Inter Parfums, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are to the corresponding 2016 periods unless noted. The unaudited statements include normal recurring adjustments. Inter Parfums develops, markets and distributes prestige fragrances through European and U.S. operations, largely under brand licenses. Its Paris-based subsidiary is 73%-owned.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $169.5 million | $157.6 million | $441.7 million | $386.3 million |
| Gross profit margin | 61% | 60% | 63% | 62% |
| Operating income | $33.2 million | $32.3 million | $73.8 million | $61.3 million |
| Operating margin | 20% | 20% | 17% | 16% |
| Net income | $22.1 million | $21.5 million | $49.5 million | $38.7 million |
| Net income attributable to Inter Parfums, Inc. | $17.1 million | $16.2 million | $37.2 million | $29.4 million |
| Diluted EPS | $0.55 | $0.52 | $1.19 | $0.94 |
- Nine-month sales rose 14.3%; management said currency movements had no discernible net sales effect for that period. Q3 sales increased 7.6%, or 5.2% at comparable exchange rates.
- Nine-month operating income increased 20%; Q3 operating income increased 3%. Nine-month net income attributable to the company rose about 26%, while Q3 rose about 5%.
- Nine-month European-based product sales increased 18.7%; U.S.-based product sales declined 1.8%. European operations accounted for about 82% of nine-month sales.
- Notable brand results included nine-month growth in Coach (sales $35.2 million, up 34%) and Rochas ($29.6 million, up 32%). Montblanc sales were $99.0 million, up 5%, and Jimmy Choo sales were $87.6 million, up 24%. Lanvin sales were $52.4 million, up 14% year to date, despite an 8% Q3 decline.
- Advertising and promotion expense was $79.6 million for nine months, or 18% of sales, versus $61.9 million and 16% a year earlier. Higher launch-related spending contributed to SG&A growth.
Cash flow, liquidity and debt
- Cash and cash equivalents were $108.4 million at September 30, 2017, down from $161.8 million at December 31, 2016. Short-term investments were $122.4 million, bringing cash and investments to $230.8 million.
- Working capital was approximately $377 million and the current ratio was 3.4 to 1. Operating activities used $16.1 million in cash in the first nine months, versus $12.6 million used in 2016. Management attributed the outflow principally to seasonal working-capital needs, including receivables and inventory.
- Investing activities used $13.1 million and financing activities used $37.6 million. Cash decreased $53.5 million before the positive $13.3 million foreign-exchange effect on cash.
- Total debt was approximately $65.6 million at September 30, 2017, compared with $74.6 million at December 31, 2016. No short-term borrowings were outstanding. The company had a $20 million domestic revolving facility and approximately $30 million in international credit lines.
- Receivables were $159.4 million and inventories were $134.3 million at quarter end. Management reported days sales outstanding of 87 days, versus 85 days in the comparable prior-year period, and said inventory supported expected sales and launches.
Changes, outlook and risks
- Growth reflected strong European brand sales and broad improvement across regions; Eastern Europe, the Middle East and Asia were among the fastest-growing markets. U.S. sales were comparatively soft year to date.
- Management anticipated full-year 2017 advertising and promotion spending of approximately 21% of net sales, with significant programs planned for Q4. It expressed confidence in the brand portfolio and distribution network and continued to examine brand acquisitions, but gave no specific sales or earnings forecast.
- The annual dividend was increased from $0.68 to $0.84 per share in October 2017. A $0.21 quarterly dividend was declared for payment in January 2018.
- Foreign exchange remains a key exposure. A stronger U.S. dollar can reduce reported sales but support gross margin because a substantial portion of European sales is dollar-denominated while most related costs are in euros. Management also noted potential margin pressure if sterling weakens further.
- Results are seasonal and depend on launch timing, holiday demand, consumer acceptance, brand-license relationships, and retailer and distributor conditions. Economic and political uncertainty in certain markets could weigh on consumer demand. The company uses foreign-exchange forwards and an interest-rate swap and stated it does not use derivatives for speculation.
- On October 6, 2017, France’s Constitutional Court invalidated a 3% dividend tax. The company filed for a refund of approximately $3.3 million paid since 2015, but did not recognize it at September 30 because reimbursement timing and treatment were uncertain; the French government was considering possible offsetting tax measures.
- The French tax-authority settlement covering 2012–2015 was finalized in Q1 2017 at $1.9 million and had been accrued in 2016. The nine-month 2016 comparison includes this nonrecurring tax expense; company-presented adjusted net income removes $1.4 million attributable to Inter Parfums shareholders.
- The Balmain license buyout payment of approximately $5.9 million was received in May 2017; the company had recognized a $4.7 million gain in 2016. The Paul Smith fragrance license was renewed through December 2021 without material changes to its terms.
Key facts for investors to verify
- Whether Q4 launches and holiday sales deliver the expected revenue growth and whether advertising spending reaches the stated approximately 21% of full-year sales.
- Working-capital conversion and cash generation, particularly receivables, inventory levels, and collection trends.
- Brand-level performance and concentration: Montblanc, Jimmy Choo and Lanvin together represented a significant portion of nine-month sales.
- Foreign-exchange effects on revenue and margins, as well as performance of the company’s hedging instruments.
- Whether and when the French tax refund is received; it was not recorded as an asset or benefit in the quarter’s statements.
- Debt repayment, available credit capacity, and the impact of the increased dividend and any future brand acquisitions on liquidity.