Inter Parfums, Inc. (NASDAQ:IPAR) Q1 2024 Earnings Call Transcript

Inter Parfums, Inc. (NASDAQ:IPAR) Q1 2024 Earnings Call Transcript May 8, 2024

Inter Parfums, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the Inter Parfums First Quarter 2024 Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the conference over to Karin Daly, Vice President at the Equity Group and Inter Parfums Investor Relations Representative. Please go ahead, Karin.

Karin Daly: Thank you, Kevin. Joining us on the call today will be Chairman and Chief Executive Officer, Jean Madar; and Chief Financial Officer, Michel Atwood. On behalf of the company, I would like to note that this conference call may contain forward-looking statements which involve known and unknown risks, uncertainties, and other factors that may cause actual results to be materially different from projected results. These factors may be found in the company’s filings with the Securities and Exchange Commission under the headings Forward-Looking Statements and Risk Factors in their most recent annual report on Form 10-K. Forward-looking statements speak only as of the date on which they are made and Inter Parfums undertakes no obligation to update the information discussed.

As a reminder, our consolidated results reflect two business segments, European-based operations and United States-based operations. Certain prestige fragrance products are produced and marketed by their European-based operations through their 72% owned French subsidiary, Inter Parfums S.A. When they refer to the U.S.-based operations, Inter Parfums is talking about their wholly owned subsidiaries. It is now my pleasure to turn the call over to Jean Madar. Jean, you may begin.

Jean Madar: Thank you, Karin, and good morning, everyone, and thank you for joining today’s call. I have spent much of the last three months of the year traveling the world to meet with distributors, manufacturers, retailers, and boutiques, and the recurring message I hear is that the momentum in the fragrance market continues. That holds true for our business, where strong sell-in and sellout as well as continued premiumization are gratifying facts. While sellout was excellent in the first quarter, even sometimes higher than sell-in, we are already seeing increased demand and sales acceleration starting in the second quarter as the month of April can attest to. We expect further expansion in the second half. Therefore, I remain confident in our ability to achieve another record year, just as our guidance implies.

As we reported, last year’s first quarter was an exception, with comparable quarter sales growth of 24%, spurred by a large number of new product launches and rollouts, particularly of our leading brands. Therefore, the 4% sales gain in the current first quarter is still an accomplishment. Our growth primarily stemmed from continued success in our key brands, plus the addition of our newest licenses, Lacoste and Roberto Cavalli, which combined drove $25 million dollars in sales. These fragrances were well received by retailers. In fact, we were able to maintain 90% of shelf space for these brands during the transitional developmental period. Early results are very encouraging, and with the addition of new fragrances, our 2024 goal of $90 million for Lacoste and Cavalli combined is very achievable.

Before I proceed, as I’m sure you all heard, Roberto Cavalli sadly passed away in Florence on April 12, and I would like to say that he revolutionized Italian fashion and defined glamour like no other as the king of excess, leaving a lasting mark in the world of fashion. May his legacy live on, inspiring us to embrace uniqueness as we forge a new path in fragrance creation. Back to business. North America, our largest market, had a slight decline in sales attributable to the concentration of launches in early 2023. However, NPD research data reflects sellout remains strong, growing double-digits in comparison to prior year. Western Europe grew sales by 10%, but Eastern Europe is understandably declining in sales due to temporary sourcing constraint which led to sales shifting from the first quarter to the second quarter.

In Asia Pacific, we are achieving further growth stemming from increased demand, especially in Australia and India. Given the economic and social repercussions of ongoing conflicts in the Middle East and Africa, sales have declined. Travel retail is finally booming, again, increasing 12% during the quarter as consumers travel to explore new cultures and experience different ways of life. We are also seeing increasing shelf space and assortment of our portfolio of brands. I have personally witnessed heightened levels of travel, and with my views in line with industry trends we are increasing our budget for travel retail. Sales for our two largest brands, Montblanc and Jimmy Choo, declined during the first quarter after their respective 28% and 63% sales growth in the 2023 first quarter.

Coach, GUESS, and Donna Karan achieved sales increase of 5%, 21% and 44%, respectively. Coach fragrances remain in high demand with established lines for both men and women. For GUESS, the combination of legacy scents and the debut of our newest fragrance, GUESS Iconic, led to another quarter of significant sales growth. As such, over time, GUESS could become a top-three fragrance brand in our portfolio. And for the fashion house duo Donna Karan/DKNY. We strategically launched the new four-scent Cashmere collection in alignment with the Fashions House Luxury Fashion campaign, which led to enormous growth in the quarter. We also achieved further expansion by several of our mid-sized brands, including Van Cleef & Arpels, MCM and Kate Spade, with 25%, 15%, and 12% sales growth, respectively.

As we mentioned in our earnings release yesterday, we have an ambitious launch strategy planned for the balance of 2024, including blockbuster fragrances for DKNY and Lacoste and extension for the Jimmy Choo I Want Choo and Roberto Cavalli signature lines. Multi-scent collections for GUESS flankers are coming to market this spring, followed in the fall by a new member of the Uomo men’s fragrance family. Furthermore, extension for Hollister and Ferragamo Signorina will debut later in the year. Beginning this year, our Italian operation started distributing brands within our European-based operations after serving as a distribution hub for certain of our U.S.-based brands, most notably Ferragamo, in 2023. We plan to expand our Italian distribution capabilities over time.

We also launched the Phase 2 of a distribution rollout for Abercrombie & Fitch during the quarter after a successful Phase 1 distribution rollout. We expect to see further sales expansion as we complete Phase 2 this year. Before turning the call over to Michel, I’m proud to report that Inter Parfums moved further up the industry ranks according to Women’s Wear Daily Annual Beauty Top 100 Issue published last month in which we placed number 30, up from 33 and 40 in 2023 and 2022 respectively. That is a nice accomplishment considering we are a pure-play fragrance company scored against companies that also sell cosmetics, skincare, home fragrance, and hair care along with fragrances. So for me, the fragrance market remains very dynamic and as is Inter Parfums.

We are committed to providing retailers and consumers with new fragrance experiences to serve their senses, curiosity, and fragrance wardrobe. We have great brands, including two new ones, a well-balanced pipeline of new product launches, and we are operating in a prestige and luxury market that remains robust. So now I will turn the call over to Michel for a more detailed financial review. Michel?

Michel Atwood: Thank you, Jean and good morning everyone. Yesterday, we reported net sales of $324 million during the first quarter of 2024. This represented a 4% growth from the prior-year period. This reflects flat sales for European-based operations and 18% sales growth within our U.S.-based operations. The 2024 first quarter was in line with our expectations from a sales perspective. There are a few moving pieces that I would like to discuss today on today’s calls that led to the 24% decline in net income. Firstly, gross margins eroded by 260 basis points on an overall basis due to unfavorable segment, geographic, and channel mix within our European-based operations. We also increased our trade spending to support the business, which was an integral part of our strategy given the limited number of fragrances we introduced earlier this year.

There was also modest cost inflation in 2023 for purchases made in Europe due to higher energy costs, and while this has subsided, with the FIFO accounting method, we must use the older, higher-cost components in our inventory purchased at a premium. Fortunately, these margin impacts are non-recurring and have lifted, and as we go forward in 2024, we expect 2024 gross margins to be broadly in line with 2023 as we’ve explained previously, and we will consider potential moderate price increases in the second half of the year if needed. Within our U.S.-based operations, gross margins increased to 58.7% of net sales, primarily driven by favorable brand and channel mix. We have increased our sales directly to retailers as opposed to third-party distributors due to our growing U.S. direct-to-retail business.

The increase in sales has allowed us to continue to absorb more fixed expenses, such as depreciation and point-of-sale expenses, as compared to the prior-year period. That covers off our gross margin. I’m going to touch on SG&A. So SG&A increased to 41.5% of net sales compared to last year’s 36.1%, and this is due primarily to our increased investments in advertising and promotion, which aggregated $48.3 million and $35.2 million in the first quarter of 2024 and 2023 respectively. And this represented 14.9% of sales versus 11.3% in the prior-year period. There are a couple of points I wanted to make regarding these numbers. First, as we all know, we’re driving strong sell-in and sellout for our newest brands, Lacoste and Cavalli, and we’re able to fill the shelf space Jean mentioned earlier.

These two brands have excellent growth potential, and to capitalize on that potential, we invested in advertising and promotional programs to drive those legacy fragrance lines. We also invested in new programs in preparation for the new products we are currently developing. For the year, we have again budgeted our A&P spending to be 21% of net sales. However, in 2024, as I’ve previously explained on many occasions, we are spreading our A&P investment somewhat more evenly over the quarters to build brand awareness and to drive a competitive age and sustainable growth going forward. The incremental investments made in the last six months are paying off, as we are seeing healthy sellout in store, as explained by Jean with the double-digit growth in consumption in the U.S., for example.

Royalty expenses total 8.4% during the current quarter, up from 7.7% one year earlier. This is largely driven by brand mix. The amortization of the cost of the Lacoste licenses accounted for $1.6 million during the first quarter of 2024 and will continue over the life of the contract, which is 15 years. As a result of these investments, our operating margin for 2024 first quarter was 21%. It represented a return to a more normalized level compared to the abnormal and unsustainable 29% in the prior year’s quarter. It’s also more in line with what we’re seeing with our competitors. We closed the quarter with working capital of $530 million, including approximately $100 million in cash and cash equivalents and short-term investments, resulting in a working capital ratio of 2.8 to 1.

Our long-term debt, including credit maturities, was $145 million at the end of the current first quarter, compared to $174 million in March 2023, associated with the Paris headquarters and Lacoste licenses, and we’re paying those down over time. From a cash flow perspective, accounts receivable is up 20% from prior year-end 2023. The balance is reasonable based on our sales levels and the seasonality of our business. The days’ sales outstanding was 73 days, only modestly higher from the corresponding period in the prior year, and we continue to see strong collection activity and do not anticipate any issues with collections given our long history and strong partnership with our retailers and distributors. Inventory levels are up 9% from year-end 2023, as expected, since we have consistently been building our inventory since 2021 and the additional inventory buildup from producing goods for Lacoste and Cavalli.

Before I turn it back to the operator for Q&A, I will touch on our guidance. We are again reaffirming our 2024 guidance as the tailwinds for the year far outweigh the headwinds we have faced thus far. We expect to achieve 10% annual sales growth to $1.45 billion. For further perspective, we believe the first half will be more modest high single-digit growth largely due to the timing of our new product launches in the first quarter, and we are expecting double-digit growth in the second half. This should lead to an 8% increase in earnings per diluted share of $5.15. Of note, included in our guidance, the Lacoste non-cash amortization expense of the acquisition cost is expected to reduce our 2024 EPS by approximately $0.11. Excluding this impact, we are projecting EPS growth of 11% versus the full-year 2023.

With that operator, please open the line for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question is coming from Linda Bolton-Weiser from D.A. Davidson. Your line is now live.

Linda Bolton-Weiser: Yes, hi. So…

Jean Madar: Hi, Linda.

Linda Bolton-Weiser: Hi. I would just like to get a little more color on the cadence among the quarters, just so we get it more right, I guess for the second quarter. Because the prior year comparison sales growth is really high too in the second quarter, so the comparison does not get easier. So in the second quarter, do you anticipate a little bit higher year-over-year growth of sales or lower or even flat sales? Or maybe you could give a little color, and then also the gross margin I would think would move up sequentially from the first quarter. Can you give a little color on that? Thank you.

Michel Atwood: Yes.

Jean Madar: Michel?

Michel Atwood: Yes. So, Linda, we are expecting double-digit growth in the second quarter. It’s related to also some of the shifts that we discussed between the first quarter and the second quarter. But at this point in time, we are expecting double-digit growth in the second quarter and also in the subsequent quarters for the balance of the year. For the gross margin, as you know, we have a significant – we had a significant charge last year in the second quarter for excess and obsolescence, which goes away. And from there we are – so there will be a significant help in gross margins in the second quarter. And for the balance of the year, again, we are expecting, I mean, the bulk of the gain will come into the second quarter, and for the balance of the year, there’ll be some marginal, at this point in time, marginal increases in gross margin.

But again, for the whole year, we’re projecting if you’re modeling this out, you should assume that the one-time gain, the one-time charge we had in the second quarter will go away, and then we’ll kind of normalize for the balance of the year to get to roughly the same gross margin as in 2023.

Linda Bolton-Weiser: Thank you. That’s very helpful. As a follow up, is there any way you could quantify the shift in Eastern Europe related to the component shortages? How much shifted from first quarter to second quarter?

Michel Atwood: We expect that – that was about, between two and three points.

Linda Bolton-Weiser: Two to three points. Percentage points of growth?

Michel Atwood: Two to three points of growth.

Linda Bolton-Weiser: Of growth. Okay, thank you. And then I was curious about, Coty actually really specifically said that they felt the global prestige fragrance market had accelerated in growth in the first quarter to mid-teens growth globally. Are you kind of in agreement with that? And do you have any sense for how your POS performed relative to the market in the first quarter?

Jean Madar: I can try to. Yes, Michel, you want to answer?

Michel Atwood: No, no, go ahead. Absolutely, Jean.

Jean Madar: I tend to agree with Coty. We have a double-digit growth in many, many important regions, U.S. for sure, in the first quarter, Germany, Italy, France for sure, growth of double-digit. Maybe it will slow down, but we have seen a robust numbers for the first three months. Michel?

Michel Atwood: Yes, definitely. I confirm we have seen double-digit growth in the U.S. I think the NPD growth for the quarter was up, I think,16%, if I’m not mistaken. And we’ve also seen low double-digit growth for most of the larger European markets like Germany, the U.K., Italy, Spain. I think France was low single digits. But overall, I think the market continues to be very strong in all of the key markets and key European markets.

Linda Bolton-Weiser: Great. Thank you. And then just my last question is on pricing. You alluded to positive – or potential price increases in second half. I mean Coty is really talking of being very targeted, very specific, seemingly more reluctant, I guess, to take pricing. So I’m wondering, do you think this would have some negative effects for you to take pricing if competitors are not or any comment on that?

Jean Madar: No, I can try. We are also reluctant to increase prices, and we think that certain products for certain lines could have a price increase, but we’ll do it in a very targeted way. We have not – Inter Parfums compared to the other competitors have not increased a lot pricing, so we still have room. And in general, our retail, I’m talking about prestige fragrances, our retail price are below the competition. So we still have room. We don’t want to make it a rule. We don’t think that all our brands in our portfolio will have a price increase, but certain products will be different.

Linda Bolton-Weiser: Okay. Thank you very much. I appreciate it.

Jean Madar: Thank you. Thank you, Linda. Always a pleasure to talk to you.

Operator: [Operator Instructions] Our next question is coming from Korinne Wolfmeyer from Piper Sandler. Your line is now live.

Korinne Wolfmeyer: Hi, thanks. Good morning. I’d like to first touch on the Lacoste and Cavalli sales. I think you said it was about $25 million in the quarter. Is there any way to quantify how much of that was kind of like retail inventory build versus what the proper quarterly run rate is to think about for both these brands going forward? I think previously you’ve quantified both them as maybe $90 million for the year. Is that still intact, or are we tracking ahead of that? Thanks.

Jean Madar: Michel?

Michel Atwood: Yes. So, Korinne, when you take over a brand, there’s already pretty much a pipeline that’s out there. The product, the brand is listed. And so essentially this is really replenishment of consumption in most cases. Now, obviously, when you take over a brand, you assess the landscape, and there might be additional distribution opportunities. But we’d say at this point in time, we’re – on both brands, we’re ahead of the budget for the time being, and we feel pretty confident about that $90 million for the year, hopefully even finish a little higher.

Korinne Wolfmeyer: Great. Thanks. And then on the Middle East last quarter, that was a point of caution for you and a reason behind the guidance that you laid out. And I think what you said, it declined a little bit in the quarter. Was that in track or in line with your expectations? Was it worse? Was it better? How should we think about that region for you?

Jean Madar: What we see in the Middle East was in our budget. So we projected to have a certain softness in the region because of the geopolitical tension. But we have – we are more optimistic for the second half of the year regarding the region. So we think that sales in the important Saudi Arabia and Emirates and also countries around will pick up in the second half.