Inter Parfums, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. The interim financial statements are unaudited. Unless noted otherwise, amounts are in U.S. dollars.
Business context and reporting period
Inter Parfums manufactures, markets and distributes fragrances and fragrance-related products through European and U.S. operations. European operations accounted for 82% of first-half sales and are primarily conducted through the company’s 73%-owned French subsidiary, Interparfums SA.
The Burberry license had ended, with limited transition sales continuing through March 31, 2013. Accordingly, reported year-over-year first-half comparisons are materially affected by $130.3 million of Burberry sales in the first half of 2013. Management also presents ongoing-brand comparisons excluding Burberry.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $118.2 million | $117.5 million | $239.9 million | $331.3 million |
| Gross margin | $68.1 million | $63.6 million | $137.3 million | $198.3 million |
| Gross margin as % of sales | 58% | 54% | 57% | 60% |
| Operating income | $12.9 million | $7.9 million | $30.3 million | $74.9 million |
| Operating margin | 10.9% | 6.7% | 12.6% | 22.6% |
| Net income attributable to Inter Parfums, Inc. | $6.1 million | $3.8 million | $15.0 million | $35.5 million |
| Diluted EPS | $0.20 | $0.12 | $0.48 | $1.14 |
- Comparable sales: Ongoing-brand sales, excluding Burberry, increased 22.1% in Q2 and 19.4% in the first half; at comparable exchange rates, increases were 20.0% and 17.8%, respectively. Reported first-half sales fell 27.6% because Burberry sales were absent.
- Cash flow: Cash used in operating activities was $11.4 million in the first half, versus $1.1 million used a year earlier. Working-capital movements used cash, including higher receivables and inventory and lower accrued expenses. Investing activities used $36.7 million, principally reflecting net purchases of short-term investments; financing activities used $16.2 million.
- Liquidity: At June 30, cash and cash equivalents were $60.2 million and short-term investments were $214.6 million, totaling $274.8 million. Working capital was approximately $409 million and the working-capital ratio was 5.0 to 1. Management said the European-held funds were readily convertible into U.S. dollars and did not expect liquidity problems.
- Debt and equity: Bank loans payable were $0.3 million at June 30, down from $6.1 million at year-end 2013. The company reported $45 million of revolving and international credit lines. Total equity was $540.6 million.
- Dividends: The company declared $0.24 per share for the first half and continued its $0.48-per-share annual dividend for 2014.
Material changes and management commentary
- Q2 reported sales were nearly flat, but ongoing-brand sales grew substantially. Q2 operating income rose 63% and net income rose 70%, supported by stronger European ongoing-brand sales and improved gross margin.
- First-half operating income and net income declined sharply against an unusually strong 2013 first quarter, which included substantial Burberry sales and relatively low promotional expense. Burberry’s departure also reduced first-half gross margin, partly offset by lower related selling and royalty expenses.
- European ongoing-brand sales increased 31% in Q2 and 25% for the first half. Management cited product launches, including Karl Lagerfeld fragrances, and strong Montblanc performance. U.S. sales declined modestly; management cited a difficult Asian market affecting Anna Sui.
- Management anticipated stronger second-half Jimmy Choo sales, citing a higher-than-expected backorder log for Jimmy Choo Man. Planned launches included Dunhill Icon, Shanghai Tang fragrances and expanded U.S. distribution for Agent Provocateur products. These are expectations, not quantified financial guidance.
- The company entered or began operating under new licenses for Shanghai Tang, Agent Provocateur and Oscar de la Renta. The agreements include customary minimum commitments; the company paid a $5.0 million upfront entry fee for Oscar de la Renta.
Risks, contingencies and unusual items
- Foreign-exchange exposure is significant: more than 40% of European sales are denominated in U.S. dollars while European costs are in euros. The company used forward contracts with maturities under one year; their June 30 fair value was a $117,000 liability. Management warned that currency movements can affect sales and earnings.
- Management said economic uncertainty in certain European markets had not significantly affected business to date, but prolonged or worsening uncertainty could hurt consumer confidence, demand and spending. Eastern European sales were affected by the difficult Russian market and currency depreciation; Asian growth was weak.
- Operating cash flow was negative in the first half despite positive net income. Inventory increased 8% from year-end, which management attributed to requirements for upcoming launches. Approximately $107 million of short-term investments carried early-withdrawal penalties that could forfeit some interest.
- Contractual obligations reported as of December 31, 2013 totaled $1.153 billion, including $1.119 billion of purchase obligations, primarily advertising and promotional commitments and minimum royalty guarantees. The schedule is dated year-end 2013, not June 2014.
- Management reported no current impairment indicators for intangible assets, but noted that an adverse change in expected sales or other assumptions could result in a material impairment charge. The filing also identifies uncertainty in estimates for returns, promotional allowances and inventory valuation.
- The company was evaluating a new revenue-recognition standard effective for periods beginning after December 15, 2016; its adoption impact had not yet been determined. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Assess ongoing-brand growth separately from reported sales, and confirm that comparisons properly account for Burberry transition sales in 2013.
- Monitor whether new product launches and licenses convert into sustained sales and margins, including the expected second-half launches and Jimmy Choo Man backorders.
- Track operating cash flow, receivables, inventory and advertising accruals to determine whether working-capital usage eases.
- Review the currency exposure and the effect of exchange rates on European margins, alongside the company’s forward-contract position.
- Evaluate the scale and timing of minimum royalty, advertising and other purchase commitments against available liquidity and future cash generation.