Inter Parfums, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. Inter Parfums develops, markets and distributes prestige and specialty fragrances through European and U.S. operations. This unaudited filing covers the quarter and six months ended June 30, 2015; comparisons are with the same 2014 periods. Financial amounts below are in U.S. dollars unless noted.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $102.0 million | $118.2 million | $211.3 million | $239.9 million |
| Gross margin | $60.3 million; 59% | $68.1 million; 58% | $127.9 million; 61% | $137.3 million; 57% |
| Income from operations | $8.2 million | $12.9 million | $29.3 million | $30.3 million |
| Net income | $5.5 million | $7.7 million | $18.8 million | $19.8 million |
| Net income attributable to Inter Parfums | $4.4 million | $6.1 million | $14.4 million | $15.0 million |
| Diluted EPS | $0.14 | $0.20 | $0.46 | $0.48 |
| Operating cash flow | Not separately reported for the quarter | $(9.0) million | $(11.4) million |
- Revenue and earnings: Q2 sales fell 13.7% year over year (5.3% at comparable exchange rates); first-half sales declined 11.9% (4.0% at comparable rates). European-based sales fell 18.5% in Q2 and 16.8% in the first half, while U.S.-based sales rose 5.7% and 10.3%, respectively.
- Margins and costs: Gross margin improved to 59% in Q2 and 61% in the first half. SG&A declined in dollars but rose as a share of sales: 51% in Q2 versus 47%, and 47% for the first half versus 45%. Operating margin was 8.1% in Q2 versus 10.9%, and 13.9% in the first half versus 12.6%.
- Cash flow and liquidity: First-half operating cash use was $9.0 million. Working-capital items used $34.5 million, with inventory growth a significant use of cash. Cash and cash equivalents were $76.9 million and short-term investments $151.9 million at June 30, totaling approximately $228.8 million. The company reported working capital of approximately $342 million and a current ratio of nearly 4.0 to 1.
- Debt: June 30 debt totaled approximately $111.6 million, including $21.9 million current and $89.7 million long-term. The debt primarily reflects financing for the Rochas acquisition. The filing reports compliance with the loan covenants.
Material changes, outlook and risks
- Rochas acquisition: In May, the company acquired the Rochas brand for approximately €106 million (about $118 million), plus $4.4 million for inventory. Most of the purchase price, including approximately $5.4 million of acquisition-related expenses, was allocated to indefinite-lived trademarks. The purchase was financed with a five-year term loan. An interest-rate swap fixed the rate on €100 million of debt at approximately 1.2%.
- New licenses: In April, Interparfums SA entered an 11-year exclusive worldwide Coach fragrance license, with distribution planned to begin in 2016. The license includes minimum sales, advertising and royalty requirements. New Abercrombie & Fitch and Hollister fragrances were also planned for 2016 under agreements signed in 2014.
- Management outlook: Management expected certain established European brands to perform strongly, but tempered its outlook because of continuing weak market conditions in China and Eastern Europe. Planned launches included Jimmy Choo Illicit in August 2015, Lady Emblem in the second half of 2015, and Lanvin Eclat de Fleurs. No numerical full-year earnings or sales guidance is provided in the supplied filing text.
- Brand and regional performance: Jimmy Choo local-currency sales rose 62% in Q2, while Montblanc declined 23% and Lanvin declined 9%. U.S. growth was supported by Oscar de la Renta and Dunhill launches; Anna Sui sales weakened amid China market conditions.
- Currency and operating risks: A stronger U.S. dollar reduced reported sales, while benefiting European earnings because nearly half of European sales are denominated in dollars and most costs are in euros. First-half foreign-currency losses were $2.1 million, primarily from unhedged intercompany balances. Management cited economic uncertainty, consumer demand, foreign exchange, launch execution and potential brand impairment as risks. The business is seasonal, with sales influenced by launches and the third- and fourth-quarter holiday period.
- Other notable items: A June 2015 Burberry royalty settlement contributed $1.2 million to first-half royalty expense. The board authorized an 8% increase in the annual dividend to $0.52 per share; the next $0.13 quarterly dividend was scheduled for October 15, 2015. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Investor verification points
- Check whether revenue trends improve at comparable exchange rates and whether European sales stabilize, particularly in China and Eastern Europe.
- Track the performance and launch costs of Rochas, Coach, Jimmy Choo, Montblanc, Lanvin, Oscar de la Renta and Dunhill.
- Review inventory growth, operating cash conversion and the effect of working-capital needs on liquidity.
- Confirm debt amortization, covenant headroom and the accounting and cash-flow implications of the Rochas financing and interest-rate swap.
- Monitor currency movements, the impact of the Burberry settlement and any updates to full-year outlook; the filing cautions that interim results are not necessarily indicative of the full year.