Inter Parfums, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Figures are unaudited; financial amounts below are in U.S. dollars. Inter Parfums develops, markets and distributes prestige and specialty fragrances through European and U.S. operations. European operations are conducted primarily through its 73%-owned subsidiary, Interparfums SA.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior year-end |
|---|---|---|
| Net sales | $178.2 million | $171.8 million; up 3.8% reported and 7.4% at comparable exchange rates |
| Gross margin | $109.8 million; 61.6% of sales | $105.6 million; 61.5% |
| Operating income | $33.3 million; 18.7% operating margin | $30.4 million; 17.7% |
| Net income | $25.0 million consolidated; $18.9 million attributable to Inter Parfums, Inc. | $21.9 million consolidated; $15.9 million attributable to Inter Parfums, Inc. |
| Diluted EPS | $0.60 | $0.51 |
| Operating cash flow | $(14.6) million | $(20.7) million |
| Cash and short-term investments | $228.2 million | $261.0 million at December 31, 2018 |
| Debt, excluding leases | $39.6 million total | $46.1 million at December 31, 2018 |
Working capital was approximately $387 million and the working-capital ratio exceeded 3.1 to 1. Total assets were $824.5 million. Operating cash use reflected working-capital needs, including increases in receivables and inventory; receivables rose 24% from year-end, while management reported days sales outstanding of 85 days versus 87 days a year earlier. Cash declined $36.8 million during the quarter. The company reported no short-term borrowings and cited $48 million of available credit lines.
The company declared dividends of $0.28 per share in the quarter, compared with $0.21 a year earlier. The annual dividend had been increased 31% to $1.10 per share; the next quarterly dividend of $0.275 was scheduled for July 15, 2019.
Material changes versus the prior comparable period
- U.S. product sales grew 54.8% to $34.5 million, primarily reflecting GUESS legacy fragrance sales, which began in Q2 2018. European product sales declined 3.8% to $143.7 million as reported, but were relatively unchanged at comparable exchange rates.
- U.S. operations’ gross margin rose to 55.1% from 51.4%; European operations’ gross margin increased to 63.2% from 63.0%. Overall gross margin improved slightly.
- SG&A rose 1.8% to $76.6 million, but declined as a share of sales to 42.9% from 43.8%. Advertising and promotion expense was $27.4 million; royalty expense increased to $13.0 million from $11.8 million.
- Operating income increased 9.5%; consolidated net income rose 14.3%, and net income attributable to the company rose 19%.
- Other comprehensive income included a $8.5 million foreign-currency translation loss, compared with a $13.2 million gain in Q1 2018.
Outlook, management commentary and risks
- No specific full-year revenue or earnings guidance is stated. Management expected Montblanc Explorer to continue contributing to sales growth in Q2 and cited planned launches including Lanvin A Girl in Capri, new Jimmy Choo products, Authentic by Abercrombie & Fitch, Mermaid by Anna Sui, GUESS extensions, Lily Aldridge fragrances and Graff fragrances.
- Management anticipated full-year advertising and promotion spending of approximately 21% of net sales, consistent with the prior two years, and expected improved sales comparisons to provide further SG&A leverage.
- Management described liquidity as strong and believed cash, operating cash flow and credit facilities would support present and reasonably foreseeable operating needs. The company continued to evaluate potential brand acquisitions but gave no assurance any transaction would occur.
- Business depends substantially on third-party brand licenses and renewals. The four largest brands—Montblanc, Jimmy Choo, Coach and Lanvin—represented 26%, 17%, 12% and 9% of sales, respectively.
- Currency movements affect reported sales and margins. Management noted that a stronger U.S. dollar can reduce reported sales but benefit European gross margins; it was monitoring U.K. currency volatility and warned that further sterling devaluation could affect territory margins. The company had forward contracts with maturities under one year and an interest-rate swap fixing the rate on €100 million of debt at approximately 1.2%.
- Sales are affected by product-launch timing and holiday seasonality. Management also cited economic uncertainty in select markets, product-launch costs and possible cannibalization of existing products.
- Adoption of the lease accounting standard on January 1, 2019 resulted in initial recognition of $31.8 million in right-of-use assets and $32.4 million in lease liabilities, with no retained-earnings adjustment or material effect on net income or cash flows. At March 31, lease liabilities were $30.9 million; an additional $4.2 million of leases had not yet commenced.
- Management reported disclosure controls and procedures were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether reported sales growth and U.S. sales momentum persist after accounting for currency effects and the GUESS comparison base.
- Performance of key brands and the timing, commercial results and costs of planned launches.
- Cash conversion and working-capital trends, particularly receivables and inventory, alongside the decline in cash and investments.
- License renewal and concentration exposure, foreign-exchange sensitivity, lease commitments and debt repayment requirements.
- Whether the expected advertising spend and dividend commitments remain supported by operating cash generation.