Interparfums Inc Q3 FY2025 Earnings Call

Greetings, and welcome to Interparfums Inc.'s 2025 Third Quarter Conference Call and Webcast. As a reminder, this conference call is being recorded. At this time, I'd like to turn the call over to Karin Daly, Vice President at The Equity Group and Interparfums' Investor Relations representative. Thank you. You may begin.

Thank you, operator. Joining us on the call today will be Chairman and Chief Executive Officer, Jean Madar; and Chief Financial Officer, Michel Atwood. As a reminder, this conference call may contain forward-looking statements which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from projected results. These factors may be found in the company's filings with the Securities and Exchange Commission under the headings Forward-Looking Statements and Risk Factors. Forward-looking statements speak only as of the date on which they are made, and Interparfums undertakes no obligation to update the information discussed. Interparfums' consolidated results include two business segments: European-based operations through Interparfums SA, the company's 72% owned French subsidiary; and United States-based operations. It's now my pleasure to turn the call over to Jean Madar. Jean?

Thank you, Karin. Good morning, everyone. Following the trend we observed in the second quarter, sales continued to decrease in the third quarter as macroeconomic conditions remain uncertain. We are focusing more on innovation throughout our portfolio, emphasizing product enhancements and new launches that align with the changing preferences of consumers globally. These initiatives are supported by strong advertising and promotional efforts that enhance brand awareness, increase consumer engagement, and bolster our competitive stance. As we reported last month, third quarter and year-to-date sales grew by 1% in both periods, with sales from our European operations rising by 5% for the first quarter, benefiting from last year’s growth and a stronger euro against the dollar. In contrast, U.S.-based operations experienced a 5% decline in sales during the third quarter, excluding Dunhill. Our largest brand, Jimmy Choo Fragrance, saw a 16% increase in sales this quarter, primarily due to the success of the I Want Choo fragrance line and Jimmy Choo Man. Additionally, Coach fragrance sales grew by 6% from the previous quarter, thanks to its established lines and the introduction of Coach Gold, while Montblanc fragrance sales slightly decreased due to a phase of innovation, and Lacoste fragrances are on track to reach $100 million in sales this year. In the first 9 months of 2024, U.S.-based operations sales rose by 11% with the inclusion of Roberto Cavalli in our brand portfolio, setting a high bar for the year. Looking ahead to 2025, we plan to leverage this newer brand through the successful launch of Serpentine, a new feminine fragrance from Cavalli. We are also observing increased consumer demand in adjacent categories for Donna Karan fragrances, such as deodorants. We launched new products late in the third quarter that will primarily support fourth quarter sales for our U.S.-based operations. These include La Mia Bella Vita for GUESS, Sublime Leather from Ferragamo, two new DKNY extensions, a new Roberto Cavalli subcollection called Marbleous, and the Just Cavalli duo, Give Me Magic, along with Abercrombie & Fitch Fierce Reserve. We initiated Phase 3 of the Fierce rollout in May to new markets, including the U.K., and launched both Fierce and Fierce Reserve at nearly 50 different locations. We expect to see continued momentum as we expand the brand’s reach. The third quarter marked an important milestone for us with the launch of our first ultra-luxury direct-to-consumer offering, the Solférino collection. Our flagship store opened in Paris' luxury district, and we are forming selective partnerships with about 40 retail stores, rolling out the brand strategically. By next September, we aim for 100 stores, with a goal of product placement in 500 stores by the end of 2030. As we refine our expertise in luxury and artisanal fragrance, we will apply the insights we gain to enhance and serve other brands in our portfolio. We invite you to explore the passion behind Solférino on our fully owned, direct-to-consumer website. Fragrance sales are growing across digital platforms as e-commerce has firmly established its presence. According to Euromonitor, fragrance accounts for nearly 50% market share within the beauty category on Amazon. We see similar positive trends as our e-commerce platform continues to perform well. Our presence on Amazon is robust, while Divabox and TikTok Shop enable us to promote and sell smaller products, enhancing our visibility to consumers seeking affordable luxury. The influence of social media significantly drives traffic and sales on Amazon. Another notable but smaller channel for us is travel retail, which grew by 13% in the third quarter compared to last year, supported by Lacoste, Jimmy Choo, Coach, and GUESS among others in our portfolio. The popularity of our products among traveling consumers is helping secure more shelf space at duty-free locations. We expect to see further growth in our travel retail business moving forward. Regarding our operations, we continuously seek ways to enhance efficiencies and streamline our supply chain to manage cost pressures and support long-term growth. We have confidence in the recent steps we have taken, including transitioning to 100% third-party providers for packing, shipping, warehousing, and order fulfillment, which we expect to complete by the end of the year. We are also shifting our manufacturing closer to where certain U.S. products are sold, particularly those produced in Europe and other regions. These operational improvements will help us remain agile amidst ongoing geopolitical or macroeconomic challenges while maintaining strong service levels. On the matter of tariffs, our position remains largely unchanged from three months ago. We have implemented many strategies to mitigate the expected impact of imports into the United States. Our strategic supply chain initiatives have been effective, and our final step involves adopting a more cost-effective approach using the first sale rule for finished goods imported into the U.S. that are made in Europe by our European operations. This will require further IT development, which we anticipate to complete by the second quarter of 2026. As previously mentioned, we began implementing pricing actions in August, and we are starting to see their effects. Early indicators suggest that these higher prices will help mitigate rising input costs, though we may still see some gross margin erosion. We are also observing rising prices in the fragrance and cosmetic market, particularly in the U.S., where unit prices increased by an average of 5.9% in the third quarter, up from 1.2% at the end of June. In September, average unit price increases reached 7.2% across the industry, indicating a 5% to 6% pricing mix reaching consumers, which may slow overall growth. It's important to note that we have only raised prices on select brands, mostly in prestige and luxury categories, as consumers of lifestyle brands tend to be more price-sensitive. Overall, our 2% average price increase will continue to be effective through the end of the year and into 2026. We do not plan to make further pricing adjustments unless there is a significant market change. Regarding inventory, some retailers are employing AI and other tools to optimize their stock levels. Despite growth in store-level sales, we have not yet seen a corresponding increase in new orders as sell-through rates surpass sell-in rates. However, we are prepared to act swiftly to ensure retailers have our products available for replenishment. Before handing it over to Michel, I am pleased to share some exciting news. Women's Wear Daily has recognized Interparfums as the Beauty Company of the Year in the Public Company category. This acknowledgment is a true testament to the strength of our brands, the creativity of our teams, and the lasting relationships we have built with fashion houses, distributors, and retailers globally. I was honored to accept this award on behalf of our dedicated team and leadership, and I look forward to continuing to explore new ideas and shape the fragrance industry with all of you. Now, I will pass it over to Michel.

Thank you, Jean, and good morning, everyone. As reported, we delivered net sales of $430 million for the third quarter, resulting in a 1% increase for both the 3 and 9 months ended September 30, 2025. The impact of foreign exchange aided our top line performance, contributing to 2 points of growth in the third quarter and 1% on a year-to-date basis. But the stronger euro also increased our cost base in the rest of the P&L and our balance sheet. Organic sales, excluding FX and Dunhill, declined 1% in the third quarter but rose 1% for the first 9 months of the year. Gross margin for the first 9 months expanded by 80 basis points to 64.4% from 63.6% during the prior year period. This was driven by favorable segment, brand and channel mix in the first 9 months of 2025. In the third quarter, however, gross margins declined by 40 basis points to 63.5%, as these favorable tailwinds were more than offset by the impact of higher tariffs on our U.S. imports, which represented about $6 million for the quarter. Although we implemented price increases and also tariff interventions, these price increases happened later in the quarter and only had a minor benefit on the results for the quarter. If we exclude the tariffs, gross margins would have improved by 100 basis points. SG&A expenses as a percentage of net sales were 38.2% and 42.4%, respectively, for the third quarter and first 9 months of 2025 as compared to 38.9% and 41.8% for the prior year periods. The decrease during the quarter and increase year-to-date reflect a more even distribution of A&P activities over the course of 2025, which totaled $66 million or 15.3% of third quarter sales and $186 million or 16.9% of year-to-date net sales, respectively. We continue to invest in A&P activities ahead of our growth and in line with our expected sellout trends, and we will continue to do so in the fourth quarter. Overall, consolidated operating income and margin improved for both the quarter and year-to-date compared to prior year periods. Operating income was $109 million for the quarter, a 2% increase, resulting in an operating margin of 25.3% or a 30 basis points expansion from prior year. On a year-to-date basis, operating income increased by 2% to $243 million, with an operating margin of 22% or 10 basis points improvement versus prior year. Now looking below the operating line. We reported a loss of $7.7 million for the first 9 months of 2025. This is pretty close to what we had last year, where we had a loss of $7.1 million. The year-over-year change primarily reflects a couple of factors. First, we have higher losses on foreign currency. We lost $4.6 million compared to $3.1 million in the prior year period. And as you know, the significant swings in the euro exchange rate throughout the year have helped our top line, but have led to larger than usual FX losses. The second factor was the impact on marketable securities, where we recorded a loss of $2.5 million in the first 9 months of 2025 compared to a loss of $800,000 in the first 9 months of 2024. Conversely, and thanks to the strengthening cash positions, changes in interest expenses and interest income were favorable year-over-year with net interest expenses of $1.8 million during the first 9 months of this year as compared to a net interest expense of $2.9 million in the prior year period. Our consolidated effective tax rate on a year-to-date basis was 23.5%, down 20 basis points from 23.7% in the prior year period as we benefited from a one-time favorable tax gain of $2 million in the quarter following a positive outcome from prior year tax assessments. Essentially, it was a mutual agreement procedure that we successfully got through. These factors, combined with our disciplined execution and cost management, led to third quarter net income of $66 million or $2.05 per diluted share, which is a 6% increase over last year's third quarter. For the first 9 months of the year, net income is consistent at $140 million, with diluted earnings up modestly $0.02 to $4.36. Moving to our two business segments, starting with European-based operations. As Jean pointed out, net sales rose 5% and 6% on a reported basis and 1% and 4% on an organic basis for the first 3 and 9 months ended in September. Gross margin was 66% for the quarter and 66.6% year-to-date compared to prior year periods of 66.2% and 66.3%. The slight quarterly decline reflects tariff impacts on our European operations, which were partially offset by pricing gains in the United States and favorable brand and channel mix. While SG&A expenses increased 1% and 5% for the quarter and year-to-date, respectively, SG&A as a percentage of net sales declined by 110 basis points and 40 basis points, respectively. A&P expenses totaled $44 million for the quarter and $133 million on a year-to-date basis, representing 15% and 17% of net sales. Overall, net income attributable to European operations as a percentage of net sales exhibited strong growth, with net income margin expanding 230 basis points for the quarter and 50 basis points for the year. Turning to our United States-based operations. Net sales declined by 5% and 6%, excluding the phaseout of Dunhill for the 3 and 9-month period. The phaseout of Dunhill Fragrances was completed in August 2024, so at this point in time we've completely lapped that event. Gross margin declined by 110 basis points in the third quarter due to transitional tariff impacts and brand and channel mix, but expanded by 80 basis points to 59%, largely due to the discontinuation of the low-margin Dunhill sales that impacted the prior year period. On the SG&A side, SG&A decreased 4% for the quarter and 2% for the year as we put in place strong cost containment measures. However, SG&A as a percentage of net sales rose to 39.7% and 44% for the first 3 and 9-month periods, reflecting the lower sales. A&P expenses represented 16% of net sales for the quarter and year-to-date basis, representing $21 million and $53 million, respectively. Overall, net income attributable to United States operations declined 14% to $21 million for the quarter and 20% to $39 million year-to-date, primarily reflecting these lower sell-in. At September 30, our balance sheet remains strong with $188 million in cash and cash equivalents and short-term investments and working capital of $688 million. Accounts receivable was up 3% from last year's third quarter, slightly ahead of growth driven by channel mix and foreign exchange. We continue to have a strong collection activity. We've also made meaningful progress on inventory management this quarter. Inventory levels as of September 30, 2025 decreased 6% from 2024 third quarter as we remain focused on executing on our inventory reduction strategy. The composition of our inventory has also improved with a higher mix of finished goods relative to components. This shift positions us well to continue to drive inventory efficiencies as we get into the year-end. By effectively managing our working capital in line with sales, year-to-date operating cash flow increased $68 million, up $18 million from the prior year period, reflecting 38% of net income compared to $50 million or 28% of net income in the same period last year. Obviously, cash always is higher in the run-up until the last quarter of the year and should get better at the end of the year. We also took advantage of our stronger cash position and the recent drop in the stock price to continue our share repurchase program. Year-to-date, we have repurchased $7.5 million in shares and will continue to evaluate additional share repurchases if the stock price remains below what we believe is the intrinsic value. As we have communicated in the past, our fully owned French subsidiary, Inter Parfums Holding SA, essentially an empty shell, will merge into our French subsidiary, Interparfums SA, which is a public entity. Since IPH hasn't conducted any business, we do not expect this merger to have any material impact on our shareholders. Following the completion of the merger next month, our company, Interparfums Inc., will continue to own roughly 72% of Interparfums SA, but this will now be a direct ownership as opposed to an indirect ownership and will simplify our corporate structure. Moving to our current year guidance, and as per our earnings release yesterday evening and reflective of current market dynamics and year-to-date trends through September, we are refining our full year 2025 outlook. We now expect sales of approximately $1.47 billion, representing 1% year-over-year growth, and diluted earnings per share of $5.12, which is in line with 2024. Additionally, while we will provide more formal full year 2026 guidance on Tuesday, November 18, we currently anticipate moderate top and bottom line growth in that year, generally in line with what we are seeing this year. We anticipate a return to stronger growth in 2027, driven by enhanced innovation, including the development and distribution of our newest licenses, Off-White, Longchamp, as well as Goutal. While demand has moderated in several international markets, our core business and fundamentals remain strong. We have a robust pipeline of innovation, enduring partnerships with global distributors and retailers and a resilient consumer base. Overall, we remain confident in the strength of our business model and our ability to deliver sustainable performance and long-term value, as we have for more than four decades.

Our first question comes from Ashley Helgans with Jefferies.

This is Sydney on for Ashley. Just curious if you can share a little bit more about what you're seeing heading into holiday maybe that gives you confidence or caution there? And then in terms of the price increase, I would love to hear what feedback you guys received from retailers as well as the consumers. Any extra color there would be helpful.

I can try to answer on the holiday, what do we see for the holiday. We had a strong October. We continue to sell gift sets in October. Gift sets will arrive in stores in November or December. And our forecast for November is also quite strong. So it means that retailers are continuing to buy. The inventory at store level is not high. We are monitoring this in department store on a daily basis. Amazon sales are starting to pick up. But of course, this type of purchase will be done in the last two weeks of the year. So this year, we are not worried for the holiday season. Pricing, the second part of your question is about pricing. We took a very modest pricing compared to other companies. And it was, I will say, quite well accepted. We didn't increase prices across all our brands. We selected the most prestige, the most elevated. This is where we think there is more elasticity. And we did not increase prices on the more democratic lines that we have or the more lifestyle brands that we have in the portfolio. But we didn't see too much resistance, either from retailers, nor our consumers.

Yes. To elaborate on what Jean mentioned, it was anticipated that the impact of tariffs would result in some costs being passed on to consumers. We've observed this trend, especially in the U.S. during the third quarter. Year-to-date through June, our unit pricing, which reflects pricing, mix, and other factors, increased by about 1.2% compared to the previous year. In the third quarter, we saw a significant acceleration, with unit pricing rising close to 6%, and nearly 7% in September. There has definitely been a substantial amount of pricing action taken, though it's selective across different brands. Overall, we still see a slight growth in unit sales, approximately 1%. Therefore, the market growth this quarter is primarily driven by pricing.

That's helpful. If I can maybe just poke one more in there. And apologies if I missed, but there was some talk last quarter about just shipment timing maybe shifting between Q3 and Q4. Maybe I missed if you guys mentioned kind of where that ended up shaking out?

Michel?

I mean, we've certainly seen a little bit less holiday sets being sold into the third quarter relative to what we normally see. And we have seen some of that pick up during the month of October, but it isn't significant. I think the main thing here, really, Sydney, is that we continue to see a bit of a disconnect between sell-in and sell-out there. There are continues to be a couple of points difference. The markets are still up. The market actually in the U.S. for the third quarter was up 7% and is up 4% on a year-to-date basis. So consumption remains very, very healthy. We're just seeing continuing to see a small disconnect of a couple of points between sell-in and sell-out. And not only for us, but also for our competitors. I'm sure you've all seen all of our competitors have now published their earnings. And pretty much everybody, with the exception of maybe Coty, which was an outlier on the way down, and Estée Lauder, an outlier on the way up. Everybody has been hovering around 2%, which is pretty consistent in what we posted. So overall, I think we are seeing at a macro level, this continued destocking that's impacting us. By the way, this isn't any different than what we're doing as well because if you look at our inventories, our inventories are also down as we're trying to get more efficient with our inventory. And of course, everybody is basically doing that.

Our next question comes from the line of Susan Anderson with Canaccord Genuity.

I guess maybe if you could just talk about kind of looking out over the next 2 years, you have a number of new brands rolling out. I guess, how should we think about just that growth profile in terms of what will be driving the growth? Do you think that the combination of these new brands, I guess, how much growth are you expecting them to drive as well as just continuing to grow your existing brands, whether that be the smaller ones or the larger ones?

Yes. I can try to answer. So when you look at the portfolio today, we have added three important licenses or purchases of trademarks. One is Off-White, and we will see sales of Off-White in 2027. We also purchased the business of Annick Goutal, which is a prestige line of fragrance, and you will start seeing some business in 2026, but more in 2027. More important, I think the largest potential is with the license that we signed with Longchamp. Longchamp is a great bag manufacturer. As you know, we have a great journey with Coach. We think that Longchamp has a great brand territory that we can exploit for fragrances. Longchamp could be a $100 million business in 3 to 5 years. That's what we are doing. So 2026 will be, I would say, modest because the growth will be modest as we will be working for the important launch at the end of 2026 and beginning of 2027. Michel?

Yes, I would also mention that we have added a significant number of large brands over the past few years, including Cavalli, Donna Karan, Lacoste, and Ferragamo. Currently, the brands we've integrated are substantial and experiencing growth, but unfortunately, the smaller brands in our portfolio are holding us back. Therefore, we will need to continue refining the portfolio to concentrate on the larger brands that will drive more sustainable business growth in the future.

Okay. Great. And then...

We're still seeing that GUESS, Coach, Jimmy Choo and Montblanc can go at a good pace.

And maybe if I could just add one more on the model. I guess for the fourth quarter, how should we think about gross margin now that the price increases have flowed through? I think you said if it wasn't for the tariffs, third quarter would have been better by 100 basis points. So I guess should we expect that to be fully offset now in the fourth quarter on the gross margin front?

It's a great question. We've done a really good job realigning our supply chain and addressing tariffs. One major issue that takes significant time is managing the European imports into the U.S., which constitutes a substantial business for us. We've faced tariffs that have reached as high as 15%, in addition to a standard 10%. Reducing the impact of these tariffs through the first sale rule will take some time, as Jean mentioned in the prepared remarks. This will continue to affect us in the fourth quarter and the first quarter of next year, but I expect conditions to improve in the second quarter. Therefore, I anticipate that gross margins may slightly decline, likely around 50 basis points, similar to what we experienced in the third quarter.

We've reached the end of our question-and-answer session. I'd like to turn the call back over to Mr. Atwood for any closing remarks.

All right. Thank you very much, and thank you, all, for joining our call today. With this being our final conference call of the year, Jean and I extend our warmest wishes for a safe and joyful holiday season and a healthy and fulfilling new year. I would like to mention that we will be hosting the Canaccord Genuity team at our corporate headquarters on December 4 for their annual Beauty Bus Tour. If you would like to participate, please feel free to reach out to the Canaccord Genuity team. If you have any additional questions, please contact Karin Daly from The Equity Group, our Investor Relations representative. And thank you, and have a great day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.