The Stephan Company History

Company Perspectives:

With over 100 years of experience, The Stephan Company continues to keep one step ahead of the ever-changing hair and personal grooming products industry.

Key Dates:

1897:

The Stephan Company is founded in Worcester, Massachusetts.

1952:

The company moves to Florida.

1960:

The company goes public.

1981:

Frank Ferola acquires control of the company.

1992:

Williamsport Beauty & Barber Supply is acquired.

2003:

The company is taken private.

Company History:

The Stephan Company, operating out of Fort Lauerdale, Florida, is a small manufacturer and distributor of haircare and personal products for both the retail and wholesale markets. The public company is comprised of three operating segments: Professional Hair Care Products and Distribution, Retail Personal Care Products, and Manufacturing. Business is conducted through eight subsidiaries. Foxy Products, Inc. offers the Magic Wave line of hair care products for African-Americans. Morris Flamingo-Stephan, Inc. serves the barber and beauty salon markets through catalogs under the Morris Flamingo and Major Advance labels. Old 97 Company sells more than 100 hair and skin care products, fragrances, and personal grooming aids under the Old 97, Knights, and Tammy labels. Scientific Research Products, Inc. of Delaware manufactures and distributes products primarily aimed at African-Americans. Formerly known as Heads or Nails, Inc., Stephan & Co. distributes personal care products to cruise ships. Stephan Distributing, Inc. markets professional hair care products and a retail hair care line acquired from New Image Laboratories, Inc. Trevor Sorbie of America, Inc. manufactures and distributes beauty salon products. The last of Stephan's subsidiaries is Williamsport Barber and Beauty Corp, a mail order beauty salon and barbershop supply company. Stephan also operates five manufacturing facilities.

History Dates Back to 1897

The Stephan Company was founded in Worcester, Massachusetts, in 1897 by German immigrant Karl H. Stephan., who started out producing barber equipment and surgical tools. He added barber and beauty supplies, becoming the first professional men's hair care company in America as well as the first to sell products only through barber shops. It was through the barber shop trade that the company gained a reputation for the quality of its products. Stephan's bestselling product was a dandruff remover, which relied on a 19th-century formula. Under the ownership of its founder, the company thrived and even branched out to sporting goods. By 1920, the business was generating annual revenues of $5 million. In the 1930s, however, the Depression hit the company hard. One of Karl Stephan's 11 children, Richard Stephan, took charge of the business in 1938 and concentrated on the dandruff remover product to nurse the company back to health.

In 1952, Richard Stephan moved the company's headquarters from Worcester to Fort Lauderdale and incorporated Stephan in Florida. By now, Stephan, which had manufacturing facilities located in Worcester, St. Louis, and Fresno, California, had regained enough sales in barber shop hair tonics and shampoos to reach the $2.5 million mark in annual revenues. In 1960, the company went public, and by the middle of the decade its dandruff-removal product was a market leader. However, because of the cultural upheaval of the 1960s, when long hair became popular with men and a younger generation began to eschew the barbershop experience, Stephan saw its business adversely impacted. Richard Stephan attempted to find outlets for the company's products outside of the barber shop channel and even launched a national advertising campaign. This effort succeeded only in alienating its base of barber shop customers. The price of Stephan stock plummeted to 12 cents a share, leading the American Stock Exchange to delist the company. Over the next decade, Stephan passed out of family hands, annual sales fell to the $300,000 level, and its workforce was reduced to just three people.

In 1981, new ownership arrived in the form of Frank F. Ferola, an Avon executive of 16 years who had been involved in product packaging development. For some time, he and his wife Vera had wanted to run their own business and were attracted to the Ft. Lauderdale weather, but more importantly they recognized that Stephan possessed a great deal of under-utilized manufacturing capacity at its 32,000-square-foot office and factory. As Ferola told the South Florida Business Journal in a 1993 profile, "The Stephan Family had purchased so much equipment over the years that they never did catch up." Along with a group of small investors, Ferola raised $200,000 to purchase Stephan's stock. With his wife serving as office manager, Ferola took over a company that he told The Miami Herald had just one product out of 29 that was selling. Moreover, Stephan had just $13,000 in the bank and was burdened with some $250,000 in debt. To generate much needed income and make greater use of his factory, Ferola looked to manufacture private-label products. He developed product concepts and approached prospective customers about applying their labels to the items. He also managed to snare larger players like K-Mart Corp. The best known of these custom-manufactured products were Easy Net Gel and Gold Bond talcum powder. All of Stephan's customers paid cash in advance. As a result of the push into custom manufacturing, revenues improved by an average of 36 percent over the next three years, and the company was able to pay off all its debt. Now, only one-quarter of the products produced by Stephan Company carried its labels.

Foxy Products Acquired in 1986

Stephan became so liquid, in fact, that Ferola eventually concluded it was advantageous to grow by acquisition, targeting profitable brands that were small enough to escape the attention of major companies and either had a niche in the marketplace or were once high-selling brands that had lost their luster. The first of these acquisitions occurred in 1986 when Stephan acquired Foxy Products, Inc. and its line of Magic Wave products aimed at the African-American market. Two years later, Stephan bought Old 97 Company, a Tampa, Florida-based company founded in 1930. Old 97 manufactured a wide range of cosmetics, toiletries, and household products sold door-to-door in smaller markets in the South. In addition, Old 97 engaged in some private label manufacturing, producing hair and skin care products for a limited number of customers.

The price of Stephan's stock, which traded over the counter, remained a sore point for Ferola. In 1989, he decided to pay for a Standard & Poor's credit report. After receiving a favorable B+ rating, Stephan garnered more positive attention when Investor's Daily assigned a 99 percent rating for the company's earnings-per-share growth. As a result, Stephan, despite its size and scarcity of outstanding shares (more than a third were held by insiders), caught Wall Street's attention as the company continued to string together strong results. In 1989, Stephan recorded $4.66 million in revenues and a $375,000 profit, followed by sales of $5.5 million in 1990 and more than $10 million in 1991. Net income increased from $589,000 in 1990 to $1.6 million in 1991. The future looked even more promising in light of a 1991 deal with the Phar-Mor Inc. chain of 300 drugstores, which gave the company national distribution. All these positive developments combined to boost the price of Stephan's stock, which in the first ten months of 1991 grew from $4.40 to $24, adjusted for splits, or a 440 percent increase. Moreover, according to a company spokesman, a share of Stephan stock purchased ten years earlier at $1.12 had grown by more than 5000 percent.

Ferola continued to take a conservative approach to running Stephan. The company either made do with the equipment it already owned or in some cases built its own. One notable example was the $275 the company spent to construct its own cooling tunnel for molten products. A commercially bought tunnel to perform the same function would have cost as much as $50,000. Stephan also maintained a clean balance sheet by mostly paying cash for acquisitions and taking on virtually no debt. Rather than spend money on advertising and marketing, the company cut the price on its products to gain a competitive edge. In 1992, Stephan once again added new businesses, closing in January on the purchase of Williamsport Beauty & Barber Supply. The company paid $250,000 in cash, as well as a note payable over 7 years for $350,000 and 45,000 shares of restricted stock. Founded in 1939, Williamsport Beauty served its customers primarily through a mail order catalog (later augmented with a Web site), generating annual sales in the $2.3 million range. In February 1992, Stephan bought from Dow Brands the Massimo Faust line of upscale beauty salon products sold in drug stores and supermarkets. The deal called for Stephan to pay $15,000 a year for five years and a royalty of 3 percent of product sales during that same period. Both acquisitions helped Stephan maintain its impressive growth rate, as sales improved to $14.7 million in 1992 and net income to nearly $2.4 million. In 1993, Forbes magazine ranked Stephan No. 17 on its list of America's best small-growth companies, and Business Week designated the company No. 23 on its comparable list.

Continuing to scour for opportunities, Stephan made two acquisitions in 1993. In August, it completed the purchase of Penny's Heads or Nails, Inc., a cruise ship salon concessionaire, paying $357,116 in cash and 23,007 shares of stock. Next, in December 1993, Stephan paid an undisclosed amount of cash and stock to Muelhens Inc. to acquire the Frances Denney line of cosmetics, skin care products, and fragrances, sold nationwide by such major retailers as Sears, Roebuck and JC Penney. Although it was not able to duplicate a 100 percent growth rate in revenues, Stephan continued to post strong results. In 1993, net sales increased to $16.7 million and net income totaled $2.78 million. The following year would prove to be even brighter, fueled to a great degree by the April 1994 acquisition of Scientific Research Products, Inc. for 500,000 shares of stock. The Pompano Beach, Florida-based company, founded in 1950, manufactured and distributed hair and skin care products for African-Americans, Asians, and Hispanics. Its best known brands were LeKair, New Era, and T.C Naturals. As a distributor, Scientific Research had been Stephan's largest customer. Ferola explained his reasoning for buying the company to Business in Broward in a 1995 story: "Scientific was growing on the sales side and we were growing on the manufacturing side over the years. So ... the joint development of new products between The Stephan Company and Scientific really fueled the growth of the company." The proof would be reflected in the bottom line. In 1994, revenues improved by 50 percent over the previous year, totaling more than $24.3 million. Net income also exhibited strong growth, topping the $4 million mark. Also of note, Stephan's stock once again began trading on the American Stock Exchange.

Several Orphan Products Acquired in 1995

In 1995, revenues grew at a more modest rate to $26.2 million, while profits increased to more than $4.3 million. That same year, Stephan acquired several orphan products, brands that were past their prime but retained a certain level of customer loyalty. Stephan paid Colgate-Palmolive $12 million for Cashmere Bouquet Talc, Wildroot Cream Oil, Balm Barr Cocoa Butter Lotions and Creams, Protein 29 Hair Groom, Quinsana Powders, and Stretch Mark Crème. The best-known of the group was Wildroot, a popular 1950s hair cream. During their last year with Colgate, these products totaled $7.6 million in combined sales. Stephan did not, however, succeed as well as Colgate, and sales fell off.

Stephan completed one major acquisition in 1996, paying stock worth $518,000 and assuming some $3 million in debt for Trevor Sorbie of America, maker of professional hair care salon products sold to more than 100,000 salons in the United States. Stephan's salon business would be complemented by the 1997 acquisition of two product lines from New Image Laboratories at a cost of $5 million in stock. The Image line of professional hair care products sold in 125,000 salons located in the United States and abroad, including such countries as Australia, Brazil, Denmark, France, Germany, Italy, Sweden, and Thailand. In addition, Stephan picked up the Modern line of retail products, sold under the "Stiff Stuff" trademark.

Revenues topped $27 million and net income $5 million in 1997, which proved to be a high water mark for the company. Although sales climbed to nearly $35 million in 1998, the company essentially broke even, and Stephan began to trend downward. Stephan completed one more significant acquisition, paying $3.7 million in stock and assuming $1.9 million in debt for Morris-Flamingo, L.P., a distributor of hair care and beauty supplies by way of catalogs, using both the Morris Flamingo and Major Advance brand names. It would be the addition of Morris Flamingo, according to Stephan officials, that led the company to overstate earnings in the second and third quarters of 1998. A "change in the overall product mix" caused some confusion, the company claimed, resulting in its mistaken use of historical gross profit percentages. Although such an event was out of keeping with Stephan's reputation for conservative management, the firm's stock took a hit because of the revelation. The error was little more than an embarrassment, especially in light of more significant factors affecting the company's business. As early as January 1998, Florida Trend commented, "For 100 years, The Stephan Co. has been making products to deal with problems like tired, limp hair. But after a recent buying spree in which it added both companies and individual brands, it may have ended up with too many tired, limp products." The Colgate products, in particular, failed to live up to expectations, but Stephan also faced a challenging new retail environment that threatened to have a lasting impact. As the drug store industry consolidated, the surviving mega-chains began to demand large discounts and promotional allowances, which bled profits from suppliers like Stephan. Furthermore, consolidation took place in the distribution network for professional products, resulting in declining revenues for Stephan's professional and manufacturing business segments. After peaking in 1998, revenues began to fall steadily, to $34.4 million in 1999, $31.1 million in 2000, and $28.3 million in 2001. After recording a net profit of $1.8 million in 1999, Stephan saw its income drop to $622,000 in 2000 and $608,000 in 2001.

With its stock falling to the $3 range, Stephan decided in 2001 to hire investment banker Robinson-Humphrey Co. to assess its options, including a management-led group to take the business private. In April 2002, these investors offered $4 per share for Stephan, or $17.6 million. That amount would be increased to $4.50 per share, or $19.3 million, in August 2002. The deal was postponed for several months because of a class action suit filed by a shareholder who claimed she wanted to bid on the company. Finally, in July 2003, the suit was dismissed and the transaction to take the company private was approved by the board. Although Stephan was now free of the pressures associated with being a public company, it still faced a challenging future. In 2002, a year in which sales continued to fall, totaling $25 million, Stephan posted a loss of $6.3 million. Stephan would have actually earned $500,000 for the year, but management elected instead to write-down goodwill and other intangible assets, a move that reduced income by some $6.8 million. At the very least, Stephan, once again a privately held company, entered the next phase of its history with a clean balance sheet.

Principal Divisions: Hair Care Products and Distribution; Retail Personal Care Products; Manufacturing.

Principal Subsidiaries: Foxy Products, Inc.; Old 97 Company; Williamsport Barber and Beauty Corp.; Stephan & Co.; Scientific Research Products, Inc. of Delaware; Trevor Sorbie of America, Inc.; Stephan Distributing, Inc.; Morris Flamingo-Stephan, Inc.

Principal Competitors: The Procter & Gamble Company; Revlon, Inc.; Unilever plc.

Further Reading:

• Clary, Mike, "An 1890's Formula Is Working Wonders," Florida Trend, December 1991, p. 65.
• Kane, Cheryl, "The Stephan Co.'s 3 Cs: Caution, Cost-cutting, Conservatism," South Florida Business Journal, July 2, 1993, p. 9B.
• Shillington, Patty, "Fort Lauderdale, Fla., Firm's Only Splash Is in Profits," Miami Herald, January 8, 1996.
• Taylor, Germaine, "Just A Little Off The Sides ...," Business in Broward, September 1, 1995, p 16.

Source: International Directory of Company Histories, Vol.60. St. James Press, 2004.

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