Inter Parfums, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited consolidated financial statements; amounts below are in U.S. dollars. The company manufactures, markets and distributes fragrances, primarily through licensed brands, with European and U.S. operating segments.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior year-end |
|---|---|---|
| Net sales | $144.8 million | $178.2 million; down 18.7% (17.8% at comparable exchange rates) |
| Gross margin | $89.0 million; 61.5% of sales | $109.8 million; 61.6% |
| SG&A | $71.3 million; 49.2% of sales | $76.6 million; 42.9% |
| Operating income | $17.8 million; 12.3% margin | $33.3 million; 18.7% margin |
| Net income | $13.3 million consolidated; $10.1 million attributable to Inter Parfums | $25.0 million consolidated; $18.9 million attributable to Inter Parfums |
| Diluted EPS | $0.32 | $0.60 |
| Operating cash flow | $(25.1) million | $(14.6) million |
At March 31, cash and cash equivalents were $142.6 million and short-term investments were $61.5 million, or about $204.1 million combined. Total current assets were $531.9 million and current liabilities $145.5 million; management reported a 3.7-to-1 working capital ratio. Long-term debt, less current portion, was $9.8 million; current debt was $6.6 million. The company reported $47 million of available, undrawn credit facilities. Total assets were $781.4 million, down from $828.8 million at year-end 2019.
Operating cash use reflected working-capital outflows, including accounts payable and accrued expenses. Cash declined $49.9 million during the quarter to $142.6 million, including a $4.0 million adverse effect from exchange rates. Q1 dividends declared were $0.33 per share, versus $0.28 a year earlier.
Material changes and business drivers
- European sales fell 20.6% to $114.1 million; U.S. sales fell 10.9% to $30.7 million. COVID-19-related closures and travel disruption affected both segments.
- Management estimated approximately $34 million of sales were lost versus initial expectations: $28 million in Europe and $6 million in the U.S. Advertising and promotional spending was $28.5 million, or 19.7% of sales, versus $27.3 million, or 15.4%, in Q1 2019.
- Reported gross margin was nearly unchanged, but SG&A declined more slowly than sales, increasing SG&A as a share of revenue. Operating income fell 46.6%; net income attributable to the company fell about 47%.
- By customer region, sales declined most in the Middle East (44%) and Asia (37%); North America declined 1% and Western Europe 11%.
- Coach Dreams supported a 35.9% increase in Coach brand sales; GUESS brand sales rose 28.9%. Montblanc and Jimmy Choo sales fell 33.4% and 28.3%, respectively.
Outlook, risks and unusual items
- The company withdrew its 2020 net sales and earnings guidance and said it could not issue new guidance until visibility improves. It expected a larger sales decline in Q2, given anticipated continued store closures.
- Management cited uncertainty around the duration of retail closures, reduced travel retail activity, supply-chain disruption, temporary distribution-center suspensions and weaker consumer demand. It warned the pandemic could materially adversely affect full-year 2020 results, financial position and cash flows.
- Management postponed certain planned brand launches and associated promotional spending to 2021, instituted a hiring freeze, planned significant bonus and expense reductions, and targeted fixed expenses below $25 million per quarter. It said it had not terminated or furloughed employees and did not anticipate short-term liquidity problems.
- The Board temporarily suspended the quarterly cash dividend in April 2020 and said it would revisit reinstatement when conditions improve. This followed the Q1 dividend declaration.
- Management reported signs of recovery in South Korea and China, particularly in internet sales, and said it was maintaining inventory to prepare for a potential demand rebound. It did not anticipate material impairment of trademarks, licenses and other intangible assets at the time of filing.
- A French tax audit will examine IP Suisse for 2010–2018. No assessment had been issued. The company disputed the French authorities’ position and recorded no provision; stated exposure was approximately $5.8 million, net of Swiss taxes already paid and excluding interest.
- Foreign-currency movements affected results and equity. The company reported $40 million in U.S.-dollar, £1 million in sterling and ¥170 million in yen forward contracts, all maturing within one year.
- The company’s business depends substantially on third-party brand licenses. The filing also notes potential COVID-19-related receivable losses, inventory buildup, supply delays, impairment charges and operating disruptions.
Most important facts for investors to verify
- Whether sales and operating margins recover after store reopenings, and the actual Q2 and full-year impact relative to the withdrawn guidance.
- Whether operating cash use, receivable collections and expected inventory increases remain manageable; confirm cash, short-term investment accessibility and credit availability.
- Whether the dividend remains suspended and how planned cost reductions and delayed launches affect earnings and cash flow.
- The outcome and potential financial exposure of the French tax audit, and any future impairment testing of intangible assets.
- Performance and renewal terms for major licensed brands, given the company’s dependence on license agreements.