Inter Parfums, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2011. Inter Parfums develops, markets and distributes fragrances and related products through European prestige and U.S. specialty-retail and mass-market operations. European operations generated about 90% of nine-month sales. Burberry represented 50% of nine-month sales, down from 56% a year earlier; Lanvin represented 13%, down from 15%. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $171.7 | $120.9 | $426.1 | $348.0 |
| Gross profit / margin | $108.6 / 63% | $71.3 / 59% | $270.2 / 63% | $207.7 / 60% |
| Operating income / margin | $21.5 / 12.6% | $16.6 / 13.7% | $57.9 / 13.6% | $44.1 / 12.7% |
| Net income | $13.3 | $11.4 | $37.1 | $27.3 |
| Net income attributable to Inter Parfums | $10.4 | $8.4 | $28.2 | $20.4 |
| EPS, basic and diluted | $0.34 | $0.28 | $0.92 | $0.67 |
- Sales increased 42% in Q3 and 22% year to date; at comparable exchange rates, growth was 36% and 18%, respectively. The weaker U.S. dollar increased reported sales.
- Nine-month operating cash flow was negative $49.1, versus positive $31.3 in 2010. Working capital used $97 million, principally reflecting increases of $73.2 million in receivables and $74.0 million in inventory.
- Cash and short-term investments totaled $29.9 at September 30, versus $86.9 at year-end 2010. Working capital was $209 million and the current ratio was 2.2 to 1.
- Total loans and debt were about $28.0, versus $16.3 at December 31, 2010; this comprised $20.4 of bank borrowings and $7.6 of current debt maturities, with no long-term portion outstanding. Available facilities included a $15 million domestic revolving line and approximately $23 million of international credit lines.
- Total assets were $522.1, compared with $438.1 at year-end. Receivables were $167.6 and inventories $182.3, up from $97.6 and $109.8, respectively. Shareholders’ equity, including noncontrolling interests, was $332.7.
Material changes versus the prior period
- European sales rose 42% in Q3 and 24% year to date; U.S. sales rose 46% and 12%, respectively. Growth reflected the Burberry Body launch, Jimmy Choo and Montblanc momentum, and the start of direct U.S. distribution of European products.
- Gross margin improved, primarily because direct distribution replaced a third-party U.S. distributor. However, SG&A rose to 51% of Q3 sales from 45% and to 50% year to date from 47%. Advertising and promotion expense increased to $78.0 million year to date from $58.5 million.
- Operating margin declined in Q3 despite higher operating income, while improving for the nine-month period. The nine-month effective tax rate was 36.6%, versus 33.2% in 2010.
Outlook, risks and unusual items
- Management expected continued growth in the final quarter of 2011, citing its brands, distribution network and product launches; the filing provides no specific full-year sales or earnings guidance. Planned 2011 capital expenditures were $8–9 million.
- New and renewed arrangements included Gap and Banana Republic renewals through 2014, an exclusive 12-year Balmain license, a 10-year Anna Sui license with renewal options, an S.T. Dupont renewal through 2016, and a Lane Bryant agreement through 2015. Balmain required an upfront fee of about $2.1 million; Anna Sui required a $2.0 million fee and purchase of certain existing-licensee assets and inventory.
- Burberry could initiate a valuation process to buy out the unexpired license term: it had to notify the company by January 1, 2012, with a final decision due by July 31, 2012. Management said it had no insight into Burberry’s intentions.
- In October 2011, the company reached an agreement in principle with the French Tax Authority regarding an audit. It recorded a $1.7 million increase in income tax expense and reduced a previously recorded non-income-tax contingency reserve by $1.3 million.
- Foreign exchange is a key exposure: a weaker dollar supports reported sales but can pressure margins because a significant portion of European sales is dollar-denominated while costs are incurred in euros. The company used forward contracts of approximately $68 million and £8.1 million, all maturing within one year.
- Other risks include reliance on licensed brands—especially Burberry—launch execution, consumer demand, inventory and receivable recoverability, and potential impairment of goodwill or trademarks. The year-end contractual-obligations table reported $1.24 billion of purchase obligations, including advertising commitments and minimum royalty guarantees; amounts are based on estimates and terms as of December 31, 2010.
Important facts for investors to verify
- Whether Burberry gives notice to begin the license buyout valuation process and its eventual decision.
- Whether the large receivables and inventory build converts to cash and supports anticipated sales without elevated returns, obsolescence or credit losses.
- Whether new launches and direct distribution sustain sales and gross-margin gains while advertising and SG&A remain elevated.
- The final impact and settlement terms of the French tax audit, including the recorded tax expense and contingency-reserve adjustment.
- The scale and timing of contractual purchase commitments, including minimum royalties and advertising obligations, and the company’s ability to fund them alongside dividends and debt needs.