Inter Parfums, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Inter Parfums develops, markets and distributes prestige fragrances through European and U.S. operations, relying substantially on licensed brands.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $149.4 | $129.1 | $321.1 | $272.2 |
| Gross profit | $95.7 | $83.9 | $201.3 | $174.0 |
| Gross margin | 64% | 65% | 63% | 64% |
| Operating income | $18.8 | $14.5 | $49.2 | $40.6 |
| Operating margin | 12.6% | 11.2% | 15.3% | 14.9% |
| Net income | $14.3 | $9.2 | $36.1 | $27.4 |
| Net income attributable to Inter Parfums | $10.9 | $6.7 | $26.8 | $20.1 |
| Diluted EPS | $0.35 | $0.22 | $0.85 | $0.64 |
Q2 sales rose 15.7% (12.3% at comparable exchange rates); first-half sales rose 18.0% (12.8% at comparable rates). First-half operating income increased 21% and parent-attributable income increased 33%. Dividends declared were $0.21 per share for Q2 and $0.42 for the first half.
Cash flow, liquidity and debt
- First-half operating cash flow was negative $6.1, improving from negative $10.7 a year earlier. Working-capital changes used $47.3 of cash, notably higher receivables and inventory.
- Investing cash outflow was $20.1, including $10.0 of net purchases of short-term investments and $8.0 for intangible assets. Financing cash outflow was $32.8, including $12.1 of debt repayments and $21.8 of dividends paid to company and noncontrolling shareholders.
- Cash fell $63.0 to $145.3; short-term investments were $77.6, for combined cash and investments of approximately $222.9. Management reported working capital of approximately $372 and a working-capital ratio of almost 3.2:1.
- Total debt was $58.1 at June 30 ($23.6 current and $34.5 long-term), down from $60.6 at year-end 2017. No short-term borrowings were outstanding. Available facilities included a $20.0 domestic revolver and approximately $29.0 in international credit lines.
Material changes and business developments
- European-based sales increased 17.1% for the first half; U.S.-based sales increased 22.5%. Sales grew across regions, with Asia up 31%, Eastern Europe 24% and the Middle East 23%.
- Coach sales increased 166% for the first half, supported by men’s fragrances and the Coach Floral launch. Montblanc first-half sales rose nearly 12%; Jimmy Choo first-half sales remained down 12% despite an 8% comparable Q2 increase.
- Gross margin declined one percentage point in both the quarter and first half. Management attributed most of the European margin pressure to the stronger euro against the U.S. dollar; U.S. margins improved with a stronger mix of prestige products.
- SG&A increased 14% for the first half, but fell as a share of sales to 47% from 49%. Advertising and promotion spending was $59.3 for the first half.
- The GUESS fragrance license became effective April 1, 2018, under a 15-year worldwide agreement; an 8-year Graff worldwide license was signed; and the Van Cleef & Arpels license was renewed through December 2024.
Outlook, risks and notable items
- No full-year revenue or earnings guidance is provided in the filing. Management expects full-year 2018 advertising and promotion spending to be approximately 21% of net sales and said Jimmy Choo sales improvement is anticipated as new products roll out.
- Inventory was up approximately 26% from year-end; management said this reflected second-half sales expectations and product launches. Receivables were up 19.8%; days sales outstanding were 84 versus 83 a year earlier.
- Key risks include dependence on third-party brand licenses and renewals, product-launch and seasonal variability, foreign-exchange movements, and uncertainty in some markets. A weaker U.S. dollar can pressure margins; management also monitors British pound volatility related to Brexit.
- Q2 comprehensive loss was $13.2 despite net income of $14.3, primarily reflecting negative foreign-currency translation adjustments of $27.6. The first-half effective tax rate was 30%, versus 33%; the company had received a $3.9 French dividend-tax refund by June 30.
- Management stated liquidity was strong and expected available cash, operating cash flow and credit facilities to cover foreseeable operating needs. It is examining potential brand acquisitions but gave no assurance any transaction will occur.
Investor facts to verify
- Whether sales momentum, particularly Coach and U.S. operations, continues and how new GUESS and Graff licenses contribute.
- Whether first-half inventory and receivables growth converts into sales and cash; operating cash flow remained negative.
- How currency movements affect European gross margins and reported sales, and whether translation volatility persists.
- Progress on license obligations, advertising commitments and renewals, along with any acquisition plans or related financing.
- The eventual effects of the Tax Act accounting estimates and adoption of the upcoming lease-accounting standard; management expected a significant increase in recognized lease assets and liabilities.