Our Secret Formula + = Growth. Unique Solutions. Innovation

Transcription

1 Our Secret Formula Innovation + = Unique Solutions Growth annual report 2007

2 Physicians Formula is one of the fastest growing cosmetics companies operating in the masstige (1) market. Under its Physicians Formula brand name, created in 1937, the Company develops, markets and distributes innovative, premium-priced products for the mass market channel. Physicians Formula differentiates itself by addressing skin imperfections through a problem-solving approach, rather than focusing on changing fashion trends. Currently, Physicians Formula products are sold in almost 27,000 stores throughout the U.S., including stores operated by Wal-Mart, Target, CVS, Walgreens and Kroger. The Company s products have broad consumer appeal, address specific, everyday cosmetics needs, and include face powders, bronzers, concealers, blushes, foundations, eye shadows, eyeliners, mascaras, brow makeup and lip color. The Company has a loyal and rapidly growing consumer base, and the Physicians Formula brand has one of the highest perceived quality images in the masstige market. (1) The Company defines the masstige market as products sold in the mass market channel under the following premium priced brands: Physicians Formula, Almay, L Oréal, Max Factor, Neutrogena, Revlon and Vital Radiance. Philosophy of Innovation WE BROUGHT MULTI-COLORED FACE POWDERS TO THE U.S. MASS MARKET WE BROUGHT BRONZERS AS A SEGMENT TO THE U.S. MASS MARKET WE BROUGHT MINERAL MAKEUP TO THE U.S. MASS MARKET WE BROUGHT THE FIRST ECOCERT CERTIFIED ORGANIC 100% NATURAL ORIGIN MAKEUP TO THE U.S.... And unique concepts, formulas, and delivery systems in color cosmetics.

3 Innovation through... a problem-solution approach From concealing dark under-eye circles and red blemishes, to smoothing wrinkles and correcting uneven skin tone, Physicians Formula creates cosmetics with a problem-solution approach that sets it apart from its competitors that focus on color and fashion trends. Using techniques such as color correction, used by makeup artists to neutralize skin discolorations, we develop makeup solutions that feature the latest technologies for the specific, yet common skin problems that women face every day. We apply this problem-solution approach to every aspect of the product. By adding mirrors and applicators wherever possible and by creating patent-pending unique delivery systems, our consumer knows we understand her and her busy lifestyle. innovative new products Innovation is a cornerstone to the foundation of Physicians Formula and it has been since the Company s inception. When Dr. Frank Crandall, founder of Physicians Formula, developed the first hypoallergenic, fragrance-free, and dermatologist approved makeup in 1937, he set the tone for the corporate philosophy for the next 70 years and beyond. Each of the 50 to 100 new products we introduce year after year must adhere to our commitment to high quality standards, advanced functionality and product performance that reinforce our class-tomass strategy. The cross-functional product development process allows us to consistently launch product innovations in 12 months or less. Each employee is challenged to be an innovator in his or her respective role, and everyone wears the developer s hat which ensures a robust new product pipeline. masstige market leadership By providing innovative product solutions that warrant premium pricing and introducing department store concepts to the food, drug and mass channels, we are positioned as a masstige brand. This affords us the benefit of attracting a wide consumer base. We attract the highly-coveted cross shopper who shops at both department stores and in the Food, Drug and Mass ( FDMx ) channels for the best beauty value, without sacrificing high quality and innovation. At the same time, we represent an affordable luxury to the mid-range consumer. Specializing in Face and Eye cosmetics, through our unique positioning we have become a leader in categories such as face powders and bronzers with leading market shares in the masstige market. We are today one of the fastest growing masstige brands in the United States and have experienced double-digit growth in sales at FDMx for the past 5 years. Net Sales (in millions) Gross Profit (in millions) Income from Operations (in millions) $52.6 $62.3 $78.7 $95.4 $111.5 $29.6 $37.6 $46.6 $53.5 $61.2 $8.3 $10.5 $15.4 $8.3 $

4 The First ECOCERT Certified Organic Line of Makeup in the U.S. 100% Natural Origin Makeup The 1st 100% Natural Origin Makeup formulated with certified organic ingredients in the U.S. The 1st mass makeup line in the U.S. that is 100% free of harsh chemicals, synthetic preservatives and parabens The 1st mass makeup line in the U.S. to use 100% eco-conscious packaging featuring revolutionary patent-pending paper compact technology which uses 93% less plastic than a traditional compact The Foremost Mineral Makeup Solution We brought mineral makeup to FDMx in the U.S. We brought Mineral Makeup Innovations to FDMx in the U.S.: Mineral Pressed Powder & Blush, Mineral Liquid Foundation and even Mineral Mascara 2008: Continued growth and expansion of the segment through innovations such as Mineral Concealer Stick, Mineral Lip Sheen and Illuminating Veil The High-Performance Solutions with Endless Possibilities Innovative Eye Makeup Solutions Innovative class-to-mass eye makeup solutions in the eye shadow, mascara, eyeliner and brow categories Introduction of a new, patent-pending packaging strategy to make the products more eye-catching The destination brand for consumers with sensitive eyes and contact lens wearers

5 2007 Form 10-K Our Secret Formula Innovation + = Unique Solutions Growth

6 To our shareholders Design: Creative Strategy Group csg-design.com Chief Executive Officer and Chairwoman of the Board 2007 was a year of successful product innovation and introductions, distribution gains and growth in sales and net income. One of our key strengths is the emphasis we place on correcting skin imperfections and skin problems faced by every woman, every day. The success of this approach is reflected in our diverse and loyal customer base that propelled our market share of the premium color cosmetics market at Food, Drug and Mass ( FDMx ) to 7.9% for the 52 weeks period ending January 26, 2008 (according to ACNielsen data), an increase of 11.3% over the prior year period. Net sales for 2007 increased approximately 17% over 2006, to $111.5 million, and net income per diluted share increased to $0.60 from $0.05 in These results illustrate continued strong demand for our existing lines in Face Powders and Bronzers, and specifically for our Mineral Wear product line which has consistently grown since its 2005 introduction and is poised for continued growth in These results also reflect strong distribution gains in both the number of doors and space allocation with Physicians Formula products available in almost 27,000 doors at the end of CULTIVATING A PHILOSOPHY OF INNOVATION At the core of the Physicians Formula philosophy is innovation; bringing women new, problem-solving, high-quality cosmetics products at a reasonable price. In 1997, we brought bronzers to FDMx in the U.S. and we now have a 72.5% market share in the premium segment according to ACNielsen data for the 52 weeks period ending March 22, In 2005, we introduced a mineral cosmetic line into FDMx and continue to achieve consistent growth, strong customer loyalty and recurring sales. The mineral makeup segment has become the fastest growing face makeup segment in our channel. In recognition of the positive impact of our Mineral Wear launch, Physicians Formula was awarded the prestigious 2007 Women s Wear Daily Industry Award for the Best Executed Launch Strategy of the year within the Mass Market Color Cosmetics category. In keeping with our philosophy of innovation, during 2007 we introduced our three new 2008 strategic initiatives to retail partners, and we began shipping these new products to them in December These include an extension of our successful Mineral Wear line, a rejuvenation of our Eye Makeup Category through innovative packaging and merchandising, and our first-to-market introduction of our Organic wear line. Physicians Formula made green history by introducing the first 100% ECOCERT certified organic color cosmetic line into the U.S. Going one step further, we used eco-conscious packaging and developed a patent-pending pressed powder compact utilizing 93% less plastic in its pressed powder components. We believe that Organic wear will bring many long-term growth opportunities, including opening the doors of high-growth adjacent categories. Consistent with our new product strategy, our 2008 introductions are supported by creative and distinct advertising and marketing strategies that highlight our problem-solution and first-movers approach. Our main advertising campaign this year features a new tagline: My Secret Formula : Physicians Formula and the iconic use of a simple math formula to position each problem and the product as the solution. The My Secret Formula campaign, as well as the How green is your makeup? campaign supporting the launch of Organic wear, are expected to continue to increase awareness of the brand in We are well positioned for continued long-term growth by meeting the needs of our customers as a masstige problem-solution based brand, providing highquality makeup solutions to our consumers. Our proven strategy continues to generate market share gains, increased loyalty and expanded distribution. For 2008 we expect the number of retail doors that offer our product to increase from almost 27,000 to 29,000, with significant room to grow to reach the 49,000 estimated door count of our masstige competitors. I thank you, our shareholders, for your commitment to Physicians Formula, and look forward to continued success through 2008 and beyond. Sincerely, Chief Executive Officer and Chairwoman of the Board

7 Corporate Information directors Chief Executive Officer and Chairwoman, Physicians Formula Holdings, Inc. Jeffrey P. Rogers President, Physicians Formula Holdings, Inc. Principal, Summit Partners Vice President and Treasurer, Del Monte Foods Company Chief Financial Officer, Church & Dwight Co., Inc. (Retired) committees of the board Audit Committee Compensation Committee Nominating and Corporate Governance Committee officers Chief Executive Officer and Chairwoman Jeffrey P. Rogers President Joseph J. Jaeger Chief Financial Officer transfer agent Computershare 250 Royall Street Canton, MA independent registered public accounting firm Deloitte & Touche LLP 350 South Grand Avenue Los Angeles, CA stocklisting NASDAQ Global Select Market Ticker symbol: FACE 1055 west eighth street azusa, california tel fax This is a Physicians Formula saved the following resources by producing this Green Annual Report : trees preserved for the future lbs water-borne waste not created 3,782 gals wastewater flow saved 234 lbs air emissions not generated 418 lbs solid waste not generated 824 lbs net greenhouse gases prevented 6.3 million BTUs energy not consumed 557 cubic ft natural gas unused Environmental impact estimates were made using the Environmental Defense Paper Calculator. For more information visit Cert no. SGS-COC