Inter Parfums, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Unaudited consolidated results; dollar figures below are in millions unless stated otherwise.
Business context
Inter Parfums manufactures, markets and distributes fragrances and related products through European and U.S. operations. European-based prestige products accounted for about 91% of sales. Burberry remained the largest brand in the quarter, representing 51% of sales, but its license buyout took effect December 31, 2012; a transition arrangement continued certain activities through March 31, 2013.
Key financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $213.8 | $165.4 | +29% |
| Gross profit / margin | $134.6 / 63.0% | $106.7 / 64.5% | Margin down 1.5 percentage points |
| Operating income / margin | $67.0 / 31.3% | $31.8 / 19.2% | Operating income +111% |
| Net income | $42.9 | $20.3 | +112% |
| Net income attributable to Inter Parfums, Inc. | $31.7 | $15.5 | +105% |
| Diluted EPS | $1.03 | $0.51 | +102% |
| Operating cash flow | $19.5 | $(1.1) | Improved |
Sales growth was 29% at comparable foreign exchange rates. Excluding Burberry in both periods, European-based sales rose 15.5%; U.S.-based sales declined 8%. Gross margin declined mainly due to customer rebates associated with planned inventory reduction. SG&A fell 10% to $67.7 million, including advertising and promotion expense of $14.7 million versus $26.7 million a year earlier; reduced Burberry advertising obligations contributed to the decrease. Management cautioned that promotional spending was expected to rise in subsequent quarters.
Balance sheet, liquidity and cash flow
- At March 31, cash and cash equivalents were $146.2 million and short-term investments were $166.9 million, totaling $313.1 million. The prior year-end cash balance was $307.3 million, with no short-term investments reported.
- Current assets were $627.8 million and current liabilities $230.6 million; working capital was approximately $397 million and the reported current ratio was 2.7:1.
- Bank loans payable were $26.7 million, down from $27.8 million at December 31, 2012. The filing reports no long-term debt balance at March 31.
- Operating cash flow of $19.5 million included substantial working-capital movements, including a $46.3 million cash use from receivables and a $29.3 million cash source from lower inventory.
- Investing cash outflow was $174.1 million, primarily the purchase of $172.1 million of short-term investments. Financing cash outflow was $2.5 million; cash declined by $161.1 million, largely reflecting that investment reallocation and $4.1 million of adverse exchange-rate effects.
- The company reported purchase obligations of $974.7 million as of December 31, 2012, primarily for advertising, promotion and minimum royalty commitments; operating lease obligations were $30.1 million.
Developments, outlook and risks
- Burberry sales rose 54% to $109.7 million during the quarter. Burberry inventory was approximately $18 million at March 31. Burberry agreed to purchase certain finished goods and materials at cost, subject to stated caps; remaining inventory could be sold off through June 30. The company said its inventory reserves were adequate.
- The $198.8 million gain from the Burberry license termination was recognized in 2012, not Q1 2013. Related tax, at approximately 36%, was paid in April 2013.
- Management described Q1 profitability as unusually strong, citing sales growth and unusually low promotional expense. It expected higher promotional spending later in 2013, including support for launches such as Repetto, Van Cleef & Arpels and Boucheron. No numerical full-year earnings or sales guidance is provided in the filing.
- Management expected no Karl Lagerfeld sales contribution in 2013 while product development continued. The company’s Alfred Dunhill license commenced April 3, 2013, with a 10-year term; the company paid a $0.9 million entry fee. Management also cited potential acquisitions and new licenses but gave no assurance they would occur.
- Foreign currency loss was $1.4 million versus $0.2 million in Q1 2012. The company identified currency movements as a risk: about 44% of European-operation sales are denominated in U.S. dollars while costs are incurred in euros. It held forward contracts of approximately $61 million and £5.2 million, all maturing within a year.
- Management said European economic uncertainty had not significantly affected the business during the quarter, but worsening or prolonged uncertainty could weaken consumer demand. Other stated sensitivities include brand performance, inventory estimates, impairment assumptions and the risk that actual sales or costs differ from projections.
- The board increased the 2013 annual dividend by 50% to $0.48 per share. The first quarterly dividend of $0.12 per share was paid April 15, 2013.
Most important facts for investors to verify
- How much of Q1 growth and earnings reflected Burberry’s final transition-quarter sales, and how the business performs after the license exit.
- Whether reduced Q1 advertising and promotional expense is temporary, and the effect of higher planned spending on margins in later quarters.
- Burberry inventory purchases, sell-off progress and any resulting reserve or earnings impacts by the June 30, 2013 deadline.
- The composition, maturities and early-withdrawal terms of short-term investments, including the approximately $38 million of certificates of deposit with early-withdrawal penalties.
- Execution and financial commitments for new licenses, including Alfred Dunhill and Karl Lagerfeld, and the scale and timing of any acquisitions.
- Ongoing foreign-exchange exposure, substantial purchase commitments and the company’s dependence on licensed brands; Burberry alone represented 51% of Q1 sales.