Prestige Reports Weak 2Q Results

While Prestige Brand Holdings PBH reported unimpressive second-quarter earnings, we're maintaining our fair value estimate as results through the first two quarters are mostly in line with our projections for the full year. That said, we do intend to take a much deeper dive into the results to ensure that our valuation adequately reflects the challenging economic landscape Prestige is facing. Sales increased a mere 1.0% from the prior-year quarter, with gross margins expanding by 150 basis points, to 52.5%. Operating margins were essentially unchanged from the year-ago period at 23.5%, as Prestige increased its advertising and promotional spending to 15.5% of second-quarter sales (up from 12.6% in the second quarter of 2007) to help support not only its existing brands but also the launch of two new products in the quarter. While we agree with management's focus on attempting to rejuvenate its core brands, it remains to be seen whether the firm's current initiatives will enable it to drive the level of sales growth it needs to right the ship, particularly as economic conditions continue to deteriorate and consumer spending tightens.