Inter Parfums, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The company develops, markets and distributes prestige fragrances through European and U.S. operations, primarily using brand licenses. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
- Revenue: Q3 net sales were $157.6 million, up 13.4% year over year (14.8% at comparable exchange rates). Nine-month sales were $386.3 million, up 10.3% (11.0% at comparable rates). European-based sales rose 12.0% in Q3 and 10.9% year to date; U.S.-based sales rose 19.0% and 8.0%, respectively.
- Profit and EPS: Q3 operating income was $32.3 million, up 17%; net income was $21.5 million, up 15%; and net income attributable to Inter Parfums, Inc. was $16.2 million, or $0.52 diluted EPS, versus $14.2 million and $0.46. Nine-month operating income was $61.3 million, up 8%; net income was $38.7 million, up 3%; attributable net income was $29.4 million, or $0.94 diluted EPS, versus $28.6 million and $0.92. Excluding the French tax settlement, nine-month adjusted attributable net income was $30.8 million, or $0.99 per diluted share; this is a non-GAAP measure.
- Margins and expenses: Gross margin was 60% in Q3 versus 62% in 2015, and 62% for nine months versus 61%. Operating margin was 20.5% in Q3 versus 19.9%, and 15.9% year to date versus 16.3%. SG&A was $62.5 million in Q3 and $179.3 million year to date, up 7% and 14%, respectively. Advertising and promotion expense was $61.9 million year to date versus $51.4 million.
- Cash flow: Operating activities used $12.6 million in the first nine months, similar to $12.5 million used in 2015. Investing activities used $37.9 million and financing activities used $34.6 million. Cash and cash equivalents fell $81.0 million to $96.0 million; short-term investments rose to $118.0 million.
- Liquidity and debt: Cash plus short-term investments totaled about $213.9 million at September 30. Working capital was approximately $351 million, with a current ratio of nearly 3.7:1. Total long-term debt, including its current portion, was $84.7 million, down from $98.6 million at December 31, 2015. No short-term borrowings were outstanding. The company reports adequate liquidity and available credit facilities.
- Other metrics: Accounts receivable was $145.7 million and inventory $105.3 million; management attributed the receivables increase to seasonal sales and reported 85 days sales outstanding. Dividends declared were $0.45 per share for the first nine months, versus $0.39 in 2015.
Material changes and business drivers
- Coach’s new women’s fragrance generated $13.8 million of incremental sales after its July launch; rollout was expected to continue into 2017. Montblanc sales rose 23% year to date to $94.3 million, and Rochas fragrance sales reached $22.3 million year to date following its integration. Jimmy Choo year-to-date sales were flat at $70.7 million; Lanvin sales declined 13% year to date.
- U.S. growth benefited from international launches of Abercrombie & Fitch First Instinct and Hollister Wave. Growth in Western Europe and North America contrasted with weaker conditions in Eastern Europe, the Middle East and China.
- Q3 gross margin pressure reflected a greater mix of lower-margin holiday gift sets. Year-to-date promotional spending increased, while higher European gross margin was partly offset by increased advertising and other SG&A.
Outlook, risks and unusual items
- Management expected Coach and Rochas to be important drivers for European operations for the remainder of 2016, and Abercrombie & Fitch and Hollister for U.S. operations. It anticipated 2016 advertising and promotion expense of approximately 20% of net sales and an effective tax rate of approximately 35%, excluding the settlement. The filing does not provide a specific full-year revenue or earnings forecast.
- The Board increased the annual dividend to $0.60 per share in January 2016 and, after quarter-end, to $0.68; the next $0.17 quarterly dividend was scheduled for January 2017.
- Interparfums SA agreed in principle to settle French tax assessments for 2012–2015 for $1.9 million, versus an original 2012 assessment of $6.9 million. The amount was accrued in Q1; $1.1 million had been paid by July. Formal documentation remained pending. The settlement also sets future acceptable commission and royalty rates, which management did not expect to materially affect cash flow.
- Foreign exchange remains a risk: a strong dollar can reduce reported sales, although it can benefit European margins because a substantial share of European sales is dollar-denominated while most costs are in euros. Management monitored sterling volatility following the U.K.’s EU-exit decision and did not expect significant pricing changes, but said continued pound devaluation could pressure future U.K. margins.
- Management cited economic and political uncertainty in certain markets and the possibility that prolonged weakness could hurt consumer demand. Intangible-asset valuations depend on estimated future cash flows; the company reported no current impairment indicators but noted a material impairment charge could result if actual results fall short of assumptions.
- The company renewed its S.T. Dupont fragrance license through December 31, 2019, with no material change in terms. It also reported plans to consider brand acquisitions, without assurance any transaction will occur.
Important facts for investors to verify
- Whether Coach, Rochas, Abercrombie & Fitch and Hollister launches sustain growth, and whether weaker Lanvin sales and soft markets persist.
- Whether elevated advertising and promotion spending supports sales and profitability, given lower Q3 gross margin and year-to-date operating-margin compression.
- Cash conversion and working-capital trends, particularly receivables, inventory and the seasonal cash-flow pattern.
- Completion and final terms of the French tax settlement, and the effects of foreign exchange movements and the new commission and royalty arrangements.
- Future performance against management’s stated promotional-spending and tax-rate expectations; these are not formal revenue or earnings guidance.