Inter Parfums, Inc. — Q1 2012 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2012, compared with Q1 2011. The company manufactures, markets and distributes fragrance and related products through European prestige and U.S. specialty-retail and mass-market operations. European operations generated about 88% of Q1 2012 sales. The company cautions that interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Net sales | $165.4 million | $133.4 million; up 24% reported and 26% at comparable exchange rates |
| Gross profit / margin | $106.7 million / 65% | $86.6 million / 65% |
| Operating income / margin | $31.8 million / 19.2% | $25.5 million / 19.1% |
| Net income | $20.3 million | $17.3 million; up 17% |
| Net income attributable to Inter Parfums, Inc. | $15.5 million | $12.8 million; up 21% |
| Diluted EPS | $0.51 | $0.41; up 24% |
| Operating cash flow | $(1.1) million | $(1.8) million |
SG&A rose 23% to $74.9 million, while SG&A as a share of sales improved to 45% from 46%. Advertising and promotion expense increased to $26.7 million, or 16.2% of sales, from $18.3 million, or 13.7%. The effective tax rate rose to 36% from 33%, principally reflecting a French tax-rate increase.
At March 31, 2012, cash was $27.4 million, working capital was approximately $227 million, and the current ratio was 2.4:1. Current assets were $390.6 million and current liabilities $163.6 million. Bank loans payable were $13.6 million and current maturities of long-term debt were $3.1 million. Cash decreased $8.4 million during the quarter. Investing cash outflow was $6.3 million, including $4.0 million of capital spending and $2.3 million for intangible assets, primarily the Anna Sui license entry fee. Dividends declared were $0.08 per share; the board had authorized an annual 2012 dividend of $0.32 per share.
Material changes and management commentary
- European product sales increased 19% to $145.2 million. Management cited strong Jimmy Choo and Montblanc performance; local-currency sales for those brands rose 68% and 77%, respectively. Burberry sales rose 12% in local currency, while Lanvin rose 12%.
- U.S. product sales increased 71% to $20.2 million, led by the Nine West launch and the start of Anna Sui distribution. The company also launched new Banana Republic and Gap products.
- Management said Q1 sales and profitability were in line with expectations, citing momentum in established brands and a solid start for newer brands. It expected continued strength from Jimmy Choo and Montblanc, a full year of Burberry Body sales with substantial marketing support, and new Lanvin, Montblanc and Boucheron products. It did not expect significant 2012 contributions from Balmain and Repetto, which were early in product development. No specific full-year numerical guidance was provided.
- Operating cash use reflected working-capital demands, including inventory investment to support growth and new licenses. Management said receivables collection remained strong, with days sales outstanding around 90 days, and expected near-term funding needs to be met by cash, operations and available credit lines.
Risks, contingencies and unusual items
- Burberry license: Burberry represented 43% of Q1 sales, down from 50% a year earlier. The parties were discussing a possible new operating structure. Burberry could elect by July 31, 2012 to buy out the remaining license term as of December 31, 2012, or continue the existing contract through December 31, 2017. A buyout price would be the greater of fair market value of the unexpired term or 70% of 2010 net wholesale sales. No agreement or buyout outcome was assured.
- Brand and market concentration: The business depends substantially on prestige brands and license arrangements. Management noted that prolonged economic uncertainty could weaken consumer demand, particularly in affected markets.
- Currency exposure: Foreign exchange affects reported sales and earnings; more than 40% of European operations’ sales were denominated in U.S. dollars while their costs were incurred in euros. Forward contracts were used for risk management, not trading; outstanding contracts included approximately $67 million and £6.6 million, all maturing within one year.
- Commitments: Contractual obligations reported as of December 31, 2011 totaled approximately $1.296 billion, including $1.269 billion of purchase obligations, primarily advertising, promotional and minimum royalty commitments. These estimates span license terms and include variable-price estimates.
- Impairment and estimates: No 2012 goodwill impairment triggering events were identified. The filing reports a $0.8 million Nickel goodwill impairment in 2011 and notes that a 10% decline in Nickel sales could result in an additional $0.5 million charge. Results also depend on estimates for returns, promotional accruals, inventory values and intangible-asset valuations.
- Disclosure controls were judged effective, and the company reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Burberry’s decision by July 31, 2012, the status of discussions, and the financial implications of a potential buyout or continued license.
- Whether sales momentum in Jimmy Choo, Montblanc and newer U.S. launches continues, and how much advertising spending is required to support growth.
- Inventory levels, working-capital conversion and cash generation, given operating cash outflow and the quarter’s inventory build.
- The nature, timing and variability of the substantial purchase obligations and minimum royalty commitments.
- Currency sensitivity, European consumer conditions, and any changes to the company’s stated outlook or financing needs.