Business context and reporting period
Inter Parfums, Inc. reported unaudited results for the three months ended March 31, 2014. The company develops, markets and distributes fragrances through European and U.S. operations; its European business is conducted primarily through its 73%-owned subsidiary, Interparfums SA.
The period’s comparison is substantially affected by the termination of the Burberry license: Burberry sales were included in Q1 2013 but not Q1 2014. The company says ongoing-brand sales exclude Burberry.
Key financial metrics
Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where applicable.
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Net sales | $121.7 million | $213.8 million |
| Gross profit / margin | $69.2 million / 56.9% | $134.6 million / 63.0% |
| Operating income / margin | $17.4 million / 14.3% | $67.0 million / 31.3% |
| Net income, consolidated | $12.2 million | $42.9 million |
| Net income attributable to Inter Parfums, Inc. | $8.9 million | $31.7 million |
| Diluted EPS | $0.29 | $1.03 |
| Operating cash flow | $(27.3) million | $19.5 million |
| Cash and cash equivalents | $45.6 million | $125.7 million at Dec. 31, 2013 |
| Short-term investments | $227.3 million | $181.7 million at Dec. 31, 2013 |
| Bank loans payable | $3.2 million | $6.1 million at Dec. 31, 2013 |
Ongoing-brand sales rose 17% to $121.7 million (16% at comparable exchange rates), while reported sales fell 43%. European ongoing-brand sales increased 20% to $102.3 million; U.S. sales rose 4% to $19.4 million. Promotion and advertising expense was $14.5 million, approximately 11.9% of sales, versus $14.7 million, or 6.9%, a year earlier. The effective tax rate was 34%, compared with 35%.
Liquidity, cash flow and balance sheet
At March 31, 2014, working capital was approximately $409 million and the current ratio was 4.9:1. Cash plus short-term investments totaled approximately $272.9 million; management said these funds were readily convertible into U.S. dollars and reported no current liquidity issues. About 90% of total assets were held by European operations. Short-term borrowings were $3.2 million, supported by available credit lines of $15 million from a domestic bank and approximately $25 million from international banks.
Operating activities used $27.3 million, reflecting $42.6 million of cash use from working-capital items, including higher receivables and payments of prior-year advertising liabilities. Accounts receivable increased 26% from year-end; management reported days sales outstanding below 70 days. Investing activities used $47.2 million, primarily reflecting purchases and sales of short-term investments; approximately $107 million of certificates of deposit carried early-withdrawal interest penalties. Financing activities used $4.9 million, including dividends paid of $3.7 million. The company declared a $0.48-per-share annual dividend for 2014, payable quarterly at $0.12 per share.
Material changes and management commentary
- Burberry represented 51% of Q1 2013 sales; its absence drove most of the reported revenue and earnings decline. Q1 2013 was also unusually profitable, with lower promotional costs under the Burberry transition agreement.
- Gross margin declined mainly because Burberry products had higher margins than ongoing brands. U.S. gross margin also decreased, which management attributed primarily to product mix.
- New product launches supported European growth, including Karl Lagerfeld fragrances, Montblanc Emblem, and Boucheron and Van Cleef & Arpels products. Jimmy Choo and Lanvin faced difficult prior-year comparisons; management anticipated stronger second-half Jimmy Choo sales and expected Lanvin sales to benefit from a later-year launch.
- Agent Provocateur fragrances launched in March 2014, with a favorable initial response reported. The company planned initial Shanghai Tang fragrances in late 2014 and launches under Alfred Dunhill and Oscar de la Renta later in the year and in 2015, respectively.
- Management said it would continue evaluating brand and license opportunities, without assurance that acquisitions or new agreements would be completed. It expected available cash, operating cash flow and credit facilities to cover foreseeable operating needs; no numerical earnings or sales guidance was provided.
Risks, contingencies and unusual items
- Foreign-exchange exposure is material: more than 40% of European operations’ sales are denominated in U.S. dollars while costs are incurred in euros. The company used forward contracts with maturities under one year; it reported no cash-flow hedges in the quarter.
- Management identified economic uncertainty and volatility in some markets as potential risks to consumer confidence and demand. A difficult Russian market and weaker Anna Sui sales contributed to declines in Eastern Europe and Asia.
- Contractual obligations reported as of December 31, 2013 totaled approximately $1.153 billion, including $1.119 billion of purchase obligations. These primarily comprise advertising and promotional commitments and minimum royalty guarantees; they are not presented as March 31, 2014 balances.
- The filing states that no impairment indicators existed for intangible assets, but notes that a material impairment could result if actual performance falls short of projections. Sales returns, promotional accruals, inventory valuation and intangible-asset valuations involve estimates.
- Disclosure controls were deemed effective, and the company reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of the reported year-over-year decline reflects the Burberry exit versus the underlying performance and margins of continuing brands.
- Whether planned launches and expected second-half brand recoveries translate into sales growth, and how much advertising and launch spending they require.
- Whether working-capital outflows, especially receivables and advertising-liability payments, reverse in subsequent quarters.
- The liquidity and investment terms of the European cash and certificates of deposit, including the stated early-withdrawal penalties and foreign-exchange exposure.
- The timing and enforceability of the substantial purchase obligations and minimum royalty commitments reported at year-end.