Inter Parfums Inc

NASDAQ:IPAR

Earnings Call Transcript 2024-Q1

[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 heading Forward-Looking Statements and Risk Factors and our 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 2 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, Interparfums SA. 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, executive]

Thank you, Karin, and good morning, everyone, and thank you for joining today's call. I have spent much of the last 3 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 sell-out as well as continued premiumization are gratifying facts.

While sell-out 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 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 glamor 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 new paths 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 sell-out remained 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 constraints, 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 2 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 3 fragrance brand in our portfolio. And for the fashion house duo, Donna Karan/DKNY, we strategically launched their new first scent, Cashmere Collection in alignment with the Fashion House Luxury Fashion campaign, which led to the enormous growth in the quarter.

We also achieved further expansion by several of our midsized 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 fragrance are coming to market this spring, followed in the fall by a new member of the Uomo men's fragrance family.

Furthermore, extensions for Hollister and Ferragamo's 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 Phase 2 of a distribution rollout for Abercrombie & Fitch here 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 [ WWD Beauty ] Annual Beauty Top 100 issue published last month, in which we placed #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, skin care, 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 [ to our group ]. We have great brands, including 2 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, executive]

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 reintroduced earlier this year.

There was also a 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 nonrecurring 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. So 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. So there are a couple of points we wanted to make regarding these numbers.

First, as we all know, we're driving strong sell-in and sell-out for our newest brands, Lacoste and Cavalli, and we're able to fill the shelf space Jean mentioned earlier. These 2 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 investments somewhat more evenly over the quarters to build brand awareness and to drive a competitive edge and sustainable growth going forward. The incremental investments made in the last 6 months are paying off as we are seeing healthy sell-out in store, as explained by Jean, with the double-digit growth in consumption in the U.S., for example.

Royalty expenses totaled 8.4% during the current quarter, up from 7.7% 1 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% and 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 2.8:1. Our long-term debt, including current 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 the cost licenses, and we're paying those down over time.

From a cash flow perspective, accounts receivable is up 20% from 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 noncash 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.

[Operator]

[Operator Instructions] Our first is question is coming from Linda Bolton-Weiser from D.A. Davidson.

[Linda Bolton-Weiser, analyst]

I would just like to get a little more color on the cadence among the quarters, just so we get it, we're right, I guess, with 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 wouldn't move up sequentially from the first quarter. Can you give a little color on that?

[Jean Madar, executive]

Michel?

[Michel Atwood, executive]

Yes. So Linda, we are expecting a 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 in the second quarter. And for the balance of the year, there will 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 onetime gain -- the onetime 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, analyst]

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, executive]

We expect -- that was about between 2 and 3 points.

[Linda Bolton-Weiser, analyst]

2 to 3 points -- percentage points of growth?

[Michel Atwood, executive]

2 to 3 points of growth.

[Linda Bolton-Weiser, analyst]

Of growth, okay. 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, executive]

Yes. I can try to answer. Yes, Michel, do you want to answer?

[Michel Atwood, executive]

No, no, go ahead. No, no, go ahead. Absolutely, Jean.

[Jean Madar, executive]

I can't 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 in the -- but we have seen a robust numbers for the first 3 months. Michel?

[Michel Atwood, executive]

Yes, 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 large European markets like Germany, the U.K., Italy, Spain. I think France was low single digits. But yes, overall, I think the market continues to be very strong in all of the key markets -- in key European markets.

[Linda Bolton-Weiser, analyst]

Great. And then just my last question is on pricing. You alluded to positive potential price increases in the 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 effect for you to take pricing as competitors or not? Or any comment?

[Jean Madar, executive]

No, we are -- I can try. We are also reluctant to increase prices. And we think that certain products or certain lines could have a price increase, but we do it in a very targeted way. We have not -- Inter Parfums comparing to the other competitors have not increased a lot in pricing. So we still have room. And in general, our retail -- I'm talking about Prestige fragrances, our retail prices 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 do, definitely.

[Operator]

[Operator Instructions] Our next question is coming from Korinne Wolfmeyer from Piper Sandler.

[Korinne Wolfmeyer, analyst]

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 $90 million for the year. Is that still intact? Or are we tracking ahead of that?

[Jean Madar, executive]

Michel?

[Michel Atwood, executive]

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 budget for the time being. And we feel pretty confident about that $90 million for the year and hopefully even finish a little higher.

[Korinne Wolfmeyer, analyst]

Great. 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 you said it was -- 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, executive]

What we see in the Middle East was in our budget. So we projected to have a certain softness in this 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.

[Korinne Wolfmeyer, analyst]

Great. And then if I could squeeze in one more. Michel, I believe you talked a little bit about spreading out that A&P spend over the 4 quarters versus the typical seasonality we see. How should we be thinking about that? Is it really going to be more balanced? Are we still going to see some heavier spend in the back half? And then how does this plan to your operating margin expectations over the next couple of quarters?

[Michel Atwood, executive]

Yes. It's a great question, Korinne. I think I've been pretty consistent about the fact that we want to avoid some of the things that we've done in the last couple of years, where the sales comes in higher, and we don't have enough runway to spend the A&P and go to ROI. We have built into our financial plans a lot more front spending in order to build the momentum. The market is strong. Our brands are doing great. We've got great innovation.

So really, the idea is to capitalize on that and to front spend. To answer your question, we have historically probably spent 45% of our A&P -- or 40% of our A&P in the last quarter. We're going to continue to have pretty high spending. But we're looking more for about 35% of our spending, and then it will be spread out a little bit more evenly over quarter 2 and quarter 3. So Q1 will continue to always be a lighter quarter in terms of spending. I think our spending was really, really low, and we needed to rebalance that.

[Operator]

Our next question today is coming from Ashley Helgans from Jefferies.

[Ashley Helgans, analyst]

Just to start on the energy cost inflation. Was this expected to be an impact or something that came about throughout the quarter? And then just another question on the potential price increases. Can you remind us the last time you took price? And correct me if I'm wrong, but I feel like your competitors, maybe like Coty, were a little bit more aggressive with pricing this last year, and you guys kind of stopped taking price kind of midway through last year.

[Jean Madar, executive]

Michel, do you want to answer the first part? I will do the second part.

[Michel Atwood, executive]

Yes, sure. Ashley, no -- I mean the cost of goods -- most of the cost of good inflation basically came in 2023, primarily driven by the higher cost of energies, which drove up the cost of glass bottles, particularly in Europe. It wasn't really a big surprise for us to see some of those costs coming through. Typically, as you've seen, we have about 9 months of inventory.

So some of this stuff kind of will be coming -- will be kind of coming through. I think in the last couple of quarters, it was hidden by the fact that our -- we had -- there's also some, I would say, channel mix. And our U.S. business is growing much faster. As you know, we have more direct business in the U.S. So the gross margins are higher there, and that part of the business is growing a lot faster. So it was kind of hiding -- it was hiding a bit of some of that cost inflation that was kind of making its way.

So not really a surprise. I know it's a big number. But at this point in time, we're still very confident that we're going to hit our gross margin numbers for the year and be more or less flat versus prior year. We were always expecting some cost inflation. And in terms of -- and I'll let Jean basically cover off. I don't know if that covers off your question on COGS, and then I'll hand off to Jean on the pricing piece.

[Jean Madar, executive]

Yes. I think we have to -- yes, thank you for asking this question because Inter Parfums has been very, very careful about the price increase in the last 18 months. Whenever we could avoid the price increase, we did, and I think we did the right thing. But that's true that certain brands want to be positioned at a more premium level. I'm thinking of Van Cleef, I'm thinking of Ferragamo. So this is where we think we have, for certain products and certain brands, possibility to adjust retail price. But it's not at all an overall price increase like other people.

[Operator]

Your next question is coming from Hamed Khorsand from BWS Financial.

[Hamed Khorsand, analyst]

So the first question I had was regarding your top 5 or top 10 brands. How dependent are they on new fragrances to grow sales versus through a more traditional established fragrances?

[Michel Atwood, executive]

Jean, do you want take that?

[Jean Madar, executive]

Michel?

[Michel Atwood, executive]

Yes. Overall -- it's a great question, Hamed. Overall, it's about balance, right? I mean, obviously, this is an industry where you have a pretty high pace of innovation. And newness is important, and you need to have a good balance of newness to keep the brand fresh. This being said, newness can come in different ways. I can always use the -- a great example of Chanel No. 5. It's been out there for 50 years, and it's been able to stay fresh, not necessarily with product newness, but with commercial newness. And we've had advertisements like Brad Pitt and stuff like that.

So you don't necessarily need product newness to keep the brands fresh. You need strong heroes, and that's one of the things that we're clearly trying to build. And if you look at some of our larger brands, we are building strong hero pillar lines that we can leverage and build over time.

And now newness can have some impacts on pipeline. And you -- and that typically where it comes out. But in the form of consumption, I think you can certainly build your brands up with a good product and a strong brand without necessarily having a massive amount of newness, but you need to keep the brand fresh. Jean?

[Jean Madar, executive]

Yes, yes. I totally agree, we need to have a balance. Sometimes it's quite a subtle balance between heroes, blockbuster or a new pillar that we -- for each brand, we do every year, I would say, every 3 years. But every year, we have, in order to keep the newness and we have to add the line extensions, or what we call in our language [indiscernible] that we -- this is the nature of the business. So you have, in the portfolio, existing heroes. And every year, we come up with extension and novelty and, of course, different [ newness ] for spring and Christmas season. But I don't say that we are dependent. So we see the nature of the business. This is the way we build our model.

[Hamed Khorsand, analyst]

Okay. So you're not really seeing consumers just buy the brand-new fragrance, try it out and then move on to the next one right now. That's not what you're seeing?

[Michel Atwood, executive]

No.

[Jean Madar, executive]

Not really. I think that we are more open to try new things, but we have pillars in our portfolio that have been in the portfolio for more than 10 years, and they're still there and they still grow.

[Hamed Khorsand, analyst]

Okay. My last question was regarding your ad spend. Are you doing anything different as far as the advertising particularly? Is it a different strategy? Other than the spending, are you using different avenues, more online?

[Jean Madar, executive]

So Michel, do you want to answer regarding the amount of EBITDA spending?

[Michel Atwood, executive]

Yes. I mean, overall, as you know, Hamed, most of the advertising and promotion has shifted into the digital space. I mean, we typically -- every brand has a different prime prospect and a different consumer, and we try to tailor that. But most of our advertising and promotion is in digital. And we've just basically put in more GRPs and spend more dollars as opposed to spending on new avenues. Jean?

[Jean Madar, executive]

Yes, yes, absolutely. Nothing to add.

[Operator]

We reached the end of our question-and-answer session. I'd like to turn the floor back over to Michel for any further or closing comments.

[Michel Atwood, executive]

All right. Well, thank you for joining our call today. Before I end the call, I would like to announce a few upcoming events. I will be both in Chicago and Milwaukee later this month with Piper Sandler, and Jean will be in Grasse with Jefferies at the end of the month. And in June, I will also be in Nantucket with the Jefferies at their Annual Consumer Conference. If you're interested in attending these events, please reach out to your respective -- their respective sales representatives.

If you have any additional questions, please contact Karin Daly from The Equity Group, our Investor Relations representative. The telephone number and e-mail address can be found on our most recent earnings release. We look forward to the next conference call, and thank you again, and have a great day.

[Operator]

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.