Inter Parfums, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited consolidated results; amounts below are in U.S. dollars unless noted. The company develops, markets, and distributes fragrances through European- and U.S.-based operations. European operations are primarily based in France.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $126.8 million | $166.3 million | $458.0 million | $477.2 million |
| Gross margin | $70.0 million; 55% | $101.1 million; 61% | $268.3 million; 59% | $295.7 million; 62% |
| Income from operations | $14.6 million | $22.1 million | $89.5 million | $66.5 million |
| Net income | $9.9 million | $13.2 million | $57.4 million | $40.9 million |
| Net income attributable to Inter Parfums, Inc. | $7.9 million | $10.0 million | $43.4 million | $31.5 million |
| Diluted EPS | $0.25 | $0.33 | $1.40 | $1.03 |
| Operating margin | 11.6% | 13.3% | 19.5% | 13.9% |
- Cash flow: Nine-month operating cash flow was $21.5 million, versus $22.4 million a year earlier. Investing activities used $150.1 million, largely reflecting net purchases of short-term investments; financing activities used $44.4 million, including debt repayments and dividends. Cash and cash equivalents fell by $170.2 million to $137.2 million.
- Liquidity and debt: Cash plus short-term investments totaled approximately $287.6 million at September 30, 2013. Working capital was $418 million, with a 4.7-to-1 working-capital ratio. Bank loans payable were $0.3 million; no long-term debt was reported on the balance sheet. Management said available cash, operating cash flow, and credit facilities should cover foreseeable operating needs. Much of the company’s liquidity is held by European operations.
- Dividends: The board increased the 2013 annual dividend by 50% to $0.48 per share. Dividends declared were $0.12 per share in Q3 and $0.36 per share for the nine-month period.
Material changes versus the prior comparable period
- Burberry exercised its license buy-out effective December 31, 2012; the transition arrangements ended during Q1 2013. Burberry sales were zero in Q3 2013 and $130.3 million for the first nine months, compared with $79.1 million and $213.2 million, respectively, in 2012. Excluding Burberry, European prestige-product sales increased 41% in Q3 and 24% year to date.
- Overall sales declined 24% in Q3 and 4% year to date. U.S.-based product sales increased 62% in Q3 and 25% year to date, while European-based product sales declined 34% and 8%, respectively, primarily reflecting Burberry’s exit.
- Q3 gross margin fell to 55% from 61%, partly because Burberry products had higher margins than the continuing portfolio and because of the license transition. Year-to-date gross margin was 59%, down from 62%; the inventory disposition and sale to Burberry at cost also affected the comparison.
- Q3 operating income and attributable net income declined, while nine-month operating income and attributable net income increased. Management attributed the stronger year-to-date result partly to exceptionally strong first-quarter sales and low promotional expense; Q3 reflected the reduced Burberry contribution. Year-to-date results are therefore not necessarily indicative of full-year performance.
- Continuing brands cited as performing well included Jimmy Choo, Montblanc, and Lanvin. U.S. growth benefited from Anna Sui and the addition of Alfred Dunhill distribution.
Outlook, management commentary, and risks
- No specific numerical full-year revenue or earnings guidance is provided. Management expected continued strength from Lanvin, Jimmy Choo, Montblanc, and Boucheron, and planned significantly higher promotional spending in Q4 to support holiday sales, launches, and portfolio development.
- The company signed a 12-year worldwide Shanghai Tang fragrance license, with a planned first launch in spring 2014, and a 10.5-year Agent Provocateur license, with a planned 2014 launch. In October 2013 it entered a 12-year Oscar de la Renta license, expected to close December 2, 2013; it had paid a $5 million entry fee and agreed to purchase certain inventory.
- The $10 million Burberry inventory reserve established in December 2012 against the license termination was fully consumed by September 30, 2013 through inventory dispositions, rebates, and free merchandise. Burberry bought $7.8 million of inventory at cost and $2.8 million of fixed assets under the transition arrangements.
- Foreign exchange is a material exposure: approximately 40% of European operations’ sales are denominated in U.S. dollars while costs are incurred in euros. The company uses forward contracts; outstanding contracts at September 30 included approximately $11 million and £6.5 million, with maturities under one year.
- Management said European economic uncertainty had not materially affected operations to date, but worsening or prolonged uncertainty could weaken consumer confidence and demand. Other relevant risks include brand and license performance, launch execution, customer returns and promotional estimates, and potential impairment of goodwill or intangible assets. The company noted a prior $1.8 million goodwill impairment relating to Nickel and the possibility of future impairment if expectations are not met.
- Contractual obligations disclosed in the filing were measured as of December 31, 2012, not September 30, 2013. They included approximately $974.7 million of purchase obligations, principally advertising, promotional, and minimum royalty commitments; the schedule reflects license terms then in effect.
Important facts for investors to verify
- How quickly continuing brands and the new licenses can replace Burberry sales and profit contribution.
- Whether planned Q4 promotional investment supports sales without materially weakening margins.
- Cash generation and working-capital trends, including the effects of tax payments and the company’s short-term investments.
- The scale, timing, and conditions of minimum royalty, advertising, and other purchase commitments, particularly given the obligation schedule’s December 2012 measurement date.
- Foreign-exchange exposure, European concentration of assets and liquidity, and the assumptions supporting intangible-asset valuations.