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Non-Tech : Parlux (PARL) Fragrances
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To: M Goodson who wrote (168)12/11/1996 10:00:00 AM
From: nick haines   of 527
 
As I'm sure you have seen, the negative operating cash flow in fiscal year 1996 and through the first six months of fiscal year 1997 is a result of increasing current assets and decreasing current liabilities. The increase in inventories is not particularly alarming because of the corresponding increases in sales for the company which have kept the inventory turnover relatively constant. The disturbing feature is the increase in receivables from "affiliated parties" which is presumably from the sister company, "Perfumania" which the CEO is also involved in. I agree that these receivable seem abnormally high and I think, as I mentioned in my first email, the insider dealings between Parlux and Perfumani are a chief risk in my mind. However, this risk is mitigated in my mind by (i) the financial condition of Perfumania which should have the capacity to repay these receivables and (ii) the cyclical nature of the cosmetics business where companies inventories and receivables increase in anticipation of the Christmas season where these accounts are converted into cash. If the companies receivables and inventories continue to rise in the next several quarters, then there might me a more serious problem. However, even in the worst possible even down the road of a liquidation, there is sufficient asset value in my mind to protect investors who get in at the current price levels. I think however the probability of this draconian scenario is small.
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