Inter Parfums, Inc. — Q2 2020 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2020, compared with the same 2019 periods. The company develops, markets and distributes prestige fragrances through European and U.S. operations, relying substantially on third-party brand licenses. COVID-19-related retail closures and travel disruption sharply curtailed demand.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $49.5m | $166.2m | $194.3m | $344.5m |
| Gross margin | $26.8m; 54% | $107.0m; 64% | $115.9m; 60% | $216.8m; 63% |
| Operating income (loss) | $(5.5)m | $22.5m | $12.3m | $55.7m |
| Net income (loss) | $(3.0)m | $15.6m | $10.3m | $40.6m |
| Net income (loss) attributable to Inter Parfums | $(3.1)m | $12.3m | $6.9m | $31.2m |
| Basic and diluted EPS | $(0.10) | $0.39 | $0.22 | $0.99 |
- Q2 sales fell 70.2%; first-half sales fell 43.6%. First-half European-based sales declined 43.0% and U.S.-based sales declined 45.7%.
- Q2 SG&A was $32.4m, or 65% of sales, versus $84.5m and 51% a year earlier. First-half SG&A was $103.6m, or 53% of sales, versus $161.1m and 47%.
- First-half operating cash flow was negative $21.3m, compared with positive $0.6m in 2019. Investing cash flow was negative $23.3m and financing cash flow negative $19.1m. Cash and cash equivalents declined $65.0m to $127.5m.
- At June 30, cash and short-term investments totaled $195.0m; current assets were $487.6m and current liabilities $102.0m (reported working-capital ratio: 4.8 to 1). Long-term debt was $18.9m, with $5.6m current debt; $48m of credit facilities were unused.
- Total assets were $753.7m versus $828.8m at year-end 2019. Inventories increased to $194.8m from $167.8m; accounts receivable fell to $77.4m from $133.0m.
Changes, outlook and notable items
- Management attributed the steep Q2 decline to store closures, event cancellations and shutdowns of international air travel. Sales began improving from April’s low levels as some stores reopened, but management expected significant challenges through the remainder of 2020 and potentially early 2021.
- The company withdrew 2020 net-sales and earnings guidance, stating it could not issue new guidance until visibility improved. It expected many retail-partner businesses to improve in the second half, but saw no near-term recovery in travel retail. Management expected COVID-19 to materially adversely affect results, financial position and cash flows through at least year-end.
- Cost and cash measures included postponing selected product launches and related advertising to 2021, a hiring freeze, planned reductions in 2020 bonuses, and temporary suspension of the quarterly dividend. The company said it had not terminated or furloughed employees and did not anticipate short-term liquidity problems.
- Gross margin was pressured by product mix and an approximately $2.0m charge for assuming a return liability associated with products sold by a former licensee. The stronger U.S. dollar provided a small gross-margin benefit.
- In June, the company acquired a 25% interest in Divabox, owner of the Origines-parfums e-commerce platform, for €12.5m ($14m), financed in part by a €12m ($13.4m) three-year term loan. The company also signed an exclusive five-year worldwide Moncler fragrance license, with a possible five-year extension; the first launch was planned for Q1 2022.
- A French tax audit will examine IP Suisse for 2010–2018. No assessment had been made; the company disputes the position and recorded no provision. Its estimated exposure was approximately $5.8m, net of Swiss tax recovery and excluding interest.
- Other risks cited include possible customer payment delays or bad debts, supply and shipping disruption, impairment of intangible assets, reduced productivity, and broader recession risk. Management did not anticipate material impairment of trademarks, licenses and other intangible assets at the filing date.
Investor verification priorities
- Track retail reopening, travel-retail recovery and regional sales trends against management’s expectations; confirm whether and when guidance is reinstated.
- Assess cash conversion and working-capital needs, particularly inventory growth, receivables collectability and the negative first-half operating cash flow.
- Verify the impact of postponed launches, reduced promotion and royalty concessions on sales, margins and future spending.
- Monitor the Divabox investment and new loan, Moncler launch requirements, and any minimum advertising or royalty commitments.
- Follow the French tax audit, including any assessment, interest or change in the company’s no-provision conclusion.
- Watch for changes to the dividend suspension, credit availability, debt and potential impairment or other COVID-19-related charges.