with substantial savings. Some of that goes to the bottom line, and some goes to the marketing budget, so we can grow the top line and improve margins. We are focusing our marketing investments on fewer, bigger brands and initiatives, and that's been giving us better top-line growth than anything we've achieved the past ten to 15 years.

What kind of presence does the company have internationally?

Sally is already No. 1 in the U.K. But less than 5 percent of Sally's overall volume, including BSG, is overseas. On the other hand, about half of our consumer products business is overseas. In the year that just ended, we did about $500 million outside of the U.S. in sales for packaged goods and $70 million for Sally.

Do you plan to continue to grow through acquisitions?

Yes. We've shown an ability to buy at the right price and grow what we buy. We actually had very few acquisitions in the past fiscal year. We invested $18.8 million for acquired businesses, compared with $144.8 million in 2000 and $62.3 million in 1999. And we still grew sales by 11 percent.

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