Inter Parfums, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results; amounts below are U.S. dollars unless stated otherwise.
Business context
Inter Parfums manufactures, markets and distributes prestige fragrances, primarily through licenses with third-party brand owners. It reports European and U.S. operations; its 73%-owned French subsidiary, Interparfums SA, accounts for much of the European business. European operations generated approximately 77% of nine-month sales. Sales are seasonal, with the third and fourth quarters generally stronger.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $191.2m | $177.2m | $535.7m | $498.3m |
| Gross margin | $114.4m; 59.8% | $109.1m; 61.6% | $331.3m; 61.8% | $310.4m; 62.3% |
| Operating income | $36.6m | $35.0m | $92.4m | $84.1m |
| Net income | $26.7m | $24.4m | $67.2m | $60.5m |
| Net income attributable to Inter Parfums | $20.8m | $18.9m | $52.1m | $45.7m |
| Diluted EPS | $0.66 | $0.60 | $1.64 | $1.45 |
Sales increased 7.9% in Q3 and 7.5% for the nine months; at comparable exchange rates, growth was 9.7% and 10.2%, respectively. Operating margins were 19.2% in Q3 and 17.2% year to date, versus 19.7% and 16.9%. SG&A was $77.8m in Q3 and $238.9m year to date, respectively 40.7% and 44.6% of sales.
Cash flow: Nine-month operating cash flow was $6.7m, compared with cash used of $3.8m in 2018. Working-capital movements used $65.8m, including increased receivables and inventory. Investing activities provided $1.4m, including net proceeds from short-term investments; financing activities used $55.7m, principally for debt repayments and dividends. Cash declined $54.7m to $138.5m.
Liquidity and debt: Cash plus short-term investments totaled approximately $191.7m at September 30. Working capital was about $375m and the current ratio exceeded 3.2:1. Long-term debt, including its current portion, was approximately $28.1m; operating lease liabilities were $31.1m. No short-term borrowings were outstanding. Available credit lines totaled approximately $47m.
Other metrics: Dividends declared were $0.28 per share for Q3 and $0.83 year to date. The effective tax rate was 27.4% for Q3 and 27.9% for the nine months, down from 28.6% and 29.7% in 2018. Foreign-currency translation reduced nine-month comprehensive income, with a $23.3m translation adjustment.
Material changes and management commentary
- U.S.-based product sales rose 20.7% in Q3 and 28.6% year to date; European-based sales rose 4.2% and 2.5%. U.S. growth was attributed mainly to GUESS, with contributions from Abercrombie & Fitch and Hollister.
- Montblanc sales grew 32.2% in Q3 and 22.0% year to date, supported by Montblanc Explorer. Jimmy Choo sales rose 10.1% and 4.5%. Lanvin sales fell 15.4% year to date amid challenging Asian and South American markets.
- Gross margin declined year over year, despite a stronger U.S. dollar benefiting European margins. Management cited higher-than-typical costs for Montblanc Explorer as offsetting part of the currency benefit. U.S. margins improved; tariffs had a small negative Q3 impact, with no material future impact anticipated.
- The company extended its Oscar de la Renta license through 2031, with a five-year extension option, and signed an exclusive worldwide Kate Spade fragrance license beginning January 1, 2020. The Kate Spade agreement includes customary minimum advertising and royalty obligations.
- Management expected full-year 2019 advertising and promotion spending of approximately 21% of sales, in line with the prior two years. The board raised the annual dividend to $1.32 per share in October 2019; no quantified revenue or earnings guidance is provided in the filing.
Outlook, risks and notable items
Management stated that existing cash, operating cash generation and credit facilities should cover present and reasonably foreseeable operating needs, and that it did not expect liquidity issues. It continued to consider brand acquisitions or licenses but gave no assurance that transactions would occur. Key risks include dependence on renewal and continuation of third-party brand licenses, foreign-exchange movements, seasonal sales patterns, new-product execution and working-capital needs. Management was monitoring U.K. currency volatility; a further pound devaluation could pressure future gross margins. The company uses forward contracts and an interest-rate swap to manage exposures.
The company adopted lease accounting on January 1, 2019, recognizing $31.8m of right-of-use assets and $32.4m of lease liabilities at adoption; it reported no material effect on net income or cash flows. Q3 translation adjustments materially reduced comprehensive income, although net income increased. Management attributed receivables growth to seasonal Q3 sales and reported days sales outstanding of 84, versus 85 a year earlier. Inventory was approximately 8% above year-end levels to support sales and launches.
Investor verification priorities
- Track whether U.S. sales growth and Montblanc Explorer momentum continue, and whether Lanvin stabilizes.
- Assess the sustainability of gross margins given product costs, currency movements, tariffs and the sales mix.
- Monitor receivables, inventory and operating cash flow, especially as seasonal sales convert to cash.
- Review the economics and obligations of the Kate Spade license, including required advertising and royalty payments, and the expected launch contribution.
- Verify dividend cash requirements, debt repayment and the distinction between borrowings and operating lease liabilities.
- Evaluate license-renewal concentration and currency exposure; the filing reports that Montblanc, Jimmy Choo and Coach represented 23%, 17% and 14% of nine-month sales, respectively.