Inter Parfums, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited consolidated results; dollar amounts below are in millions unless noted.
Business context
Inter Parfums manufactures, markets and distributes fragrances and related products through European and U.S. operations. European prestige products generated about 87% of first-half sales. The Burberry license ended effective December 31, 2012, with certain transition activities continuing through March 31, 2013; Burberry products still contributed $20.7 million of Q2 sales and $130.3 million for the first half.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $117.5 | $145.6 | $331.3 | $310.9 |
| Gross profit | $63.6 | $88.5 | $198.3 | $194.5 |
| Gross margin | 54% | 61% | 60% | 63% |
| Operating income | $7.9 | $12.6 | $74.9 | $44.4 |
| Operating margin | 6.7% | 8.7% | 22.6% | 14.3% |
| Net income | $4.5 | $7.5 | $47.5 | $27.7 |
| Net income attributable to Inter Parfums | $3.8 | $6.0 | $35.5 | $21.5 |
| Diluted EPS | $0.12 | $0.20 | $1.14 | $0.70 |
Q2 sales declined 19.3% year over year; first-half sales rose 6.6% (5.7% at comparable exchange rates). Excluding Burberry, European prestige sales increased 15% in both periods. First-half gains included Jimmy Choo, Montblanc and Lanvin. Q2 gross margin was pressured by the Burberry inventory resolution, including sales to Burberry at cost. First-half operating results benefited from an exceptionally strong first quarter and low promotional expense; Q2 operating income and company-attributable earnings declined.
First-half selling, general and administrative expenses fell 18% to $123.4 million, including advertising and promotion of $37.1 million versus $57.1 million a year earlier. Management said it expects heavier promotional investment in the second half to support launches and brands. The effective tax rate was 37% for the first half versus 36%; a new French tax on dividends contributed about $1.3 million. Excluding that tax, management reported a 35% first-half effective rate.
Cash flow, balance sheet and liquidity
- Operating cash flow was negative $1.1 million for the first half, versus positive $11.3 million in 2012. Management attributed the cash use primarily to taxes paid on the Burberry license-termination gain and working-capital movements.
- Investing cash flow was negative $122.0 million, largely reflecting net purchases of short-term investments of about $120.6 million. Financing cash flow was negative $40.6 million, including $27.4 million of bank-loan repayments and $14.5 million of dividends paid to shareholders and noncontrolling interests.
- At June 30, cash and cash equivalents were $142.1 million and short-term investments were $119.7 million, totaling $261.8 million. Current assets were $513.1 million and current liabilities $113.4 million; management reported working capital of about $400 million and a 4.5-to-1 current ratio.
- Bank loans payable were $0.4 million, down from $27.8 million at year-end 2012. The company reported available credit facilities of $15 million domestically and approximately $50 million internationally. A €20 million short-term facility used for Karl Lagerfeld license payments was repaid by June 30.
- Total equity was $528.0 million. The board authorized a 50% increase in the annual dividend to $0.48 per share for 2013; quarterly dividends declared were $0.12 per share.
Changes, outlook and risks
- Burberry transition: Burberry agreed to buy $7.8 million of inventory at cost; remaining inventory was sold, destroyed or transferred without charge. The $10 million reserve established in December 2012 against inventory and related sell-off costs was fully consumed by June 30. Burberry also purchased fixed assets for $2.8 million.
- New licenses after quarter-end: A 12-year Shanghai Tang worldwide fragrance license began July 1, 2013, with a planned first launch in spring 2014. A 10.5-year Agent Provocateur license begins August 1, 2013, with launches planned for 2014. Both agreements include stated minimum obligations customary to the industry.
- Management outlook: The company expects continued strong performance from Lanvin, Jimmy Choo, Montblanc and Boucheron, initial Repetto sales, and no Karl Lagerfeld contribution in 2013 while products are developed. Management may pursue brand acquisitions or licenses but gave no quantified earnings or sales guidance.
- Risks and commitments: The loss of Burberry is expected to significantly affect European sales. Foreign exchange is material: about 40% of European sales are denominated in U.S. dollars while costs are in euros; the company used forward contracts of approximately $48 million and £5.2 million, maturing within one year. Management noted continued uncertainty in some markets and the possibility of weaker consumer demand if volatility worsens or persists. Reported contractual obligations as of December 31, 2012 included $974.7 million of purchase obligations, primarily advertising, promotional and minimum royalty commitments.
Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Investor verification priorities
- Track the replacement of Burberry-related sales and profits, and the performance and launch timing of continuing and new licensed brands.
- Assess whether higher second-half advertising and promotional spending supports growth without materially compressing margins.
- Reconcile operating cash generation and tax payments with reported earnings, and monitor the composition, maturity and liquidity of short-term investments.
- Review minimum sales, advertising, royalty and other contractual commitments, including obligations associated with the new licenses.
- Monitor foreign-exchange exposure, consumer demand in key markets, and the extent to which first-half operating results depended on an unusually strong first quarter.