Inter Parfums, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The company manufactures, markets and distributes prestige fragrances, primarily under brand licenses, through European and U.S. operations. Results are unaudited; the six-month results are not necessarily indicative of full-year performance. Amounts below are in U.S. dollars.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $166.2 million | $149.4 million | $344.5 million | $321.1 million |
| Gross margin | $107.0 million; 64% | $95.7 million; 64% | $216.8 million; 63% | $201.3 million; 63% |
| Operating income | $22.5 million | $18.8 million | $55.7 million | $49.2 million |
| Consolidated net income | $15.6 million | $14.3 million | $40.6 million | $36.1 million |
| Net income attributable to Inter Parfums | $12.3 million | $10.9 million | $31.2 million | $26.8 million |
| Diluted EPS | $0.39 | $0.35 | $0.99 | $0.85 |
Q2 sales rose 11.3% as reported (13.7% at comparable exchange rates); first-half sales increased 7.3% (10.4% at comparable rates). Operating income grew 20% in Q2 and 13% for the first half. Operating margins were 13.5% and 16.2%, respectively, versus 12.6% and 15.3% in the comparable 2018 periods. SG&A was $84.5 million in Q2 and $161.1 million for the first half; as a share of sales it was unchanged year over year at 51% and 47%, respectively.
Cash flow and balance sheet: First-half operating cash flow was $0.6 million, compared with $6.1 million used in the prior-year period. Working-capital items consumed $45.9 million; inventory was up about 12% from year-end and receivables up 8%. Investing activities used $3.1 million and financing activities used $42.0 million. Cash declined $46.3 million to $146.8 million from year-end; cash plus short-term investments totaled $213.7 million. Working capital was $375.9 million and the current ratio was over 3.1 to 1.
At June 30, 2019, total debt was $35.4 million, including $24.9 million current and $10.5 million long-term. Operating lease liabilities were $33.9 million, recognized following adoption of the new lease standard on January 1, 2019; the adoption did not materially affect net income or cash flows. No short-term borrowings were outstanding. Available credit lines included a $20.0 million domestic revolving facility and approximately $28.4 million in international facilities.
Changes, drivers and management commentary
- European-based product sales increased 8.7% in Q2 and 1.6% in the first half; U.S.-based sales increased 20.4% and 34.1%, respectively. U.S. operations rose to 22% of first-half sales from 17% a year earlier.
- Montblanc sales grew 28.3% in Q2 and 17.2% in the first half, supported by Montblanc Explorer. Coach Q2 sales rose 43.8%, while Jimmy Choo Q2 sales fell nearly 20%; first-half Jimmy Choo sales were slightly higher year over year. Management also cited gains for GUESS, Abercrombie & Fitch and Hollister.
- Reported sales growth was reduced by currency translation: the average dollar/euro rate was 1.12 in Q2 and 1.13 for the first half, versus 1.19 and 1.21 in 2018. Management said the stronger dollar benefited gross margin, but higher-than-typical cost of sales for Montblanc Explorer offset much of that benefit.
- Promotion and advertising expense was $63.8 million for the first half, or 18.5% of sales. Management anticipates full-year advertising and promotion spending of approximately 21% of 2019 sales. Royalty expense increased with new licenses and royalty-bearing sales.
- The company signed an exclusive 11-year worldwide Kate Spade fragrance license, effective January 1, 2020, subject to customary royalty payments and minimum advertising expenditures. Management said it continues to examine brand acquisition and licensing opportunities.
Outlook, risks and unusual items
No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management expects available cash, operating cash generation and credit facilities to meet foreseeable operating needs, and said it does not expect liquidity issues. It noted planned launches, including Lily Aldridge products in 2019 and 2020, a Graff launch planned for early 2020, and new GUESS products. The company cautioned that quarterly sales fluctuate with launch timing and holiday seasonality.
Key risks include reliance on third-party brand licenses and their renewal, foreign-exchange movements, general economic uncertainty in markets served, and execution of product launches. Management specifically monitors U.K. currency volatility; it did not expect significant pricing changes but warned further pound depreciation could affect gross margins in that territory. Foreign-currency forward contracts and an interest-rate swap are used to manage exposures. The filing reports no material impact from adoption of the lease standard and no material impact from the adopted hedge-accounting standard.
Investor verification points
- Assess whether first-half revenue growth and operating-margin improvement can continue, including the durability of key brand performance and launch contributions.
- Track working-capital requirements, inventory levels, collections, and conversion of reported earnings into operating cash flow.
- Verify liquidity and debt trends, including lease obligations and the location and currency composition of cash and investments.
- Monitor advertising and royalty spending, the costs and obligations attached to new licenses, and execution of the Kate Spade and other planned launches.
- Review currency exposure and the effect of exchange rates on reported sales, gross margins and earnings; assess license renewal and brand-concentration risks.