Inter Parfums, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited consolidated interim results. The company develops, markets and distributes prestige fragrances through European and U.S. operations; most brands are operated under licenses.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $262.7m | $160.6m | $668.8m | $355.0m |
| Gross margin | $167.4m; 63.7% | $97.2m; 60.5% | $425.0m; 63.6% | $213.1m; 60.0% |
| Income from operations | $67.6m | $31.4m | $160.3m | $43.6m |
| Consolidated net income | $49.8m | $21.9m | $115.5m | $32.2m |
| Net income attributable to Inter Parfums, Inc. | $38.3m | $16.5m | $88.6m | $23.5m |
| Diluted EPS | $1.20 | $0.52 | $2.79 | $0.74 |
- Sales rose approximately 64% year over year in Q3 and 88% for the nine-month period. Q3 sales were 37% above Q3 2019; nine-month sales were 25% above the comparable 2019 period.
- Nine-month operating margin was 24.0%, versus 12.3% in 2020. SG&A increased in dollars but declined as a share of sales: 39.2% for nine months versus 47.7% a year earlier. Management attributed improved gross margin partly to fewer lower-margin gift sets, better-margin launches and product mix.
- Operating cash flow was $101.3m, compared with cash used of $20.2m in the prior-year period. Investing cash outflow was $162.8m, principally reflecting $131.3m of building and equipment purchases tied to the Paris headquarters. Financing cash inflow was $88.9m.
- At September 30, cash and cash equivalents were $174.8m and short-term investments were $149.2m; management cited total cash, equivalents and short-term investments of approximately $324m. The cash-flow statement reports $189.1m of cash, including $14.2m held in escrow. Working capital ratio was 3.3:1.
- Long-term debt, including current portion, totaled $141.7m, versus $24.7m at December 31, 2020. The increase reflects the €120m, 10-year loan financing the Paris headquarters. About €80m of the variable-rate borrowing was swapped to a fixed rate of approximately 1.1%. No borrowings were outstanding under the disclosed short-term credit facilities at period end.
Material changes and notable items
- The recovery from pandemic-related disruption drove strong year-over-year growth. Q3 European and U.S. product sales were respectively 43.5% and 18.9% above Q3 2019. Management reported strong performance across major and newer brands, despite limited travel retail activity.
- In April, the company’s majority-owned European subsidiary acquired its future Paris headquarters for approximately $145m. The transaction materially increased property assets, investing outflows and debt.
- A September global Donna Karan and DKNY fragrance license is effective July 2022, with launches planned for 2023. The company issued 65,342 shares valued at $5.0m for the license. In October, it closed a worldwide Ferragamo fragrance license, effective for 10 years with a conditional five-year option.
- A French tax settlement required a €2.5m payment and lower Lanvin royalty rates through 2025, with the brand to be transferred to the French subsidiary by December 31, 2025. A new Rochas fashion license led to a $2.4m impairment charge in Q1 2021.
- The company reinstated a quarterly dividend in 2021; dividends declared were $0.75 per share for the nine months, including $0.25 in Q3.
Outlook, risks and management commentary
- Management said demand was exceptionally strong but ongoing supply-chain disruption affected component procurement, transport and costs into Q4 2021. The company was ordering earlier and in larger quantities, and plans to hold more inventory, diversify suppliers and manufacture closer to customers where possible. It expected bottlenecks to begin easing early in 2022, but warned COVID-19 could materially adversely affect results, financial position and cash flows through at least year-end 2021.
- No full-year sales or earnings guidance is provided in the filing. Management expected 2021 promotion and advertising expense to be approximately 21% of full-year sales, with many promotional programs planned for Q4.
- Other risks include continuing COVID-related restrictions and reduced travel, foreign-exchange movements, license renewal and concentration risk, and potential further supply constraints or cost inflation. Four largest brands accounted for 66% of nine-month sales: Montblanc 20%, Jimmy Choo 19%, Coach 17% and GUESS 10%.
- The filing disclosed an error in lease accounting: certain right-of-use assets and lease liabilities had been understated by approximately €14.0m ($16.6m) as of June 2020. The company deemed the interim-period effect immaterial, corrected balances in June 2021, and reported no income-statement impact. Management stated disclosure controls were effective and there was no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether supply-chain constraints ease as expected and whether the company can meet strong demand without margin erosion.
- Cash conversion, receivable collections and inventory availability; receivables increased substantially with record Q3 sales, while inventory remained below historical levels.
- Debt service, interest-rate exposure and the completed cost and renovation status of the Paris headquarters.
- Launch investment, minimum advertising and royalty obligations, and commercial performance of the Ferragamo, Donna Karan and DKNY licenses.
- Progress on the French tax settlement and Lanvin brand transfer, and the effects of license dependence and brand concentration.