Interparfums Inc Q2 FY2024 Earnings Call

Greetings. Welcome to the Inter Parfums 2024 Second Quarter Earnings Call and Webcast. As a reminder, this conference is being recorded. I would now like to hand over the call to Karin Daly, Vice President at the Equity Group and Inter Parfums Investor Relations Representative. Thank you. You may begin.

Thank you, Sherri, and good morning, everyone. 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 in its 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, consolidated results reflect the company's two business segments. European-based operations through their 72% owned French subsidiary, headquartered in Paris, Inter Parfums SA and United States-based operations through their wholly-owned subsidiaries headquartered in New York. It's now my pleasure to turn the call over to Jean Madar. Jean, you may begin.

Thank you, Karin. Good morning, everyone, and thank you for joining today's call. The fragrance market continues to grow but at a more modest pace than the rapid acceleration that followed the peak of the pandemic. We achieved record second quarter sales of $342 million, which comes as no surprise, as we are spacing our launches to minimize potential cannibalization within our portfolio and investing more time and money back into our industry and brands through our advertising and promotion structure. Our method is well-balanced as we are working with top-tier brand ambassadors and influencers in addition to traditional media, including print, targeted ads and product reviewers. Luxury fragrances are highly valued and sought after by younger generations, often influenced by celebrities in entertainment and sports with greater attention to superior ingredients. On the subject of celebrity and ambassadors, we have engaged award-winning singer and songwriter John Legend as the face of the Montblanc Legend fragrance line. Couldn't find a better ambassador. John Legend will front all five fragrances in the Hero collection and will remain on board for at least the next extension in January 2026. John Legend representing the Legend franchise, it doesn't get better than that. Jimmy Choo named Chinese actress and singer, Victoria Song as its global brand ambassador and the face of the brand, I Want You fragrance line. Victoria has been the face of the Jimmy Choo brand since 2018. And now, as the brand's fragrance line model will benefit from a significant following and impressive presence on global social commerce platforms. Finally, Coach has expanded its partnership with Boston Celtics for Jayson Tatum, who will now be the newest face of the Coach for Men's fragrance line, following the Celtics Championship win; Tatum also joined Team USA in the 2024 Olympics. Tatum automatically and inspirationally embodies the brand image and empowers the courage to be a real story in celebration of self-expression. Moving on, first half sales in our largest market, North America rose by 5% with strong momentum across all channels. Retail sellout is performing exceptionally well and online channel growth is continuing. Western Europe and Asia-Pacific followed where comparable half-year sales increased 11% for Western Europe and 6% for Asia. Central and South America sales growth was exceptional at 26%, thanks in great part to Lacoste fragrance sales, while our sales in the Middle East and Africa rose by 8%. Additionally, the travel retail business continued to surge after seeing an increase in both leisure and business travel earlier this year. To date, travel retail increased 20% from the prior year period, representing 8% of net sales. Longer-term, we target approximately 10% of net sales to be from travel retail on an annual basis. While our business is down in Eastern Europe in the first half due to sourcing constraints from the first quarter, there have been recent signs of improvement, and the second quarter was broadly in line with the prior year period. Furthermore, our business is purposely and gradually shifting towards retailers particularly in France, Italy, and the U.S., where we can achieve higher levels of gross margin. Simultaneously, we are affording heavy investments in our vast team of distributors as they are key contributors to our business. As part of our strategy, we plan to continue to make investments behind growing markets and channels to increase our market share, including specialty store Sephora and Ulta, retailers like Macy's, Saks Fifth Avenue, and Nordstrom, and of course, e-commerce through Amazon. Our Italian affiliate is performing favorably serving as a distribution hub for all of the brands in our portfolio, particularly with the addition of direct European distribution through Amazon. Online sales had a competing start, not only in Italy but also in France, Germany, and Spain. We are leveraging our successful U.S.-based e-commerce experience to roll out a winning Amazon strategy to capture sales across the rest of Europe. Our newest brands, Roberto Cavalli and Lacoste are doing well and exceeding the pace of growth we targeted. While the first half of 2024 was primarily related to supplying our fragrance products to the market, we expect the brand to scale even further in the second half and into 2025. While we are and will remain primarily a licensed fragrance business, we are also in the advanced stages of the development of our own luxury fragrance collection through our French subsidiary, Inter Parfums S.A. named Solférino Paris. This fragrance assortment will honor and celebrate Paris in the French Art de vivre with a planned launch in 2025. The collection of 10 fragrances is being created by master perfumers and will be supported by upscale merchandising and highly selective exclusive distribution. Looking at the balance of the year, we have a number of brand expansions planned, including a new fragrance duo from Karl Lagerfeld, an extension of Moncler, and two new fragrances within the Van Cleef & Arpels Collection Extraordinaire. For Lacoste, we soft-launched a men's blockbuster fragrance called Original in Paris in June and since, we expanded internationally. This fragrance is a tribute to the 1984 fragrance of the same name marking the first collaboration between Lacoste and Inter Parfums. Additionally, we will introduce a wild wonder collection. We will also introduce a new collection for MCM and also new extensions for Hollister and a new line of payments for debt, and also Roberto Cavalli signature. We recently unveiled the new DKNY blockbuster fragrance called DKNY 24/7 that launched in select markets at the end of the second quarter and will undergo full-scale distribution next month. As we announced, discussions have been underway in 2023 with a view to renewing the license agreement with Van Cleef & Arpels. We have been managing the fragrance brand since 2006, and appreciate the vote of confidence the brand owner Richemont has placed in us through the nine-year extension of our partnership. The new agreement will tighten the selective distribution of Van Cleef & Arpels worldwide and with special and limited edition extensions play into the ultra-luxury category. The fragrance market is continuing on the path of mid-single-digit growth and here at Inter Parfums, we are well prepared and aim to surpass the pace of the market. We are committed to our retailers, distributors, brands, and consumers, and we will continue to serve their fragrance appetite with a well-balanced pipeline of new product launches across our prestige portfolio. I will now turn the call over to Michel for a more detailed financial review.

Thank you, Jean, and good morning, everyone. Since we reported record second quarter sales last month, I will focus on profitability, which was a second quarter record as well with net income of $37 million and $1.14 per diluted share. On a consolidated basis, gross margin expanded by 360 basis points for the current quarter and 50 basis points for the first half. The gross margin expansion in the second quarter was driven by our European-based operations where gross margin improved by 570 basis points due in part by favorable segment geographic and channel mix as well as the one-time inventory reserve made in the prior year. Excluding the inventory reserve in the base, gross margin expanded by 250 basis points in the second quarter, partially offsetting the unfavorable mix we saw in the first quarter. On a consolidated basis, we expect 2024 gross margins to be broadly in line with 2023, which, if you recall was just under 64%. Our teams have been working on executing our A&P strategy to support our established brands and maintain the momentum of our two new brands. Our A&P spending aggregated 19.4% and 17.2% of net sales in the second quarter and the first half of 2024 compared to 17.6% and 14.5% for the corresponding period in the prior year. Now that we are balancing our A&P expense throughout the year, we will continue to work toward our target A&P spend of 21% of net sales. We fell short of 21% in the past few years because of higher-than-expected sales. We are building brand awareness to support sustainable future growth, and we are already seeing the benefits of our A&P strategy on our results. Also included in SG&A expenses, royalty expense represented just under 8% of net sales in the quarter and the amortization of the cost of the Lacoste license, which amounted to $3.2 million during the first half of 2024 will continue over the 15-year life of the contract. These items together amounted to higher levels of SG&A expense as expected for both the second quarter and the first half of 2024, representing 45.6% and 43.6% of net sales, compared to 43.1% and 39.6% of net sales in the prior year periods, respectively. For these reasons, our second quarter operating margin was 18.9%, both in line with our expectations and a continuation of a return to a more normalized level compared to post-pandemic-related surges. As we reported yesterday, below the operating line, first half net income was depressed by $1.5 million in other expenses versus a $2.8 million gain in other income in last year's first half. The main driver of this swing stems from the one-time realized gain of $3.1 million recognized in 2023 related to the sale of marketable securities compared to an unrealized loss of $600,000 in 2024. From a cash flow perspective, accounts receivable is up 24% from year-end 2023. The balance is reasonable based on the record second quarter sales levels and the seasonality of the business. Days sales outstanding was 72 days, slightly down from 73 days at the end of 2024 first quarter. Our inventory levels at mid-year increased 19% from year-end 2023 in support of our overall sales growth seasonality as well as the inventory buildup required by the inclusion Lacoste and Roberto Cavalli licenses to support the launches of these brands. We continue to actively work on programs to deliver more inventory efficiency without compromising on business growth and service levels and are targeting to maintain inventory dollars in line with the prior year by December 2024. We closed the quarter with a healthy balance sheet with working capital of $525 million, including $77 million in cash and cash equivalents and short-term investments. Our long-term debt, including current maturities was $137 million at the end of the second quarter. Once again, we are reaffirming our 2024 guidance of net sales of $1.45 billion implying mid-teen growth in the second half of this year. This results in earnings per diluted share of $5.15, which sets a new record for our company. It took four years for Inter Parfums to hit $1 billion in sales. In just two years, we are nearly halfway to our second billion. While we are observing some slowdown in the global fragrance market, it remains healthy, and we believe that the tailwinds continue to outweigh the headwinds in our business and across the industry. However, some of the trade destocking we have observed in the first half, coupled with the ongoing conflict in Eastern Europe encourages us to remain prudent with our full-year outlook. With that, operator, please open the line for questions.

Thank you. Our first question is from Oliver Chen with TD Cowen. Please proceed.

Hi, Jean Madar and Michel, thanks for your time, and congrats on great results. Jean Madar, on the own brand opportunity, what do you see ahead for that? It sounds pretty exciting, and you have a lot of capabilities. What may happen longer-term? Also, as we look at Asia-Pacific, it's been a tougher macro environment in China, and there are a lot of concerns, which are outside of your control with the economic situation. Just would love your thoughts on what you're seeing with that customer and your travel retail momentum continues to be really strong. And Michel, one for you. You called out trade destocking and some slowdown. What channels or geographies are you most concerned about as you highlighted that? Thank you.

We have been developing our own brand for over a year and a half, and we plan to launch it next year. It's a low-cost initiative aimed at a niche market. We noticed a trend towards premium products in the fragrance industry, which led us to create a line of 10 products priced over $100 or even $150. This line, called Solférino, is entirely original and not under license. We intend to introduce it in a limited number of stores, specifically chosen anchor stores in Europe, the U.S., and Asia. We have conducted tests on the fragrances and are quite confident in our offering. Initially, the distribution will be small, but it's important for us to establish a presence in this high-end market. We have experience in the luxury fragrance space, particularly with Van Cleef, and we have recently renewed our license with them. We want to leverage this knowledge for our new line. Regarding your second question about Asia and travel retail, is that correct?

Yes, in China as well. Thank you.

In China.

Our sales in China for the first half of the year have shown improvement, roughly around 20%. However, this figure could be misleading since it comes from a comparison with a period when sales were lower. We're still noticing some sluggishness in China, particularly on the e-commerce platforms where 70% of our business occurs, as well as at Sephora where our brands are available. In Henan, there hasn't been any noticeable improvement yet, but we recognize that the situation in China can change quickly. We are planning for next year to introduce a full collection tailored for Asian and specifically Chinese customers under the MCM line. Overall, travel retail is performing well, with a 20% increase in business last quarter. While some of our brands are doing well, others could perform better. Our goal is to achieve 10% of our sales from travel retail, and currently, we're at about 7% or 8%, indicating room for growth. That's all from my end. Michel?

Yes. So Oliver, if you look at the first quarter, really, we're seeing a significant destocking. The situation has improved in the second quarter, and we are starting to see sales kind of catch-up. But if you look at the U.S., for example, our NPD sales are growing around 6% to 7%, whereas our sell-in was more around 5%. So we do see a small gap there. And there are a few markets also in Europe, I'd say, particularly like the UK, where the market is doing very well. Market is up about 10%. But our distributor probably bought a little bit more inventory last year, expecting that market to pick up and so they're seeing some destocking as well from the trade. So those are some of the markets where we're seeing this. I'd say a few European markets as well as the U.S. But it is definitely getting better. What we're seeing is in July, the orders have really, really picked up, and we had a very, very strong month of July as we start to sell-in our gift sets for the holiday season.

I think we had, correct me if I'm wrong, I think we had a record July, right?

Yes, I believe so. We're still finalizing the figures for July, but we should be very close to setting a record, if not surpassing it.

Yes. So we see some strength in the market. A lot of stores are reordering, so we are optimistic for the second half.

One quick follow-up, very helpful. The gross margins were also impressive. Michel, what is the relative contribution between segment geographic and channel mix? Any details you can provide as we model that going forward? Thank you.

Thank you. The main factor contributing to our improvement this quarter is the excess and obsolescence reserve we set aside last year in the second quarter related to Moncler. The initial launch did not perform well because it coincided with COVID, and we ended up with more inventory than necessary. This resulted in a $6.2 million excess and obsolescence reserve last year, which has distorted our comparisons. Excluding that, the margins have improved by about 1.5 points, reflecting changes in our channel mix that negatively impacted gross margins in the first quarter but have been offset now. Our business essentially consists of two segments: direct sales to retail in France, Italy, and the U.S., and sales to distributors in other regions, which can lead to significant differences in gross margins between the two. Growth is primarily occurring outside these core markets, driven largely by Lacoste, which is not currently available in the U.S. I hope that clarifies the point.

Yes. Very helpful. Thanks regards.

Yes.

Hello, Linda.

I was wondering if you could provide more insight into the relationship with Richemont and the renewal of Van Cleef. You mentioned tighter distribution would be for the future; does that mean tighter, less, or broader distribution? Also, could you clarify what Richemont is doing? I believe it relates to Cartier internally, but they are allowing you to manage Van Cleef. Thank you.

I don't have all the answers, but let me try. For Van Cleef, we will be focusing on tighter and smaller distribution while continuing to sell to select accounts. Our goal to grow the business is to sell more in these stores. We plan to build more fixtures and take more space at department stores. This is our strategy for growth, and it is working. We are not just discussing perfume; we are referring to traditional high-end perfumery at high price points. Customers prefer not to see these products in too many retail locations, which is why we are maintaining exclusivity. Our relationship with Richemont is outstanding. We have Montblanc, one of our largest brands, along with Van Cleef. It is a positive sign that they renewed this license that was up for renewal at the end of the year. Richemont holds the licenses and manages the fragrance for Cartier, but they also own Chloé, which is licensed to Coty. They own Montblanc and Van Cleef, with Interparfums handling the licenses. They also manage Cartier internally. They seem to be comfortable with this multi-faceted relationship. Again, I want to emphasize that our relationship with Richemont is excellent. Michel, do you want to add something?

No, no. I think you built, so yes.

Great. Can I also ask, it seems like this year is a little bit more a year of extensions of brands and things like that. Do you have more major launches like new pillars and self-plan for 2025?

Yes. In 2025, we'll have more launches than this year for sure. But this year, we have been able to introduce a blockbuster for Lacoste, which was not easy just after one year of signing the contract; we will have a major launch for Jimmy Choo, but that's true that 2025 will have more blockbusters than this year.

Okay. Thanks. That's all from me. Take care.

Thank you.

Yes.

Thank you for taking our question, and congrats on the nice quarter. So just to start, fragrance has remained very strong, like in the U.S., up 12% year-to-date. Maybe you can just talk about some of the underlying drivers and then just how sales trends tracked throughout the quarter by month? And then I just have one more, too. We continue to see many travel size products to kind of outpace the traditional fragrance market. In your view, is this a sign of a trade down? Or is this just more of a signal that consumers are looking to engage with prestige fragrance. Thanks.

Michel, you want to start?

Yes, the market started off very strong in the U.S., with high double-digit growth in the first half of the first quarter. We have seen some slowdown, with the market growing about 7% to 8% in June. There's been some variability in growth, with some months showing higher increases and others slower. However, many retailers remain optimistic as we approach the holiday season, and the orders incoming have been robust. Overall, we feel comfortable with our sales performance. We've sold a bit less than what we typically expect, primarily because retailers are focusing on new products and have budget constraints. With our pace of innovation not matching last year's, we've likely ordered less. We believe that once consumer purchases increase, retailers will follow suit, and our strong sales in July reflect this trend. Regarding smaller sizes, there doesn't appear to be any significant trade down. Instead, more consumers seem interested in the category, with an increase in penetration. Many might start with smaller sizes as a way to sample before moving to larger ones, so we don't view this as a trade-down strategy but rather a sampling approach. The market remains very healthy.

Yes. I totally agree. I will not call this a slowdown. I will call it more of landing or soft landing; we still see a lot, a lot of interest from the consumer. I think that if we are able to attract and keep this customer with interesting products, interesting smells, they will respond very well. Of course, we saw some extraordinary numbers after COVID—things that the industry has not seen for years and years. But I see the interest. I see the momentum still here. Maybe the numbers will be in high-single or mid-single digits. But we think that there is still a huge opportunity because the customer is here and willing to try. Talking about trying, I think that the small sizes are great sampling. We participate in a lot of programs of small sizes, and they work well. People come back, they like it, and they have a big size.

Hey good morning, team. Thanks for taking the question and congrats on the quarter. I'd like to touch on your expectations for the back half in terms of the top-line cadence. It sounds like a lot of the growth has been and will be driven by innovation and new product launches. Historically, I think a lot of us have been misaligned with our modeling in terms of those new launches. So could you walk us through how we should be thinking about the cadence over the back half? And then, also as you look toward 2025, what kind of comp dynamics should we be aware of given the launch timeline? Thank you.

Yes. Thanks, Korinne, for your question. At this point in time, we're looking for, I would say, a pretty balanced growth between quarter three and quarter four, maybe a little bit more in quarter three than quarter four. But broadly, we're looking for mid-single digits for the second half, and it should be pretty equally balanced. For next year, if you look at our growth this year, you can pretty clearly see that a big chunk of our growth has come from the new brands. Lacoste and Cavalli, not to say that the other brands haven't performed well, but they have slowed down a little bit relative to the others as we focus more attention on Lacoste and Cavalli. But at this point in time, we are expecting mid-single digits for our core brands.

Yes, yes, mid-single digits for the core business. Of course, Lacoste and Cavalli will grow much faster because we are only at the beginning. This is what we think we can expect going forward.

Great. That's very helpful. Thank you. And then on the A&P spend and the SG&A for the remainder of the year, any color you can provide on Q3 versus Q4? And then how you're thinking about that spend shaking out over the longer term, if there's any change in your spending intentions going forward? Thank you.

We have been spending significantly more in the fourth quarter and spending less overall. We plan to continue increasing our expenditures compared to last year in the third quarter. Similar to the first half of the year, we're up about 28% on a year-to-date basis, and we expect to maintain that pace in the third quarter. However, we anticipate that the fourth quarter will likely be flat compared to the previous year in terms of dollars.

Yes. Hi. First question I had was on the ad spending, what's a good timeline to recognize that this new structure, spending equally or almost equally per quarter is working versus your historical ad spending?

I think it's quite fast. We see it already. We are spending more evenly than before. So this helps the sell-through. That's why, like Michel said, our sell-out was stronger than our sales team for the first six months of the year. Michel?

Yes. I mean at the end of the day, there are a lot of different pieces that come into play here to drive the ROI. There is also the pace of innovation. As you know, our pace of innovation has been a little slower in the first half. I think that it is our A&P investments that have actually enabled us to continue to grow the business. I think definitely, to Jean's point, the ROI is clearly there.

And my other question is that you already own the Rochas brand and have been selling it and now you're in with your own different brand altogether. How are the two different? And what have you learned from there that you're applying differently to this new brand line that you think will work better?

You want me to take that, Jean?

Yes.

Yes. I think it's a very different model. If you look at Rochas, Rochas is a brand we acquired. It's primarily focused in France and in Spain, that's where the bulk of the business is. It's more of a prestige brand. The Solférino brand will be more of a high-end luxury brand, designed to actually compete against the niche fragrances in this category. Of course, we're going to be bringing all of our scale and knowledge of the fragrance category, the power of our distribution, which should enable us to build up distribution more rapidly than somebody that's entering this category on their own. Ultimately, it's really a very different business model.

Yes. I would like to add that the thing that Rochas and Solférino have in common is that we are not paying royalties. We are not paying royalty on sales. This allows us to reinvest more into A&P. Royalties typically are 8% to 9%. So we have an extra 8% to 9% extra budget that we have to position this product in the store. This is quite helpful.

Great. And my last question was going to be, is there any risk here to future licensing deals not going your way because you have the Solférino brand?

I don't think so. Solférino is an initiative that the company took because we saw the need, especially in Asia, for the brands that are less commercial, that have less name recognition where inside of the bottle, what we put in the bottle is more important than the name. It's in reaction to a demand for products that are not commercial. I don't think our licensors will be unhappy if we are successful. It's a different—I don't want to say it's a different model, but we do not compete with Solférino; we do not compete with any of our designer or fashion houses.

Yes. I would also add, all of our competitors have entered this segment. Coty has recently launched their own brand. L'Oreal has made moves as well. But yes, all our competitors have entered the segments and are playing in this segment, and it's not really a concern.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Michel Atwood for closing remarks.

All right. Well, thank you again all for joining our call today. Before I end the call, I'd like to just announce a few upcoming events. In September, I will be joining Piper Sandler in Nashville and Wells Fargo in Dana Point. If you're interested in attending these events, please reach out to their respective sales representatives. We'll also be hosting our Annual Shareholder Meeting here in New York at our offices on September 17. If you have any additional questions or interest in joining us for our Annual Shareholder Meeting, please contact Karin Daly from the Equity Group, our Investor Relations Representative. Her telephone number and email address can be found in our most recent earnings release. We look forward to the next conference call. Thank you, and have a good day and a great summer.

Thank you, everyone.

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.

Thank you.