Business context and reporting period
Inter Parfums, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2018. The company develops, markets and distributes fragrances, primarily through licensed brands. Its business is managed in European and U.S. operations; Europe generated about 87% of first-quarter net sales. Results for the quarter are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $171.8 million | $143.1 million | +20%; +13% at comparable exchange rates |
| Gross profit / margin | $105.6 million / 61.5% | $90.1 million / 63.0% | Margin down 1.5 percentage points |
| Operating income / margin | $30.4 million / 17.7% | $26.2 million / 18.3% | Income +16%; margin down 0.6 points |
| Net income | $21.9 million | $18.2 million | +20% |
| Net income attributable to Inter Parfums, Inc. | $15.9 million; diluted EPS $0.51 | $13.4 million; diluted EPS $0.43 | Attributable income +19% |
Gross margin pressure was primarily attributed to the stronger euro against the U.S. dollar, which affected European operations. SG&A rose 18% to $75.2 million but declined to 43.8% of sales from 44.7%. Advertising and promotion expense was $26.9 million, or 15.6% of sales; royalties were $11.8 million, or 6.9% of sales. The effective tax rate was 30.5%, down from 32.8%, following U.S. tax reform.
Operating cash flow was negative $20.7 million, versus negative $23.0 million a year earlier. Investing cash flow was negative $11.9 million and financing cash flow negative $12.1 million. Cash and cash equivalents declined $39.4 million during the quarter to $168.9 million. Cash plus short-term investments totaled $250.7 million at quarter-end.
At March 31, 2018, working capital was approximately $401 million and the current ratio was about 3.4 to 1. Total debt, including current maturities, was approximately $56.0 million, compared with $70.2 million at March 31, 2017; no short-term borrowings were outstanding. The balance sheet reported total assets of $805.1 million and total equity of $600.3 million.
Material changes versus the prior comparable period
- European product sales increased 25% to $149.5 million, supported by Montblanc and Coach growth. Jimmy Choo sales declined 28% against a strong prior-year quarter.
- U.S.-based product sales declined 5% to $22.3 million in management’s segment discussion. Management cited growth at Anna Sui and Oscar de la Renta, offset by weakness elsewhere.
- Sales increased across most reported regions; Asia and the Middle East were among the stronger performers. The stronger euro contributed to reported sales growth: the average dollar/euro rate was 1.23 versus 1.06 a year earlier.
- Accounts receivable increased to $166.1 million from $120.7 million at year-end, while management reported days sales outstanding of 87 days, versus 88 days in the prior-year quarter. Working-capital changes remained a significant use of operating cash.
Outlook, risks, contingencies and unusual items
- Management expected better U.S. quarterly sales comparisons as new products launched and GUESS fragrance sales began in the second quarter. It also anticipated significant SG&A leverage. No formal full-year revenue or earnings guidance is provided in the filing.
- Management expected 2018 advertising and promotion spending to be about 21% of net sales, in line with 2017 as a percentage of sales.
- The GUESS worldwide fragrance license is exclusive for 15 years and became effective April 1, 2018; the Graff worldwide license is exclusive for eight years and was signed in April 2018. Both involve customary advertising and royalty obligations.
- Currency movements affect reported sales and margins. Management noted that a stronger U.S. dollar can reduce reported sales but may benefit earnings because a substantial portion of European sales is dollar-denominated while most European costs are in euros. Further British pound weakness could pressure U.K. gross margins.
- Management cited economic and political uncertainty in select markets, seasonality and product-launch timing, brand and product performance, and possible impairment of intangible assets as relevant risks. The company also noted that sales-return and inventory estimates depend on market conditions and forecasts.
- Accounting for certain effects of the U.S. Tax Cuts and Jobs Act remained subject to refinement and could differ from provisional estimates. The company had recorded a French dividend-tax refund claim of about $3.9 million, including interest; it received $1.8 million by March 31 and another $0.9 million in April.
- The company said adoption of the new lease accounting standard was expected to significantly increase lease-related assets and liabilities. It reported no material impact from adopting the new revenue recognition standard.
Important facts for investors to verify
- Whether European sales growth and new product launches, including GUESS, translate into sustained organic growth rather than mainly foreign-exchange effects.
- Whether gross margins recover as currency movements change, and whether planned advertising and royalty spending supports sales without further operating-margin compression.
- Receivables collection, inventory needs and operating cash flow, given the quarter’s negative operating cash flow and higher receivables.
- The final tax effects of U.S. tax reform and collection of the remaining French refund claim.
- Debt repayment, liquidity availability and the costs or obligations associated with new brand licenses and any prospective acquisitions.