Interparfums Inc Q1 FY2023 Earnings Call

Greetings and welcome to the Inter Parfums First Quarter 2023 Conference Call and Webcast. At this moment, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. This conference is being recorded. I would now like to hand the call over to Karin Daly, Vice President at the Equity Group and Inter Parfums Investor Relations representative.

Thank you, Daryl. 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 in 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. It’s now my pleasure to turn the call over to Jean Madar, Chairman and Chief Executive Officer of Inter Parfums. Jean, you may begin.

Thank you, Karin, and good morning, everyone. And welcome to our first quarter conference call. I will start the discussion and then Michel Atwood, our CFO, will review our financial performance, outlook and related issues. For anyone new to Inter Parfums, keep in mind that when we refer to our European based operations, we are talking about our 72% owned French subsidiary called Interparfums SA. And when we refer to our U.S. based operations, we are talking about our wholly-owned domestic subsidiaries. So 2023 already has the hallmarks of another spectacular year for our company. We admit that some of that exuberance is because of the strength in the fragrance market. But we also believe that our stellar performance is driven by the high quality operation by our talented staff every day and our ability to execute sustainable innovation. This confluence resulted in the best quarterly sales in our history. Let’s move on to our business by region. In North America, our largest market, net sales increased by 36%. You may recall that in last year’s first quarter, the change in logistics software of our logistics operator tempered 2022 first quarter sales, but that resulted in a completed year up 22% in North America last year. Western Europe and Asia-Pacific also had a strong start to the year, with sales ahead 21% and 8%, respectively. Our business in Central and South America is really gaining traction as sales rose 43%, while Eastern Europe and the Middle East grew by 25% and 5%, respectively. Our business in the duty-free sector is steadily improving and we expect to see continued momentum as the year progresses. The dollar has weakened somewhat in 2023, but the foreign exchange impact continues to provide favorability on our European based operations, which grew sales in U.S. dollars by 26% or 29% in constant currency. An interesting point about our European based operation is that Jimmy Choo brand sales exceeded those of Montblanc, historically our largest brand. Both brands performed exceedingly well, with net sales growth of 63% for Jimmy Choo, 28% for Montblanc. Our third largest brand Coach also had a great start to the year with sales up 24%. During this first quarter, we introduced a new Moncler collection. We also introduced a flanker for Jimmy Choo called Rose Passion. We had also a new innovation for Kate Spade called Chérie, Rochas launched Citron Soleil, and we had another scent for the collection extraordinary by Van Cleef Collection. In the second quarter, we will be launching Coachgreen, Montblanc Explorer Platinum, Rochas Girl Life. And in the third quarter, we have Coachlove and new entries for the Karl Lagerfeld and Van Cleef Collection. For the remainder of 2023, the pace of our product launches is expected to slow, while geographic rollout of products are delivered late in 2022 and early 2023 are expected to continue. In our U.S. based operations, which achieved first quarter sales growth of 19% on top of tremendous growth of 77% during the first quarter of 2022. As we reported last month, GUESS fragrance sales approximated those of last year’s first quarter when brand sales were 36% ahead of the prior year period. Additionally, while issues with the ERP implementation held back overall sales, it impacted GUESS disproportionately. We have received substantial orders shipping in the second quarter and new GUESS products, including Uomo Acqua, Bella Paradiso, and the GUESS original perfume are coming in the second, third, and fourth quarters, respectively. First quarter product launches for U.S. based operations were primarily focused on brand extension. For example, we launched authentic sell for Abercrombie, Canyon Sky for Hollister, Alibi for Oscar La Renta, and Signorina Libera for Ferragamo. For the balance of the year, we have an extensive innovation program under the widely recognized DKNY and Donna Karan brands. As we said on our year-end conference call, the combination of Donna Karan and DKNY franchises is destined to be our second largest brand within our U.S. based operation. We also have brand extension for MCM, Anna Sui, and GUESS, as well as others for Ferragamo and Abercrombie, plus a brand new major launch of an entirely new line for Hollister. Yesterday evening, in conjunction with our earnings release, we announced our agreement with Abercrombie to distribute its number one men’s fragrance called Fierce in selective markets. The first phase of the agreement, which becomes effective on September 1, 2023, covers Fierce distribution in certain major markets. The second phase, which activates in February 2024, covers distribution in additional regions and may include other flankers of the Fierce family of products. Our relationship with Abercrombie began in 2014 and we have brought to market several major blockbuster pillars, including first in synch, away and authentic. With close to a decade under our belt, we have earned Abercrombie & Fitch's confidence as evidenced by this agreement allowing us to distribute the iconic Fierce collection on a test basis for three years. Our plans call for growing penetration in existing Fierce markets that include department stores, specialty stores, and duty-free stores, as well as online sales while exploring opportunities in untapped markets. Moving on to a notable topic across our industry. Our sales in China in the first quarter were as expected underwhelming. About three weeks ago, I traveled to several cities in China, visiting stores, distributors and staff. Following the lift of lockdowns, we continue to see business improving, but at a slower pace than people expected. The one exception is the duty-free market of Hainan, which I visited as well, where business is booming. Chinese consumers are pulling in and buying beauty products. It is not a secret that the emphasis is and has historically been on skin care, but fragrance is growing faster. From what I could see, our Anna Sui, MCM, Van Cleef & Arpels products are doing very well there, and we suspect that fragrance products as a whole will become more relevant. The fragrance opportunity in China is still very big; however, the timing of the real breakout is much less certain. That said, the business is moving in the right direction. The younger generation of Chinese consumers are living through changing cultural customs and are not only trying but loving fragrances, more so Prestige and Mass. While looking to express themselves through fragrance, fashion, and accessories, we are seeing a preference for more exclusive niche fragrances at a higher retail cost. In an effort to address their demands, we are customizing our merchandising. For example, with Graff and Van Cleef storefront expansion in China in the next year, we will tailor our efforts to take advantage of the expected growth in brand relevancy. As always, we will share additional information on future calls as we gain visibility on China. The other notable topic is the supply chain. To sum it up, it is better, but far from ideal. Pumps and glass components remain in short supply, and as we have said for nearly two years, we are sourcing in multiple locations, ordering more, and further in advance of our expected needs. As good as the first quarter was, inventory shortfalls permitted us to ship about 80% of orders for European based operations and 70% of orders for our U.S. based operations. One other question that keeps coming up is why we are not pursuing newer artisanal fragrance brands. The answer is probably for the same reason we still clarify our focus on the celebrity fragrance obsession. It is just not our line. We really know and like the Prestige Fragrance business, which accounts for more fragrance sales and I think it’s fair to say we like it even more these days with some of our peers filling fragrance brands that have decades of brand equity with multiple touch points in apparel and accessories. In a recent article in one of the beauty trade magazines, Macy’s VP of Fragrance noted that our position gives us agility in product innovation and data-driven marketing tactics. Additionally, she mentioned our focus on storytelling and animation, which we continue to believe is one of our competitive advantages in the industry. We remain true to our stated goal of always seeking out new licenses or other types of agreements that expand our fragrance portfolio. Before turning the call over to Michel, I would like to mention that we are moving up the ranks in the beauty industry according to Women’s Wear Daily in its 2022 Beauty Top 100 article, where we ranked number 33, up from 40 one year earlier as a pure-play fragrance manufacturer up against larger companies that have additional duty segments such as cosmetics, skin care or hair care. We are very pleased and very honored. So now we will turn it over to Michel to review our financial performance. Michel?

Thank you, Jean, and good morning, everyone. We released our consolidated earnings and 10-Q filing yesterday evening, and I encourage you to review them on our company website. While the provided materials and Jean’s remarks covered much about our first quarter results, I want to highlight a few notable points. First, we often mention that over 50% of our net sales in European operations are in U.S. dollars, while almost all costs are incurred in Europe. A strong dollar can suppress our sales in dollars but enhance our gross margin. In the first quarter of 2023, the gap between the euro and dollar has narrowed from $1.12 to $1.07, leading to only a 2% negative foreign exchange impact on quarterly sales. In contrast, the prior quarter saw a negative 10% foreign exchange impact as the euro-dollar fell from $1.14 to $1.02. This indicates normalization, and we expect these foreign exchange impacts to lessen going forward. Regarding gross margins, we achieved an overall expansion of 180 basis points, driven mainly by pricing. As many of you know, we implemented a price increase at the beginning of the year, which was slightly offset by rising costs of goods due to inventory accounting practices. We anticipate this benefit to diminish in the second quarter and mostly in the latter half of the year. In European operations, the combination of pricing actions and increased U.S. sales—where we manage distribution and record wholesale versus ex-factory prices—resulted in a 100-basis-point improvement in gross margin. In U.S. operations, gross profit margin improved by 370 basis points, with pricing representing over half of this improvement. While we do expect inflation on cost of goods later in the year, we continuously aim to maximize our portfolio through an advantageous brand and channel mix with improved pricing to establish a lasting competitive edge. Another sustainable factor driving gross margin is achieving scale, which better enables us to absorb fixed costs. Turning to first quarter SG&A. Overall, SG&A expenses rose 16%, significantly less than our sales growth of 24%. As a percentage of sales, SG&A improved by 270 basis points to 36.1%. In European operations, SG&A expenses increased 12%, making up 33.6% of net sales, compared to 37.9% last year. In U.S. operations, SG&A rose 24%, accounting for 43.4% of net sales versus 41.5% in the same period last year. Increased spending on promotion and advertising was a key driver for both European and U.S. operations. Specifically, in U.S. operations, we also made extra investments in talent and infrastructure to support new licenses and the growth of established brands. This resulted in about $4 million more in SG&A expenses compared to the first quarter of 2022. With a 24% rise in first-quarter net sales, our promotion and advertising expenses increased only 3%, making up 11.3% of net sales, down from 13.6% in last year’s first quarter. Notably, our pre-pandemic first quarter 2019 promotion and advertising spend was 15.4% of net sales. If we had known the future, we would have spent significantly more on promotion and advertising, but, as many industry experts indicate, current visibility remains unpredictable, although we see potential for market growth. As we've mentioned before, our goal is to allocate 21% of net sales to promotion and advertising on an annualized basis, with historically the fourth quarter being our largest expense quarter. Other income and expenses contributed $2.3 billion or about $0.04 per share to our bottom line. Net interest and investment income, after accounting for interest expenses, added around $3 million, compared to a loss of $2.4 million in the same period last year. However, we moved from recognizing a gain of $2.2 million in foreign currency in the prior year’s first quarter to a loss of $800,000 in the current first quarter. Net income attributable to non-controlling interest increased by 53% or nearly $6 million, mainly due to the rapid growth and increased profitability of our European operations, in which we own 72%. Finally, our effective income tax rate was 23% in the current quarter, down 100 basis points compared to last year's first quarter. As mentioned in the earnings release, we closed the first quarter with working capital of $489 million, including about $238 million in cash and cash equivalents and short-term investments, resulting in a working capital ratio of 2.4:1. Our long-term debt stood at $145 million as of March 31, primarily due to the acquisition of Inter Parfums headquarters, financed by a 10-year $130 million loan at an effective fixed rate of about 1.1%. I want to share a few additional points. While our working capital needs keep increasing, they remain below our sales growth, with accounts receivable up 22% since December 31, 2022. We are receiving payments more quickly, with sales outstanding at 69 days compared to 75 days last year. From a cash flow standpoint, inventory levels rose 10% since December 31, aligning with our sales growth. While we are still facing delays in procuring certain components, we believe we maintain a healthy inventory stock and will continue managing our inventory until our supply chain normalizes further. As you noted in our sales announcement, we have raised our full-year 2023 guidance since November 2022; this is our second time. In our last conference call, I mentioned that we expect net sales growth to exceed earnings growth, mainly due to our commitment to investing 21% of net sales in promotion and advertising. While our forecast remains cautious, we anticipate that sales growth will continue to outpace earnings growth for the full year, thus our guidance of 15% for top line growth and 12% for EPS. We expect a slowdown in favorable foreign exchange conditions, which would lessen the gross margin boost we saw last year. Additionally, we anticipate that our price rises will be counterbalanced by higher costs of goods sold, and, as pointed out, we remain committed to spending 21% of net sales on promotion and advertising this year. Lastly, regarding share repurchases. In the first quarter of 2023, we initiated a modest share repurchase program. During the first quarter, we repurchased 43,000 shares at a cost of $5.6 million. These shares will be recorded as treasury shares on our balance sheet. The company plans to continue repurchasing shares throughout 2023. Before we move to your questions, I want to mention that I will be attending two investor conferences next month: Oppenheimer’s 23rd Annual Consumer Growth and E-Commerce Virtual Conference on June 13th and 14th, and the Jefferies Consumer Conference Live in Nantucket on June 20th and 21st. I look forward to seeing interested parties there. Now, Operator, please open the line for questions.

Thank you. Our first questions come from Linda Bolton-Weiser with D.A. Davidson. Please go ahead with your questions.

Yes. Hi. Congratulations on such a strong quarter. So it’s interesting to hear about your expanded relationship with Abercrombie. I am a little curious why the addition of the distribution of the Fierce brand wouldn’t add to your EPS for the year. So do you expect that to be accretive to earnings when you start doing that later in the year?

I’m not sure if I said that it wouldn't be accretive to earnings, but if I did, I realize that was a mistake. It will definitely be accretive, and we expect the Fierce business to be very profitable.

Yeah. So, Linda, as you know, we did take our guidance also, we were ready to announce this partnership already a few weeks ago when we were just kind of tightening up the communication. So, yes, this is definitely built into our guidance at this point in time, and yes, it is accretive to our business.

Okay. Great. And then, regarding Hainan, Jean, your comments were very interesting. As you mentioned, there has been a shift in consumer interest towards other luxury goods like handbags. Did you notice that at all? What is your exposure in Hainan? Do you sell a lot there, and are there specific brands that perform well in that market?

I find it challenging to comment on Estee Lauder's remarks, a company I hold in high regard. During my visit to Hainan, I noticed a vast shopping mall teeming with people purchasing not just fragrances and cosmetics, but also leather goods and clothing. As we mentioned at the end of last year, we need to be cautious about our expansion in China because it may take longer than expected. There’s a considerable amount of inventory, and while there's a strong customer base, it may not be as robust as some anticipate. However, Hainan is a stable market, and they plan to expand their selling space further. From a mid to long-term perspective, I foresee no issues; it's merely a matter of timing. We expect our second quarter to show improvement, and the third quarter should be significantly better. Currently, business growth feels slower than anticipated. Our presence in the duty-free market isn't as large as it could be. For instance, I'm attending a travel retail conference in Singapore and connecting with many travel retail operators. The positive aspect is that Hainan is attracting travelers who previously shopped in Korea, which has negatively impacted the Korean market while benefiting the Chinese market. Overall, I'm feeling quite optimistic.

Okay. Sounds good. Thanks. I will pass it on.

Thank you, Linda.

Thank you. Our next questions come from the line of Ashley Helgans with Jefferies. Please proceed with your questions.

Hi. This is Sidney on for Ashley. A couple from us. So, first one, just again kind of on the comments we have heard from some competitors on the inventory situation in China and travel retail. Any further color you can kind of give from what you are seeing from your vantage point there? And then the second question was just on have you seen any shift in trend towards maybe smaller form factor kind of the mini or roller vault size of fragrances as consumers maybe trade down or just own more SKUs? Thank you.

Inventory-wise, companies like Estee Lauder and L’Oréal that are heavily invested in travel retail are experiencing a slower recovery. However, our travel retail currently stands at 5%, and we aim to increase that to 7% or 8%, indicating there's still potential for growth. While we are cautious in our forecasts and have factored this into our guidance, we will reassess our numbers if there is a quicker recovery. Regarding your second question, I don't observe any trend towards smaller or less expensive products. Instead, I see a trend toward premiumization, with consumers opting for more expensive items or larger, more concentrated products. This trend is evident not just in Asia but also in the U.S. and Europe. That's my current perspective.

Thank you.

Thank you. Our next questions come from the line of Korinne Wolfmeyer with Piper Sandler. Please proceed with your questions.

Hey. Good morning and congrats on the quarter. Thanks for taking the questions. So, first, I’d like to just kind of dive into the updated guidance for the year. I mean it seems like you raised it by about the beat maybe slightly a little bit more. But I do know some of us were hoping for maybe a little bit more improvement in that EPS number. Can you just talk about maybe why we are not seeing as much growth there? I know we are seeing some higher investments in marketing and some pressures on the gross margin line. But anything beyond that to call out of why we maybe aren’t seeing as much upside in that bottom line earnings number?

Yeah. Maybe I will take that, Jean.

Yeah. Okay.

It really comes down to grade. If you examine the fundamentals, the gross margin expansion we have observed over the past few quarters has largely resulted from pricing and foreign exchange. However, we are starting to notice that trend shifting slightly. As I mentioned in the prepared remarks, it’s clear that we use FIFO accounting. In the first half, much of what we are currently selling, given that we have nearly nine months of inventory, consists of items purchased last year. We are beginning to see sales growth driven by higher pricing, which hasn’t been the case, but the cost of goods sold has not yet reflected that. We anticipate gross margins will experience more impact in the latter half of the year, and we have already observed a small effect on profit in the second quarter. That’s a significant factor. Another important consideration is the A&P relief. We have mentioned this multiple times; we prefer to approach financial planning conservatively, basing our spending on certain market growth assumptions. We are still seeing an upside surprise, which is encouraging as it’s not just us experiencing it. Thus, we don’t feel uncompetitive in the market, but it’s something we need to monitor closely as we aim for that 21% margin. These two points mainly explain the more cautious EPS growth outlook for the remainder of the year. Overall, it’s still a solid figure, targeting a 15% revenue increase and a 12% EPS growth, which shouldn’t be a major concern, especially given the current context.

Yeah. Definitely. That’s super helpful. And then can you just touch a little bit more on the increased marketing spend this year? What does that look like? What kind of initiatives are you putting in place? And then as we think about kind of like the ROI on these investments, what kind of return are you baking into your internal expectations with this increased marketing spend? Thanks.

Hey, Jean. Do you want to take the question on the marketing expense?

Yes. For me, the marketing you mentioned a couple of times that you want this to be at 21%, right on average for the year, Michel, that’s what you said?

Yeah. That’s right, Jean.

We have all observed the shift from traditional media to social media. We are actively engaged in campaigns on platforms like TikTok, Instagram, and Facebook. Our primary focus is to connect with shoppers in places where they are interested in building our brands, collaborating closely with fashion houses. Additionally, we continue to invest in our physical stores, as they play a crucial role in influencing purchase decisions. It's important for our brands to be appealing and competitive in-store when customers decide to buy. Regarding return on investment, the traditional question revolves around whether our media expenditures are effective. While it's often said that we lack clarity on which aspects work, we understand that investing in brand desirability is crucial. We recognize the key business drivers that enhance brand equity and ensure that our investments yield the best returns, both in the short and long term. Therefore, we continuously assess ROI.

Very helpful. Thank you.

Thank you. Our next questions come from the line of Hamed Khorsand with BWS Financial. Please proceed with your questions.

Hi. Just a follow-up on the ad spend. Is there a threshold where you think that your sales is going to be too big to support a 21% ad spend and to get the same return that you are looking for?

No. I mean the reality is, I think, if you look at our brands, our largest brands are roughly in the $200 million range; there are significantly larger brands out there that spend significantly more. I think at the end of the day, there is a correlation between share and share of spend, as long as you are investing in the right vehicles over time, there is some gradual growth that can happen there. So I don’t think we feel that would be the case. But I do want to insist on the fact that underinvesting over a sustained period will result in us not delivering the growth that we want, right? So this is why we are very keen to invest and to continue to invest. And I think, again, the only thing that’s helped us so far is that this has been pretty much across the industry. Everybody has been surprised by the market growth, and so everybody has relatively been underinvesting in A&P. So our share of investment hasn’t come down, but I know we are keeping a close eye on that, making sure that we are seeing as much as possible what the market is doing and trying to anticipate that with the spending because otherwise, it’s a big missed opportunity for us. Our focus remains on top-line growth.

Got it. And then my other question was just given the shortfall in sales this past quarter. How are you doing as far as getting the pumps and the glass that you need to fulfill the Q2 and Q3 orders as they come in?

I think there are a couple of things to consider.

Michel? Michel, disturbance. When you say shortfall, first, we have published record first quarter. So, but that’s true that we could have done more if we had all the components for our inventory just to put things in perspective. So we have made some improvement in the supply chain by plans that we started a couple of years ago, which is to diversify the sourcing, especially on glass. So today for bottles we have more than one supplier per type of bottle. So we are today in a much better position than before. But still the growth was unexpectedly higher than anticipated, and that’s why in Europe, we shipped around 80% of our orders and in the U.S. 70%. It doesn’t mean that these orders are lost. It means that we will see them later on in the quarter. Michel, you wanted to add something?

Yeah. Just to build on Jean's point, if you miss a case, it doesn’t necessarily mean we have lost consumption. There is inventory in the trade, there’s inventory with our distributors, and so it’s not going to result in lost consumption. It’s something that we expect to make up.

Okay. Great. Thank you.

Thank you.

Thank you. There are no further questions at this time. I would now like to hand the call back to Michel Atwood for any closing remarks.

Thank you, Daryl. Thank you all for tuning in for our conference call. If you have any further questions, please contact Karin Daly from the Equity Group, who is our IR counsel; her telephone number and email address can be found in our earnings release. Thank you again for your time and looking forward to meeting some of you in the upcoming conferences in June.

Thank you. This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.