DEP’s Stock Soars After Hair-Care Lines Get Restyled

If you’ve got teen-agers, check their choice of hair gel. They may be helping to style a hot little L.A. stock story.

DEP Corp., a Rancho Dominguez-based producer of hair-care products and other toiletries, on Tuesday reported a huge jump in quarterly earnings--sending its stock flying.

DEP said its profit rose to $1.04 million, or 18 cents a share, in the quarter ended April 30, from a depressed $116,000, or 2 cents a share, a year earlier. Revenue came to $27.06 million, up 10%.

The results took a lot of people by surprise, especially given the ongoing recession and tight consumer spending. DEP stock jumped 15% for the day, up 87.5 cents to a new 1991 high of $7 on the NASDAQ electronic market.

The DEP Corp. name may not be well-known among average investors, but the firm’s stable of brand-name products is surprisingly large for a 400-employee business that just topped $100 million in sales last year. Besides its Dep hair-care line, DEP owns such brands as Lavoris mouthwash, Topol smoker’s toothpaste, the Ayds appetite-control product and Cuticura soaps.

Lately, though, the real excitement at DEP has centered on its L.A. Looks hair-care products for teens. Launched just three years ago, the L.A. Looks line has emerged as a marketing coup for DEP.

In the fiscal year ending July 31, DEP Chairman Robert Berglass figures that hair-care will account for about two-thirds of DEP’s sales. And for the first time, L.A. Looks will probably surpass the company’s long-established Dep line as the biggest source of hair-care sales, Berglass says.

The kicker here is that DEP doesn’t advertise L.A. Looks--at all. That’s downright heresy for a hair-care product marketer, but DEP has proved that the no-ads concept can work.

Instead of advertising L.A. Looks, DEP has relied on flashy packaging and an affordable price (generally under $2) to attract teen and young adult shoppers who want a stylish hair-care brand without the usual big-bucks price tag.

For the 53-year-old Berglass, the decision not to advertise L.A. Looks was more pragmatic than anything else. “We didn’t have the money to spend at the time,” given other product commitments, he says simply. But the success of L.A. Looks also exemplifies DEP’s often-wily approach to marketing. “Guerrilla marketing,” Berglass calls it. “We take chances.”

The gamble he took in the mid-1980s was to quickly build a mid-size consumer products firm from what had been a mere $15-million (sales) company in 1983. Don’t knock deposed junk-bond king Michael Milken around Berglass: Milken’s bonds helped DEP mushroom in the late ‘80s.

Berglass’ success in buying and building brand-name products, however, didn’t translate into steady earnings growth. DEP’s earnings peaked at 71 cents a share in fiscal 1988, and the stock also peaked at that point, at $12.

In 1989, earnings plummeted to 26 cents a share. In 1990, results rose marginally, to 32 cents.

What went wrong? As DEP ramped up for the L.A. Looks line, an expanded Dep line and other product introductions, operating expenses jumped 28% between 1988 and 1990. At the same time, sales rose just 18%. Something had to give--in this case, the bottom line.

Berglass makes no apologies for the money he spent on long-term product development. “I can’t run this company on a quarterly basis,” he says. But he also knew by late 1989 that DEP’s expenses had to come down, and in a big way, he says.

“So we sat down with all of our vendors and said, ‘Our costs are too high--what can you do for us, and what can we do for you?’ ” Berglass says. If a vendor made plastic bottles for DEP’s hair-care products, Berglass wanted to know how it could be done more efficiently. And suggestions about cost cutting didn’t stop at the chairman’s door. In management meetings, he says, the motto became “nobody’s safe--including myself.”

The results have been blossoming on DEP’s bottom line since late last year: In the nine months ended April 30, operating earnings per share totaled 48 cents, up 153% from 19 cents in the same period of fiscal 1990. Meanwhile, DEP’s operating expenses for the nine-month period actually fell 5% from a year earlier.

“He’s (Berglass) doing a great job of cost cutting and getting his margins up, in a horrible retail environment,” marvels George Froley, whose Froley Revy Investment Co. in Westwood owns a big chunk of DEP’s convertible bonds.

But can DEP keep it up? Wall Street has pulled the stock up from a low of $2.50 last year. But if DEP earns at least 60 cents from operations in this fiscal year--as now seems likely--the stock price at $7 is less than 12 times earnings.

Berglass doesn’t entertain specific long-term profit projections. But he says confidently, “We think we have our house in order.” He admits that while the L.A. Looks line has rocketed, the company’s flagship Dep hair-care line has flattened in recent quarters. In the fiscal year starting Aug. 1, Berglass hopes to recharge the Dep line with at least six new product extensions or other reformulations.

The company also will launch new product extensions for some other key brands, including its Cuticura and Nature’s Family skin products.

But acutely mindful of costs, Berglass says none of this will involve “unreasonable” expenditures. “It’ll be very manageable,” he promises.

Over the next five years, Berglass believes DEP can flourish by continuing to serve niches that the giants of the toiletries business leave vulnerable to guerrilla marketing. He thinks DEP can grow at double-digit rates--which, if achieved, would finally mean the profit stream that the firm’s rapid expansion in the ‘80s seemed to promise. As the owner of 40% of DEP’s 5.9 million shares, Berglass has every reason to make good on his plans.

Turnaround for DEP? DEP Corp., the Rancho Dominquez-based personal-products company, has more than doubled its sales since 1986. Now earnings finally seem to be catching up. Latest Quarter-April 30 (millions, except per share figures)

1990 1991 Change Revenue $24.52 $27.06 +10% Operating expenses 14.04 14.55 +4% Net income* 0.17 1.04 +512% Earnings per share 0.02 0.18 +800%

* not including extraordinary gains Source: DEP Corp.