Inter Parfums, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. The unaudited consolidated statements cover Inter Parfums, Inc. and subsidiaries; financial amounts below are in U.S. dollars. The company develops, markets and distributes prestige fragrances through European and U.S. operations, relying substantially on third-party brand licenses.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $177.2 million | $169.5 million | $498.3 million | $441.7 million |
| Gross profit | $109.1 million | $103.5 million | $310.4 million | $277.5 million |
| Operating income | $35.0 million | $33.2 million | $84.1 million | $73.8 million |
| Net income | $24.4 million | $22.1 million | $60.5 million | $49.5 million |
| Net income attributable to Inter Parfums, Inc. | $18.9 million | $17.1 million | $45.7 million | $37.2 million |
| Diluted EPS | $0.60 | $0.55 | $1.45 | $1.19 |
- Sales rose 4.5% in Q3 and 12.8% for the nine months; at comparable exchange rates, growth was 5.4% and 10.1%, respectively.
- Gross margin was 62% in Q3 and 62% year to date, versus 61% and 63% in the comparable 2017 periods. Operating margin was 19.7% and 16.9%, versus 19.6% and 16.7%.
- SG&A was $74.2 million in Q3 and $226.3 million year to date. Advertising and promotion expense was $27.9 million and $87.2 million, respectively.
- The effective tax rate was 29% in Q3 and 30% year to date, compared with 33% in both 2017 periods.
Growth drivers and changes versus prior periods
- For the first nine months, European-based product sales grew 11.6% and U.S.-based product sales grew 18.4%. The U.S. comparison benefited in part from legacy GUESS fragrance sales beginning in Q2 2018.
- Coach sales increased 41% in Q3 and 104% year to date, supported by established signature products and 2018 flankers. Sales of Montblanc, Jimmy Choo and Lanvin were relatively unchanged year to date, according to management.
- Year-to-date regional sales increased broadly, including 22% in Asia, 12% in Eastern Europe, 11% in the Middle East, 18% in North America and 9% in Western Europe.
- Royalty expense increased to $13.0 million in Q3 and $35.5 million year to date, reflecting new licenses and increased royalty-bearing sales. U.S. SG&A grew faster than U.S. sales, which management attributed to licensed-product sales.
- Comprehensive income attributable to Inter Parfums fell to $33.2 million for the nine months from $72.1 million, principally reflecting less favorable foreign-currency translation adjustments; net income attributable to the company increased.
Cash flow, liquidity and debt
- Cash and cash equivalents were $133.6 million at September 30, 2018, down from $208.3 million at December 31, 2017. Short-term investments were $77.2 million, bringing cash and short-term investments to $210.7 million.
- Working capital was approximately $383 million and the reported working-capital ratio was nearly 3.4 to 1. Current assets were $545.7 million and current liabilities $162.4 million.
- Nine-month operating cash flow was a use of $3.8 million, improving from a $16.1 million use in 2017. Investing activities used $21.2 million and financing activities used $44.7 million; cash declined by $74.8 million.
- Management attributed operating cash use largely to seasonal working-capital needs, especially higher receivables and inventory. Receivables were $164.6 million and inventory $161.5 million at quarter-end; reported days sales outstanding was 85, versus 87 a year earlier.
- Total debt was $52.0 million, including $23.4 million current and $28.6 million long term, down from $60.6 million at year-end 2017. There were no short-term borrowings outstanding. The company cited $20 million of domestic revolving credit and approximately $29 million of international credit lines.
- The filing reports no liquidity concerns and says existing cash, operating cash generation and available credit are expected to meet foreseeable operating needs. Approximately $76 million of certificates of deposit carried early-withdrawal penalties involving forfeiture of some interest.
Outlook, management commentary and risks
- Management anticipated full-year 2018 advertising and promotion spending of approximately 21% of net sales, in line with 2017. The filing provides no numerical full-year sales or earnings guidance.
- In October 2018, the board authorized an increase in the annual dividend from $0.84 to $1.10 per share. The next quarterly dividend of $0.275 per share was scheduled for January 15, 2019.
- New arrangements included a 15-year GUESS fragrance license effective April 1, 2018; an eight-year Graff license; renewal of the Van Cleef & Arpels license through December 2024; and a Lily Aldridge fragrance line planned for launch in September 2019. New licenses carry customary royalty and advertising obligations, and GUESS includes minimum advertising expenditures.
- Key risks include reliance on third-party licenses and renewals, brand and product concentration, seasonality and launch execution, foreign-exchange movements, and consumer and economic conditions in international markets. Management noted that a stronger U.S. dollar can weigh on reported sales, while a weaker dollar can pressure gross margins; further pound depreciation could affect U.K. margins.
- Intangible-asset valuations depend on estimates of future sales, costs and discount rates; adverse changes could result in impairment charges. The company also noted that final accounting effects of U.S. tax reform could differ from estimates. The expected 2019 lease-accounting adoption was forecast to significantly increase lease assets and liabilities; the income-statement impact remained under evaluation.
- The company received a previously recorded approximately $3.9 million French dividend-tax refund, including accrued interest of approximately $0.4 million, during 2018. The filing says the claim had been recorded as of December 31, 2017.
Important facts for investors to verify
- Whether Coach and newer licensed brands sustain growth and whether launch, royalty and advertising costs remain controlled.
- Receivables, inventory and operating cash flow as seasonal working capital unwinds; management said inventory was up approximately 21% from year-end to support expected sales and launches.
- License concentration and renewal terms, especially the largest brands; Montblanc, Jimmy Choo, Coach and Lanvin represented 20%, 17%, 14% and 11% of nine-month sales, respectively.
- Currency effects, particularly U.S. dollar/euro movements and U.K. pound exposure, and the effectiveness of the company’s hedges.
- The effect of lease-accounting adoption and any final tax-reform adjustments or intangible-asset impairment assessments.