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Beauty Industry 2011 Mid-Year Review and Outlook
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Beauty Industry

2011 Mid-Year Review and Outlook

2011 Mid-Year Macroeconomic and Capital Markets ReviewRenewed concerns about the sustainability of the financial recovery following sub-par U.S. GDP growth, continuing

ImpactSituation

▪ Consumers remain uncertain about the future, adding to fears that spending will continue at a

▪ High risk of dynamic shift in the economy due to U.S. budget deficit, which breached the debt limit

unemployment, and the global debt crisis are all causing macroeconomic and consumer headwinds

Macro

tepid pace– June consumer confidence fell from 61.7 to

58.5 (lowest since Nov. 2010); spending at its slowest pace in 20 months

▪ Bifurcation exists among consumers; increase in spending among wealthy far outpaces middle class

of $14.29 trillion in May, and the sovereign debt crisis in the EU

▪ June’s 9.2% unemployment, the third consecutive monthly increase, renewed fears of a stalled economic recovery

▪ Average American still holds $10 168 of debt in spending among wealthy far outpaces middle class▪ Federal Reserve cut its 2011 economic forecast

(from 3.2% to 2.8%), however, expects growth to strengthen in the second half of 2011

Average American still holds $10,168 of debt in credit cards, loans, and non-real estate consumer debt

▪ Number of U.S. homes to receive a foreclosure filing expected to climb ~20% in 2011, reaching a peak for the housing crisis

▪ Beauty stocks mostly underperformed the S&P 400 July 2009 to July 2011

▪ U.S. IPO market remains healthy; total proceeds raised 2x more in the first half of 2011 than 2010

P i t it h ld $1 t illi f i t d

▪ No Beauty IPO’s in the first half of 2011

▪ M&A volume increased in the first half of 2011 by >45% compared to the same period in the prior year

▪ Strategics led in both quantity and size of deals; of ll t ti i th fi t h lf f 2011 83%

Capital Markets

▪ Private equity holds over $1 trillion of uninvested capital and is under pressure to put money to work in advance of raising new funds

– Unrealized investments a record 60% of total managed capital; pressure building for exits

▪ Debt markets remain open for >$20mm EBITDA

all transactions in the first half of 2011, 83% were completed by strategics and 17% were completed by financial sponsors

– Highlighted by transformational acquisitions that provided strategic buyers access to new markets, channels, and categories

2

▪ Debt markets remain open for >$20mm EBITDA opportunities; ample capital available to high grade borrowers

, , g

High-growth companies are raising equity capital to pursue growth in direct-to-consumer channels and international markets

Global Beauty OverviewThe $382 billion Global Beauty industry is supported by positive growth across all major categories, and is on track to

2010 Channel Share2010 Category Size & Growth

($ in billions) (% of channel share)Department

St

reach $437 billion by 2015(1)

Supermarkets & Hypermarkets

26.9%

Drugstores12.8%

Stores9.5%

$5 7 $6 9 $8 0 $16.8 $17.2

$28.7 $33.6

$35.5

$42.0 $48.2

$68.0 $71.5

4.6% 4.6%5.2%

6.0%

4.1%4.4%

7.5% 7.5%

4.5%

7.0% 7.3%

4.7%

Other21.3%Non-Store

Retailing16.1%

Beauty Specialists

13.4%

$5.7 $6.9 $8.0

Depi

lato

ries

Baby

care

Sunc

are

Sets

/ K

its

Deod

oran

ts

Men

's G

room

ing

Bath

& S

how

er

Ora

lcar

e

Frag

ranc

e

Colo

r Co

smet

ics

Hai

rcar

e

Skin

care

Sales by Category % Growth in 2010

5.0%

6.0%

7.0%

300

350

400

Overall Retail Sales Growth by Channel 2005 - 20102006 - 2010 Global Beauty Growth

$ %

($ in billions)

10.0%

8.0%

(% growth)

(1.0%)

0.0%

1.0%

2.0%

3.0%

4.0%

0

50

100

150

200

250

2006 2007 2008 2009 2010

6.0%

2.0%

0.0%

4.0%

(2.0%)(0.1%)2005 2006 2007 2008 2009 20102006 2007 2008 2009 2010

Total Market Premium Sales % Mass Growth % Premium Growth% Total Growth

(1) Constant 2010 prices and fixed 2010 exchange rates. Source: Euromonitor.

Retailing Non-Store Retailing

Non-Grocery Retailers

Grocery Retailers

BPC Non-StoreSales

3

U.S. Beauty OverviewAfter a decline in 2009, Beauty and Personal Care sales showed signs of life in 2010

$62 0

($ in billions) ’05-’15CAGR

1.6% shift toward Mass

Premium vs. Mass Sales MixHistorical and Projected Sales by Category

34.8% 34.6% 34.5% 33.4% 32.2% 32.4% 32.7% 33.0% 33.1% 33.1% 33.2%

5 4 5 36.0 5.3 5.28.6 9.4 10.0

9.110.1 10.6

10.310.0 10.7

$56.6$62.0$59.7

(1 4%)

1.6%

0.4%

0.9%

1.6%

65.2% 65.4% 65.5% 66.6% 67.8% 67.6% 67.3% 67.0% 66.9% 66.9% 66.8%

2005 2006 2007 2008 2009 2010 2011P 2012P 2013P 2014P 2015P

Mass Premium

17.7 19.4 20.2

5.0 5.4 5.3

2005 2010 2015

Other Bath & Shower Fragrance Color Cosmetics Skincare Haircare

1.3%

0.6%

(1.4%)

SkincareHaircare OtherColor Cosmetics Fragrance Bath & Shower

Supermarkets & Hypermarkets

24.7%

OtherStore-Based

19.7%''''

'05 - '10 CAGR '05 '10 CAGR$2.9 $3.0

$3.2

2005 - 2010CAGR = 11.5%

(% of channel share) ($ in billions)

2005 – 2010 Ecommerce Sales2010 Sales by Distribution Format

Non-Store / DTC

16 8%

Mass Merchandisers

10.7%'05 - '10 CAGR

(4.0%)

05 10 CAGR0.7%

'05 - '10 CAGR(3.1%)

'05 - '10 CAGR1.4%

'05 - '10 CAGR1.8%

'05 - '10 CAGR1.3%

$1.9

$2.2

$2.6

16.8%

Pharmacies & Drugstores

14.2%

Department Stores13.9%

2005 2006 2007 2008 2009 2010

4

Source: Euromonitor.

▪ The $10.1 billion Skincare category grew by 2.0% in 2010, driven primarily by premium product sales

U.S. Beauty Industry — Category Outlook & Growth Drivers

Skincare

▪ Already the largest Skincare segment, Facial Anti-Aging, and specifically Premium Facial Anti-Aging products, boasted 5.3% and 13.0% increases, respectively; CAGR through 2015 is forecasted at 1.0% with gains in Face, Sun, and Gifts

▪ While only 4.3% of Facial Skincare sales today, whitening treatments and spot correctors are gaining importance as women seek to reverse the effects of sun damage

▪ Increases in R&D budgets of large mass brands have yielded breakthroughs in Skincare technology rivaling prestige efficacy, enabling mass brands to achieve higher price points

Haircare

▪ Representing 23.5% of the U.S. Haircare business, Salon Haircare’s 19.7% decline since 2005 has weighed down the overall category, but is expected to reverse course through 2015

▪ Mass brands are launching value-added Haircare that rivals the efficacy of salon brands▪ Hair Color sales increased 3.0%, rebounding to 2008 levels▪ Growth in Styling Agents, Salon Haircare, and Hair Extensions are expected to counter the decline in Haircare dollar

sales

Color Cosmetics

▪ Color Cosmetics made a remarkable turnaround, growing 3.8% in 2010 to reach $9.4 billion in retail sales, after a two year decline

▪ Nail products outperformed other segments with growth of 12.0% in 2010, benefiting from women performing DIY manicures and pedicures; Nail Polish achieved impressive sales growth of 16.0%

▪ In Prestige, the Lip segment gained 7.4% in 2010 and 7.0% from January to April 2011; Lip Color specifically increased 11.0% after almost a decade of decline

▪ U.S. Fragrance sales have steadily declined since 2005; nevertheless, subtle consumer optimism helped boost sales by 1.7% in 2010; by 2015, Fragrance is expected to decline by 0.5% CAGR

▪ Roughly 5 times larger than Mass, Premium Fragrances at $4.3 billion bounced back by 3.1%, while Mass suffered a 3.8% d li F

after almost a decade of decline▪ Eye Makeup is still strong, posting a 4.5% increase in 2010, and is expected to maintain a 2.1% CAGR through 2015▪ Likewise, forecasts of the entire category turned for the better, with updated expectations for a 1.2% CAGR through 2015

decline ▪ Brand fragmentation continues as celebrity and designer launches are a dime a dozen, and typically a 1 – 2 season shelf life▪ Unisex scents fell out of favor in both Mass and Prestige channels, realizing double digit decreases in 2010▪ Classics continue to dominate the top 10 best seller list

Fragrance

Bath & ▪ The $5.4 billion Bath & Shower category declined 2.0% in 2010, after growing by 3.5% in 2009; sales are not expected to

rebound through 2015 as the category is heavily promotionalBath & Shower

rebound through 2015 as the category is heavily promotional▪ Body Wash & Shower Gel experienced a 7.5% increase in 2010▪ Majority of sales come from the Mass channel, with private label and cover label sales accounting for ~25% share▪ Increasingly, brands are adding anti-aging technology in core body products in order to achieve higher price points

5

Source: Euromonitor, Mintel, NPD, GCI, and Beauty Cross Channel Monitor.

Beauty Retail Trends

▪ The astounding pace of consumer adoption of mobile commerce is altering the retail landscape in the U.S.

▪ Beauty brands of all sizes are utilizing social media and mobile apps in order to cement relationships with consumers, garner feedback, and provide real-time services such as product locaters, efficacy ratings, tutorials, and interactive beauty advisors

Mcommerce

▪ Within 4 years, mobile usage is expected to overtake PC usage in terms of accessing the Web

▪ Ecommerce grew 16% globally and 10% in the U.S. in 2010▪ Beauty-specific internet sales reached over 5% of all Beauty retail, or $3.2 billionEcommerce

▪ After 18 months of de-stocking, retailers are replenishing stock and increasing on-hand weeks-of-supply (“WOS”), creating a smoother supply chain and allowing brands to forecast with better accuracy

▪ Average WOS stock increasing 50 – 60% since low point in 2009

Re-Stocking

Average WOS stock increasing 50 60% since low point in 2009

▪ Prestige and mass retailers alike are adding lash & brow bars, self-tanning, blowouts, nail bars and makeover studios within current retail environments to entice frequent visits and a higher average basket

▪ Consumers are drawn to instant services, tips on technique, and makeover opportunities

Services Drive Traffic , p q , pp

▪ With the onslaught of private flash sale sites and daily deals, consumers are becoming desensitized to paying value prices for top brands; furthermore, consumers are more in control as they demand free shipping, prefer to name their own price, leverage social media platforms to “aggregate” purchases, and use mobile devices to compare prices and discounts

Consumer-Centric R t il

6

Source: Euromonitor, WWD, comScore, and Morgan Stanley.

gg g p , p p▪ Top 4 flash sale sites claimed 2.7 million unique visitors in December 2010, each up 15% - 50%

over 2009Retail

Beauty Brand & Innovation Trends

▪ Perceptive brands are launching products targeting specific generational groups, whether Gen D (the “D”-igital generation that believes access to information is their birthright) or Boomers, which represent the fastest growing segment in developed countries and have unique personal care needsNiche

C ▪ At 75 million consumers strong, or 29% of the U.S. population, Boomers will double in

size in the next 20 – 30 years, representing a significant opportunity to deliver products with anti-aging benefits in all categories and packaging options customized for portability, ease, and value

Consumer Segments

▪ Topical beauty products have the potential to be delivered efficaciously via infused clothing, sleepwear, and bedding; shapewear not only has the potential to physically shrink one’s appearance, but also to actively reduce the signs of cellulite or stretch marks on the skin

Unconventional Delivery

▪ Textile manufacturers have cracked the code on embedding fabric with active ingredients, making wearable garments the newest delivery system for cosmeceuticals

ySystems

▪ New legislation aims to update the U.S. Food, Drug, and Cosmetics Act of 1938 by mandating more stringent practices on ingredient labeling across all categories, causing concern over massive repackaging expenses

▪ First signs of increased intervention are evident in the recently announced new FDA guidelines for the labeling of sunscreen products that will take effect in the next 12

Regulation

7

Source: Euromonitor, WWD, The Future’s Report, BW Confidential, GCI, and The Doneger Group.

guidelines for the labeling of sunscreen products that will take effect in the next 12 months

Overview of Public Market Comparables in the Global Beauty IndustryOverall, public valuations have improved marginally with subtle improvements in the economy; the sector is expected

Median 2011 = 9.8xMedian 2010 8 2x

400%

to grow as economic outlook remains cautiously optimistic

Median EV / EBITDAStock Performance Index Graph – Last 2 Years

10.9x9.3x

6.0x6.6x

11.1x9.3x

7.4x

11.2x10.1x 9.3x 9.6x

Median 2010 = 8.2xMeidan 2009 = 8.2x

150%

200%

250%

300%

350%

2.5x

Global Mega-Cap Large and Mid-Cap Small-Cap Specialty Retail

07/22/09 07/22/10 7/22/11

50%

100%

150%

Jul-09 Sep-09 Dec-09 Feb-10 Apr-10 Jul-10 Sep-10 Nov-10 Feb-11 Apr-11 Jul-11

Specialty Retail Large and Mid-Cap S&P 400 Small-Cap Global Mega Cap

13.5%

Median Change in Last 2 Year to Next 2 Year CAGR = 5.8%

▪ Global Mega-Cap: Colgate-Palmolive, Henkel AG, Johnson & Johnson, L’Oréal, Procter & Gamble, Unilever NV

▪ Large and Mid-Cap: All for One, Amorepacific, Avon Products, Beiersdorf, Church & Dwight, Clorox, Estée Lauder, Kao Corp., Natura Cosmeticos Oriflame Cosmetics Shiseido

Historical vs. Estimated Revenue Growth CAGRs

2.1% 1.9%

(1.3%)

4.9% 5.9% 5.0%

6.4%

Global Mega-Cap Large and Mid-Cap Small-Cap Specialty Retail

Natura Cosmeticos, Oriflame Cosmetics, Shiseido

▪ Small-Cap: Elizabeth Arden, FANCL Corp., Helen of Troy, KOSE Corp., Mandom Corp., Mannatech, Nu Skin Enterprises, Obagi Medical Products, Physicians Formula, Prestige Brands, Revlon, Unihair

▪ Specialty Retail: Limited Brands, Regis Corp., Sally Beauty, Ulta S l

Last 2-Year Next 2-Year

Salon

8

Source: Capital IQ; LTM data as of July 22, 2011.

Transaction volume increased 45% in 2010 with 2011 projected to exceed 2010; valuations continue to rebound with

M&A Trends in the Beauty & Personal Care Industry

strategics generating the majority of deals in the sector through both bolt-on and transformational acquisitions

Strategic vs. Financial Sponsor AcquisitionsMedian Transaction Multiples

75.0% 69.0% 62.0%70.8% 72.7%

88.2% 82.9%

25.0% 31.0% 38.0%29.2% 27.3%

11.8% 17.1%

2 2

9.5x

11.7x

9.7x

13.6x12.0x

11.2x12.5x

2005 2006 2007 2008 2009 2010 2011

Strategic Financial Sponsor

2.0x 1.5x 1.2x2.0x 2.0x 2.2x 1.7x

2005 2006 2007 2008 2009 2010 2011

Median EV / Revenue Median EV / EBITDA

2005 – 2011 Median EV / EBITDA by Category2005 – 2011 Median EV / Revenue by Category

1 8x

2.0x2.2x

2.3x

1 7x

Overall Median = 2.0x

10.5x13.0x

10.5x 12.3x13.6x

Overall Median = 11.9x

1.8x 1.7x 10.5x

Source: Public company filings, press releases, Capital IQ, & Demeter Group estimates as of July 22, 2011.

9

Color Cosmetics Haircare Skincare Bath & Body Oral Care Color Cosmetics Haircare Skincare Bath & Body Oral Care

Select 2011 M&A Comparables

Closed Enterprise Target Enterprise Value/Date Target Acquirer Value* Revenue EBITDA Revenue EBITDA

SkincarePending Dermik Laboratories, Inc. Valeant Pharmaceuticals International $425 $240 N/A 1.8x N/A

Pending H20 Plus, L.P. Pola Orbis Holdings, Inc. 91 N/A N/A N/A N/A

Jul-11 Marbert Holding AG (Marbert Brand) Straub GmbH N/A N/A N/A N/A N/A

Jul-11 Freeze 24▪7 Skin Care Brand TPR Holdings LLC N/A N/A N/A N/A N/A

Jun-11 Laboratories Dermatologiques d´Uriage SA Exea Corporation (Puig Beauty & Fashion Group S.L.) N/A N/A N/A N/A N/A

May-11 Pomega, Inc. (Private Placement) mBeach Software, Inc. N/A N/A N/A N/A N/A

May-11 Aero Pharmaceuticals Inc. Biozone Pharmaceuticals Inc. 321 N/A N/A N/A N/A

Apr-11 Paras Pharmaceuticals Ltd. Reckitt Benckiser Group plc 717 88 $24 N/M N/M

Feb-11 Beiersdorf AG - Juvena brand Troll Cosmetics GmbH N/A N/A N/A N/A N/A

Feb-11 Nude Skin Care LVMH Moet Hennessy Louis Vuitton N/A N/A N/A N/A N/A

Feb-11 Ole Henriksen of Denmark, Inc. LVMH Moet Hennessy Louis Vuitton N/A N/A N/A N/A N/A

Jan-11 Tjoy Holdings, Ltd Coty Inc. 400 N/A N/A N/A N/A

Mean 1.8x N/AMedian 1.8x N/A

HaircarePending Darling Group Holdings Godrej Consumer Products Ltd. $219 $224 N/A 1.0x N/A

Jul-11 Fing'rs (Europe) AG and Fing'rs (Deutschland) GmbH Pacific World Corporation N/A N/A N/A N/A N/A

Jun-11 Oscar Blandi Haircare TPR Holdings Inc. N/A 10 N/A N/A N/A

May-11 Alberto-Culver Co. Conopco (Unilever) 3,732 1,551 $248 2.4x 15.0x

May-11 Sexy Hair Concepts, LLC TSG Consumer Partners N/A N/A N/A N/A N/A

Feb-11 Beiersdorf AG - Marlies Möller brand Troll Cosmetics GmbH N/A N/A N/A N/A N/A

Feb-11 Kenra Limited TSG Consumer Partners N/A N/A N/A N/A N/A

Jan-11 Vanart and Select Brands Genomma Lab Internacional SAB de CV 85 42 N/A 2 0x N/AJan 11 Vanart and Select Brands Genomma Lab Internacional SAB de CV 85 42 N/A 2.0x N/A

Jan-11 Namasté Laboratories, LLC Dermoviva Skin Essentials Inc 140 90 N/A 1.6x N/A

Mean 1.7x 15.0xMedian 1.8x 15.0x

Color Cosmetics

Pending Somang Cosmetics Co. KT&G Corporation N/A N/A N/A N/A N/A

Jun-11 COVER FX Skin Care, Inc. Catterton Partners (Private Placement) N/A N/A N/A N/A N/A

Jun-11 Collection 2000 Li & Fung Limited N/A N/A N/A N/A N/AJun 11 Collection 2000 Li & Fung Limited N/A N/A N/A N/A N/A

Mar-11 Mirage Cosmetics, Inc., Certain Assets Revlon, Inc. N/A N/A N/A N/A N/A

Feb-11 Barielle, Ltd. Fisk Industries, Inc. N/A N/A N/A N/A N/A

Jan-11 Dr. Scheller Cosmetics AG Coty Inc. N/A $70 N/A N/A N/A

Jan-11 E.l.f. cosmetics (Private Placement) TSG Consumer Partners N/A N/A N/A N/A N/A

Jan-11 Paris Presents Mason Wells $82 70 $8 1.2x 10.0x

Mean 1.2x 10.0xMedian 1.2x 10.0x

Note: $ in millions. *Enterprise Value = Value of Shareholders’ Equity + Debt – Cash. Source: Public company filings, press releases, Capital IQ, & Demeter Group estimates as of July 22, 2011.

10

Overall Mean 1.7x 12.5xOverall Median 1.7x 12.5x

Demeter Group Overview

In the last 6 months Demeter Group has closed 4 transactions totaling +$400 million in Enterprise Value with each

Latest Transactions

In the last 6 months, Demeter Group has closed 4 transactions totaling +$400 million in Enterprise Value, with each sold at a strategic multiple to a global Consumer portfolio

Has Been Acquired By Has Been Acquired By Has Been Acquired By Has Been Acquired By

May 2011 March 2011 February 2011 December 2010

12

Demeter Group

N ti ll g i d i t t b k f d l i l high g th C d R t il iNationally recognized investment bank focused exclusively on high-growth Consumer and Retail companies

Advisory ServicesOverview

▪ Advise global, multi-channel, high-growth brands and concepts in the following sectors:

– Food & Beverage– Beauty & Personal Care– Apparel & Footwear

Private Placement

▪ Raise growth equity capital ($10 million to $50 million) from global private equity funds and family offices in non-control transactions

– Specialty Retail– Direct-to-Consumer (“DTC”) and Ecommerce

▪ Advise privately-held, founder-led, and family businesses with enterprise values between $25 million and $300 million

Sell-side

▪ Obtain strategic transaction multiples by leveraging our strategic perspectives to match our clients’ unique industry direction and shareholder objectives with buyer

– Median transaction size ~$100 million

▪ Deal teams run day-to-day by CEO

and shareholder objectives with buyer capabilities

▪ Develop tailored investment theses and identify potential targets that leverage i t ’ d b ’ biliti Buy-side investors’ and buyers’ core capabilities so they can be pre-emptive yet competitive on valuation and terms

Note: Securities offered through Demeter Advisory Group, LLC, member of FINRA / SIPC.

13

Jeff MenasheChief Executive Officer

[email protected]

Jani FriedmanManaging Director

[email protected]

100 Spear Street, Suite 1115San Francisco, CA 94105

(415) 632-4400www.demetergroup.net


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