Interparfums Inc Q1 FY2024 Earnings Call

Hello, and welcome to the Inter Parfums First Quarter 2024 Conference Call and Webcast. 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.

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 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, 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.

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. 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, sometimes even 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. 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. 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 compared to the prior year. Western Europe grew sales by 10%. However, 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. 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 increases 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. Over time, GUESS could become a top three fragrance brand in our portfolio. For the fashion house duo, Donna Karan/DKNY, we strategically launched their first scent, Cashmere Collection, in alignment with the Fashion House Luxury Fashion campaign, which led to enormous growth in the quarter. We achieved further expansion by several 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 extensions for the Jimmy Choo I Want Choo and Roberto Cavalli Signature lines. Multi-scent collections for GUESS fragrances 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 the 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, as does Inter Parfums. We are committed to providing retailers and consumers with new fragrance experiences to serve their senses, curiosity, and fragrance needs. 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. Now I will turn the call over to Michel for a more detailed financial review.

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 call 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. 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. 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 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 our gross margin. I'm going to touch on SG&A. SG&A increased to 41.5% of net sales compared to last year's 36.1%, primarily due 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. This represented 14.9% of sales versus 11.3% in the prior year period. First, as we all know, we're driving strong sell-in and sell-out for our newest brands, Lacoste and Cavalli, and we're filling the shelf space Jean mentioned earlier. These two brands have excellent growth potential. 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 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 six 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% 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 the 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 than the corresponding period in the prior year. We continue to see strong collection activity and do not anticipate any issues with collections given our long history and strong partnerships 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. Notably, 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 project EPS growth of 11% versus the full year 2023. With that, operator, please open the line for questions.

Our first question is coming from Linda Bolton-Weiser from D.A. Davidson.

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?

Michel?

Yes. We are anticipating double-digit growth in the second quarter, which is linked to the changes we talked about between the first and second quarters. Currently, we expect to see double-digit growth not only in the second quarter but also in the following quarters for the rest of the year. Regarding gross margin, as you know, we experienced a significant charge last year in the second quarter due to excess and obsolescence, which will not be an issue anymore. We are projecting a notable improvement in gross margins in the second quarter and for the remainder of the year. While we anticipate some slight increases in gross margin at this time, you should expect that the one-time gain we had in the second quarter will not recur, and we will normalize for the rest of the year, ultimately achieving a gross margin similar to that of 2023.

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 the first quarter to the second quarter?

We expect that was about between 2 and 3 points.

We expect that was about between 2 and 3 points of growth.

2 to 3 points of growth.

I was wondering if you agree with Coty, which mentioned that the global Prestige fragrance market saw accelerated growth in the first quarter, reaching mid-teens growth worldwide. Additionally, do you have any insights on how your point of sale performed compared to the market during that period?

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

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

I cannot agree with Coty. We experienced double-digit growth in many significant regions, particularly in the U.S. during the first quarter. Germany, Italy, and France also saw substantial double-digit growth. There may be a slowdown ahead, but we have observed strong numbers for the first three months.

Yes, I confirm we have experienced double-digit growth in the U.S. The NPD growth for the quarter was up by around 16%. We have also seen low double-digit growth in most of the major European markets including Germany, the U.K., Italy, and Spain. France recorded low single-digit growth. Overall, the market remains strong across all key European markets.

Great. And then just my last question is on pricing. You alluded to potential positive price increases in the second half. I mean Coty is really talking about being very targeted, 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?

No, I can try. We are hesitant to raise prices. We believe that some products or specific lines could allow for a price increase, but we approach this in a very focused manner. Compared to other competitors, Inter Parfums has not significantly increased prices. We still have the flexibility to do so. Overall, for our Prestige fragrances, our retail prices are lower than the competition, so we have room for adjustments. We don't want to establish this as a standard practice, and we don't anticipate that all our brands will see a price increase, but certain products definitely will.

Our next question is coming from Korinne Wolfmeyer from Piper Sandler.

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?

Michel?

When you take over a brand, there's already a pipeline in place. The product is listed, and typically, this is mainly a replenishment of consumption. However, when taking over a brand, you evaluate the market, and there might be new distribution opportunities. Currently, we are ahead of budget for both brands and feel confident about achieving $90 million for the year, with a possibility of finishing even higher.

Great. Regarding the Middle East, last quarter you expressed some caution which influenced the guidance you provided. You mentioned there was a slight decline during the quarter. Was this in line with your expectations? Did it perform worse or better than anticipated? How should we view that region moving forward?

What we see in the Middle East was in our budget. We projected a certain softness in this region because of the geopolitical tension. But we are more optimistic for the second half of the year regarding the region. We think that sales in the important Saudi Arabia and Emirates and surrounding countries will pick up in the second half.

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 four 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 impact your operating margin expectations over the next couple of quarters?

Yes, that's a great question, Korinne. I've been quite clear that we want to steer clear of the issues we've faced in previous years when higher sales didn't allow us enough time to invest in marketing and see a return. We have incorporated more upfront spending in our financial plans to gain momentum. The market is strong and our brands are performing well with exciting innovations. The goal is to leverage this by increasing upfront spending. To answer your question, historically, we spent about 40-45% of our advertising and promotional budget in the last quarter. This time, we are aiming for approximately 35%, with the spending more evenly distributed over the second and third quarters. The first quarter will remain lighter in terms of spending, as we need to rebalance our budget.

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

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 of 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 midway through last year.

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

Yes, Ashley. The majority of the inflation in the cost of goods was observed in 2023, largely due to rising energy costs, which increased the price of glass bottles, especially in Europe. We weren't particularly surprised to see some of these costs surface. Typically, we maintain around nine months of inventory, so some of this will be reflected moving forward. In recent quarters, this cost inflation was somewhat obscured by our faster growth in direct business in the U.S., which has been outpacing other segments. While the costs are significant, we remain confident that we will meet our gross margin targets for the year, staying relatively flat compared to last year. We always anticipated some cost inflation. I'll let Jean discuss the pricing aspect.

Yes, thank you for asking this question because Inter Parfums has been very careful about price increases over the last 18 months. Whenever possible, we avoided raising prices, and I believe that was the right decision. Some brands do want to be positioned at a more premium level, like Van Cleef and Ferragamo. For certain products and brands, we see an opportunity to adjust retail prices, but this is not a broad increase like other companies.

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

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

Jean, do you want to take that?

Michel?

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. 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 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. We've had advertisements like Brad Pitt and stuff like that. You don't necessarily need product newness to keep the brands fresh. You need strong heroes, and that's one of the things we're clearly trying to build. If you look at some of our larger brands, we are building strong hero pillar lines that we can leverage and build over time. Newness can impact the pipeline. 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.

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 do every year, or every three years. 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 extensions. This is the nature of the business. You have existing heroes in the portfolio. Every year, we come up with extensions and novelty and, of course, different ideas for spring and Christmas season. I don’t say that we are dependent. This is the way we build our model.

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?

No.

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 ten years, and they're still there and they still grow.

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?

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

Yes. Overall, as you know, Hamed, most of the advertising and promotion has shifted into the digital space. Every brand has a different consumer, and we try to tailor that. But most of our advertising and promotion is in digital. We've just basically put in more GRPs and spent more dollars as opposed to spending on new avenues.

Yes, absolutely. Nothing to add.

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.

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

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.