Inter Parfums, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Inter Parfums manufactures, markets and distributes fragrances and related products through European and U.S. operations. European operations generated about 84% of sales and are primarily conducted through the company’s 73%-owned Paris subsidiary, Interparfums SA. The filing states that interim results are not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Net sales | $143.1 million | $111.5 million; up 28% reported and 31% at comparable exchange rates |
| Gross margin | $90.1 million; 63.0% of sales | $71.3 million; 63.9% of sales |
| SG&A | $63.9 million; 45% of sales | $53.8 million; 48% of sales |
| Operating income and margin | $26.2 million; 18.3% | $17.5 million; 15.7% |
| Net income | $18.2 million consolidated; $13.4 million attributable to Inter Parfums | $9.4 million consolidated; $7.3 million attributable to Inter Parfums |
| Diluted EPS | $0.43 | $0.24 |
| Operating cash flow | $(23.0) million | $(12.4) million |
Net income attributable to the company increased 82%; consolidated net income increased 92%. The 2016 comparison includes a $1.9 million French tax settlement charge, or $1.4 million net of noncontrolling interests. Excluding that item, company-attributable adjusted net income was $8.7 million and adjusted diluted EPS was $0.28 in Q1 2016; these are non-GAAP measures.
Gross margin declined year over year, reflecting product mix and higher purchase-with-purchase and gift-with-purchase promotional costs. Advertising and promotion expense rose to $22.9 million from $16.1 million. A stronger dollar versus the euro added about $1.3 million to gross margin, partly offset by $1.4 million of Balmain inventory sold at cost.
At March 31, 2017, cash and cash equivalents were $109.8 million and short-term investments were $115.7 million, totaling $225.5 million. Working capital was approximately $344 million and the working-capital ratio exceeded 3.3 to 1. Total debt was about $70.2 million, down from $97.8 million at March 31, 2016. Total assets were $704.1 million. Cash fell $52.0 million from year-end 2016, while operating activities used cash, largely reflecting working-capital requirements: receivables and inventories increased. Management reported 88 days sales outstanding, unchanged year over year.
Changes, outlook and risks
- European sales grew 30% to $119.7 million; U.S.-based product sales grew 20% to $23.4 million. Growth was broad across reported customer regions. Jimmy Choo, Lanvin and Rochas sales rose, while Montblanc declined 10% against a strong prior-year launch comparison.
- Management described Q1 sales as exceptionally strong, partly due to the timing of major product launches, and did not expect comparable year-over-year growth in the remaining quarters. For 2017, it expected Abercrombie & Fitch and Hollister to be key U.S. growth drivers, with new launches and expanded distribution supporting the business. No specific full-year revenue or earnings guidance is provided in the filing.
- The Balmain license buyout was effective December 31, 2016; the company recognized a $4.7 million gain in 2016 and received the $5.7 million buyout payment in May 2017. Balmain purchased remaining inventory of $1.4 million after the sell-off period ended in Q1.
- Management cited foreign-exchange exposure, including potential margin effects from further British pound weakness; economic and political uncertainty in certain markets; seasonality and launch timing; and the risk that actual brand performance could differ from assumptions underlying intangible-asset valuations. The company uses foreign-currency forwards and an interest-rate swap and says derivatives are not used for speculation.
- Management said it had no expected liquidity issues and considered cash, operating cash generation and available credit facilities sufficient for foreseeable needs. It continues to examine brand acquisition and licensing opportunities, but cannot assure that deals will be completed. The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales growth and new-product launches can be sustained after management’s unusually strong Q1 comparison, and how the major brands perform.
- Whether gross margin stabilizes given promotional spending, product mix and currency movements.
- How working-capital needs, particularly receivables and inventory, affect cash generation in subsequent quarters.
- Debt repayment, available credit capacity and the liquidity and maturity terms of short-term investments, including certificates of deposit with early-withdrawal penalties.
- Effects of the Balmain exit, the 2016 French tax settlement comparison, and continuing currency, market and brand-license risks.