Inter Parfums Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 8 speakers on the call.

Operator

Hello, and welcome to the Inter Parfums First Quarter 20 24 Conference Call and Webcast. As a reminder, this conference is being recorded. It's now my pleasure to turn the conference over to Karen Daly, Vice President at The Equity Group and InterProFoam's Investor Relations representative. Please go ahead, Karen.

Speaker 1

Thank you, Kevin. Joining us on the call today will be Chairman and Chief Executive Officer, Jean Madar and Chief Financial Officer, Michelle 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 headings Forward Looking Statements and Risk Factors in their most recent annual report on Form 10 ks. Forward looking statements speak only as of the date on which they are made and Interpark Foods undertakes no obligation to update the information discussed.

Speaker 1

As a reminder, our consolidated results reflect 2 business segments, European based operations and United States based operations. Certain Prestige Fragrance products are produced and marketed by their European based operations through their 72% owned French subsidiary, Interparfums S. A. When they refer to the U. S.-based operations, Interparfums is talking about their wholly owned subsidiaries.

Speaker 1

It is now my pleasure to turn the call over to Jean Madar. Jean, you may begin.

Speaker 2

Thank you, Karen, and good morning, everyone, and thank you for joining today's call. I have spent much of the last 3 months of the year traveling the world to meet with distributors, manufacturers, retailers and boutiques. And the recurring message I hear is that the momentum in the fragrance market continues. That holds true for our business where strong sell in and sell out as well as continued premiumization are gratifying facts. While sell out was excellent in the Q1, even sometime higher than sell in, we are already seeing increased demand and sales acceleration starting in the Q2 as the month of April can attest to.

Speaker 2

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 Q1 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 Q1 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 $25,000,000 in sales.

Speaker 2

These fragrances were well received by retailers. In fact, we were able to maintain 90% of shelf space for these brands during the transitional developmental period. Early results are very encouraging. And with the addition of new fragrances, our 2024 goal of €90,000,000 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.

Speaker 2

And I would like to say that he revolutionized Italian fashion and defined glamour 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 path 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 sellout remains strong, growing double digit in comparison to prior year. Western Europe grew sales by 10%, but Eastern Europe is understandably declining in sales due to temporary sourcing constraint, which led to sales shifting from the Q1 to the Q2.

Speaker 2

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.

Speaker 2

And with my views in line with industry trends, we are increasing our budget for travel retail. Sales for our 2 largest brands, Montblanc and Jimmy Choo, declined during the Q1 after their respective 28% 63% sales growth in the 2023 Q1. Coach, Guess and Donakaran achieved sales increase of 5%, 21% and 44%, respectively. Coach fragrances remain in high demand with established lines for both men and women. For GUESS, the combination of legacy scents and the debut of our newest fragrance GUESS Iconic, led to another quarter of significant sales growth.

Speaker 2

As such, over time, Guess? Could become a top 3 fragrance brand in our portfolio. And for the fashion house duo, Donna Karan DKKNY, we strategically launched the new 4th Sand Cashmere collection in alignment with the luxury fashion campaign, which led to the enormous growth in the quarter. We also achieved further expansion by several of our midsized brands, including Van Cleef and Arpels, MCM and Kate Spade with 25%, 15% and 12% sales growth, respectively. As we mentioned in our earnings release yesterday, we have an ambitious launch strategy planned for the balance of 2024, including blockbuster fragrances for DKNY and Lacoste and extension for the Jimmy Choo I Want Shoe and Roberto Cavalli Signature lines.

Speaker 2

Multi scent collection for Guess' flankers are coming to market this spring, followed in the fall by a new member of the WOMO men's fragrance family. Furthermore, extension for Hollister and Ferragamo Senorita 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.

Speaker 2

We also launched Phase 2 of a distribution rollout for Abercrombie and Fitch Cheers 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 Altaepaise moved further up the industry ranks according to Women's Wear Daily Annual Beauty Top 100 issue published last month, in which we placed number 30, up from 3340 in 20232022 respectively. That is a nice accomplishment considering we are a pure play fragrance company scored against companies that also sell cosmetics, skincare, home fragrance and hair care along with fragrances. So for me, the fragrance market remains very dynamic and as is Inter Parfums.

Speaker 2

We are committed to providing retailers and consumers with new fragrance experiences to serve their senses, curiosity and fragrance wardrobe. We have great brands including 2 new ones, a well balanced pipeline of new product launches and we are operating in a prestige and luxury market that remains robust. So now, I will turn the call over to Michel for a more detailed financial review. Michel?

Speaker 3

Thank you, Jean, and good morning, everyone. Yesterday, we reported net sales of $324,000,000 during the Q1 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.

Speaker 3

The 2024 Q1 was in line with our expectations from a sales perspective. There are a few moving pieces that I would like to discuss today on today's calls that led to the 24% decline in net income. Firstly, gross margins eroded by 260 basis points on an overall basis due to unfavorable segment, geographic and channel mix within our European based operations. We also increased our trade spending to support the business, which was an integral part of our strategy given the limited number of fragrance we introduced earlier this year. There was also modest cost inflation in 2023 for purchases made in Europe due to higher energy costs.

Speaker 3

And while this has subsided with the FIFO accounting method, we must use the older higher cost components in our inventory purchased at a premium. Fortunately, these margin impacts are non recurring and have lifted. And as we go forward in 2024, we expect 2024 gross margins to be broadly in line with 2023 as we've explained previously, and we will consider potential moderate price increases in the second half of the year if needed. Within our U. S.-based operations, gross margins increased to 58.7 percent of net sales, primarily driven by favorable brand and channel mix.

Speaker 3

We have increased our sales directly to retailers as opposed to 3rd party distributors due to our growing U. S. Direct to retail business. The increase in sales has allowed us to continue to absorb more fixed expenses such as depreciation and point of sale expenses as compared to the prior year period. So that covers off our gross margin.

Speaker 3

I'm going to touch on SG and A. So SG and A increased to 41.5 percent of net sales compared to last year's 36.1%. And this is due primarily to our increased investments in advertising and promotion, which aggregated 48,300,000 dollars 35,200,000 in the Q1 of 20242023, respectively. And this represented 14.9% of sales versus 11.3% in the prior year period. So a couple of points I wanted to make regarding these numbers.

Speaker 3

First, as we all know, we're driving strong sell in and sell out for our newest brands, La Costa and Cabali, and we're able to fill the shelf space, Jean mentioned earlier. These two brands have excellent growth potential and to capitalize on that potential, we invested in advertising and promotional programs to drive those legacy fragrance lines. We also invested in new programs in preparation for the new products we are currently developing. For the year, we have again budgeted our A and P spending to be 21% of net sales. However, in 2024, as I've previously explained on many occasions, we are spending we are spreading our A and P investments somewhat more evenly over the quarters to build brand awareness and to drive a competitive age and sustainable growth going forward.

Speaker 3

The incremental investments made in the last 6 months are paying off as we are seeing healthy sellout in store, as explained by Jean with the double digit growth in consumption in the U. S, for example. Royalty expenses totaled 8.4% during the current quarter, up from 7.7% 1 year earlier. This is largely driven by brand mix. The amortization of the cost of the La Coste licenses accounted for $1,600,000 during the Q1 of 2024 and will continue over the life of the contract, which is 15 years.

Speaker 3

As a result of these investments, our operating margin for 2024 Q1 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 530,000,000 dollars including approximately $100,000,000 in cash and cash equivalents and short term investments, resulting in a working capital ratio of 2.8:one. Our long term debt, including current maturities, was $145,000,000 at the end of the current Q1 compared to 174,000,000 dollars in March of 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 prior year from year end 2023.

Speaker 3

The balance is reasonable based on sales levels and the seasonality of our business. The days sales outstanding was 73 days, only modestly higher from the corresponding period in the prior year, and we continue to see strong collection activity and do not anticipate any issues with collections given our long history and strong partnership with our retailers and distributors. Inventory levels are up 9% from year end 2023, as expected, since we have consistently been building our inventory since 2021 and the additional inventory buildup from producing goods for La Costa and Cavalli. Before I turn it back to the operator for Q and 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.

Speaker 3

We expect to achieve 10% annual sales growth to $1,450,000,000 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 Q1, and we are expecting double digit growth in the second half. This should lead to an 8% increase in earnings per diluted share of $5.15 Of note, included in our guidance, the Lacoste non cash amortization expense of the acquisition cost is expected to reduce our 2024 EPS by approximately $0.11 Excluding this impact, we are projecting EPS growth of 11% versus the full year 2023. With that, operator, please open the line for questions.

Operator

Certainly. We'll now be conducting a question and answer session. Our first question is coming from Linda Bolton Weiser from D. A. Davidson.

Operator

Your line is now live.

Speaker 4

Yes, hi.

Speaker 2

So Hi, Linda.

Speaker 4

Hi. I would just like to get a little more color on cadence among the quarters just so we get it more right, I guess, for the Q2. Because the prior year comparison sales growth is really high too in the Q2. So the comparison does not get easier. So in the Q2, do you anticipate a little bit higher year over year growth of sales or lower or even flat sales?

Speaker 4

Or maybe you could give a little color. And then also the gross margin, I would think, wouldn't move up sequentially from the Q1. Can you give a little color on that? Thank you.

Speaker 3

Yes. So Linda, we are expecting double digit growth in the second quarter. It's related to also some of the shifts that we discussed between the first quarter and the second quarter. But at this point in time, we are expecting double digit growth in the second quarter and also in the subsequent quarters for the balance of the year. For the gross margin, as you know, we have a significant we had a significant charge last year in the second quarter for excess and obsolescence, which goes away.

Speaker 3

And from there, we are so there will be 2nd quarter. And for the balance of the year, again, we are expecting I mean, the bulk of the gain will come in the 2nd quarter. And for the balance of the year, there'll be some marginal at this point in time, marginal increases in gross margin. But again, for the whole year, we're projecting, if you're modeling this out, should assume that the one time gain, the one time charge we had in the Q2 will go away. And then we'll kind of normalize for the balance of the year to get to roughly the same gross margin as in 2023.

Speaker 4

Thank you. 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 Q1 to Q2?

Speaker 3

We expect that was about between 23 points.

Speaker 4

2 to 3 points percentage points of growth?

Speaker 3

2 to 3 points of growth.

Speaker 4

Of growth. Okay. And then I was curious about Cody actually really specifically said that they felt the global Fragrance Prestige Fragrance market had accelerated in growth in the Q1 to mid teens growth globally. Are you kind of in agreement with that? And do you have any sense for how your POS performed relative to the market in the Q1?

Speaker 2

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

Speaker 5

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

Speaker 2

I tend to agree with Coty. We have a double digit growth in many, many important regions, U. S. For sure in the Q1, Germany, Italy, France, for sure growth of double digit. Maybe it will slow down in the but we have seen a robust numbers for the 1st 3 months.

Speaker 2

Michel?

Speaker 3

Yes, yes, definitely. I confirm. We have seen double digit growth in the U. S. I think the NPD growth for the quarter was up, I think, 16%, if I'm not mistaken.

Speaker 3

And we've also seen seen low double digit growth for most of the larger European markets like Germany, the UK, Italy, Spain. I think France was low single digits. But yes, overall, I think the market continues to be very strong in all of the key markets and key European

Speaker 4

markets. Great. Thank you. And then just my last question is on pricing. You alluded to positive potential price increases in second half.

Speaker 4

I mean, Cody is really talking of being very targeted, very specific, seemingly more reluctant, I guess, to take pricing. So I'm wondering, do you think this would have some negative effect for you to take pricing as competitors or not or

Speaker 2

any comment? No, we are I can try. We are also reluctant to increase prices and we think that certain products for certain lines could have a price increase, But we do it in a very targeted way. We have not under Parfums comparing to the other competitors have not increased a lot pricing. So we still have room.

Speaker 2

And in general, our retail I'm talking about prestige fragrances, our retail price are below the competition. So we still have room. We don't want to make it a rule. We don't think that all our portfolio will have a price increase, but certain products will do differently. Talk to you.

Operator

Thank you. Our next question is coming from Corrine Wolfmeyer from Piper Sandler. Your line is now live.

Speaker 6

Hey, thanks. Good morning. I'd like to first touch on the Lacoste and Cavalli sales. I think you said it was about $25,000,000 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?

Speaker 6

I think previously you've quantified both of them as maybe $90,000,000 for the year. Is that still intact or are we tracking ahead of that? Thanks.

Speaker 2

You said?

Speaker 3

Yes. So Karim, when you take over a brand, there's already pretty much a pipeline that's out there. The product, the brand is listed. And so essentially, this is really replenishment of consumption in most cases. Now obviously, when you take over a brand, you assess the landscape and there might be additional distribution opportunities.

Speaker 3

But we'd say at this point in time, we're on both brands, we're ahead of budget for the time being. And we feel pretty confident about that $90,000,000 for the year and hopefully even finish a little higher.

Speaker 6

Great. Thanks. And then on the Middle East, last quarter that was a point of caution for you and a reason behind the guidance that you laid out. And I think what you said it declined a little bit in the quarter. Was that in track or in line with your What

Speaker 2

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

Speaker 6

Great. And then if I could squeeze in one more. Michel, I believe you talked a little bit about spreading out that A and P spend over the 4 quarters versus the typical seasonality we see. How should we be thinking about that? Is it really going to be more balanced?

Speaker 6

Are we still going to see some heavier spend in the back half? And then how does this play into your operating margin expectations over the next couple of quarters? Thanks.

Speaker 3

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

Speaker 3

We've got great innovation. So really the idea is to capitalize on that and to front spend. To answer your question, we have historically probably spent 45% of our A and P or 40% of our A and P in the last quarter. We're going to continue to have pretty high spending, but we're looking more for about 35% of our spending. And then it'll be spread out a little bit more evenly over Q2 and Q3.

Speaker 3

So Q1 will continue to always be a lighter quarter in terms of spending. I think our spending was really, really, really low and we needed to rebalance that.

Speaker 6

Great. Thanks so much. Thank you.

Operator

Thank you. Our next question today is coming from Ashley Helgans from Jefferies. Your line is now live.

Speaker 5

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

Speaker 5

Thanks.

Speaker 2

Michel, you want to answer the first

Speaker 3

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

Speaker 3

So some of this stuff kind of will be coming through. I think in the last couple of quarters, it was hidden by the fact that our we had there's also some, I would say, channel mix and our U. S. Business is growing much faster. As you know, we have more direct business in the U.

Speaker 3

S. So the gross margins are higher there, and that part of the business is growing a lot faster. So it was kind of hiding a bit of some of that cost inflation that was kind of making its way. So not really a surprise. I know it's a big number, but at this point in time, we're still very confident that we're going to hit our gross margin numbers for the year and be more or less flat versus prior year.

Speaker 3

We're always expecting some cost inflation. And in terms of and I'll let Jean basically cover off, I don't know if that covers off your question on COGS and then I'll hand off to Jean on the pricing piece.

Speaker 2

Yes. I think we have to yes, thank you for asking me this question because Inter Parfums has been very, very careful about the price increase in the last 18 months. Whenever we could avoid the price increase we did. And I think we did the right thing. But that's true that certain brands wants to be positioned at a more premium level.

Speaker 2

I'm thinking of Van Cleef, I'm thinking of Ferragamo. So this is where we think we have for certain products and certain brands the possibility to adjust retail price. But it's not at all an overall price increase like other people do.

Speaker 5

Great. Thanks so much.

Speaker 2

Thank you.

Operator

Thank you. Next question is coming from Hamed Khorsand from BWS Financial. Your line is now live.

Speaker 2

Hi. So Hello, Hamed.

Speaker 3

Hello, Hamed. Hi.

Speaker 7

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

Speaker 2

Jean, you want to take that? Yes.

Speaker 3

Overall, it's a great question, Amit. Overall, it's about balance, right? I mean, obviously, this is an industry where you have a pretty high pace of innovation. And newness is important. And you need to have a good balance of newness to keep the brand fresh.

Speaker 3

This being said, newness can come in different ways. I always use the great example of Chanel No. 5. It's been out there for 50 years and it's been able to stay fresh, not necessarily with product newness, but with commercial newness. And we've had advertisements like Brad Pitt and stuff like that.

Speaker 3

So you don't necessarily need product newness to keep the brands fresh. You need strong heroes and that's one of the things that we're clearly trying to build. And if you look at some of our larger brands, we are building strong hero pillar lines that we can leverage and build over time. And now newness can have some impacts on pipeline and you and that typically where it comes out. But in the form of consumption, I think you can certainly build your brands up with a good product and a strong brand without necessarily having a massive amount of newness, but you need to keep the brand fresh.

Speaker 3

Jean?

Speaker 2

Yes, yes. I totally agree. We need to have a balance. Sometimes it's quite subtle, it's a balance between heroes, blockbuster, new pillars that we for each brand we do every, I would say, every 3 years. But every year, we have in order to keep the leanness and the novelty, we have to add line extensions or what we call in our language, flankers.

Speaker 2

But we this is the nature of the business. So you have in the portfolio existing heroes. And every year, we come up with the extension and novelty and of course, different gift sets for spring and Christmas season. But I don't say that we are dependent to this is the nature of the business. This is the way we build our model.

Speaker 7

Okay. So you're not really seeing a consumer 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?

Speaker 2

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 10 years and they still sell and they still grow.

Speaker 7

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

Speaker 2

Michel, you want to answer regarding the amount of No,

Speaker 3

I mean overall, yes, I mean overall, as you know, Ahmed, most of the advertising and promotion has shifted into the digital space. I mean, we typically every brand has a different prime prospect and a different consumer, and we try to tailor that. But most of our advertising and promotion is in digital. And we've just as opposed to as opposed to spending on new avenues, Sean?

Speaker 2

Yes, absolutely. Anything to add?

Speaker 7

Great. I appreciate it. Thank you.

Speaker 2

Thank you.

Operator

Thank you. 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.

Speaker 3

All right. Well, thank you for joining our call today. Before I end the call, I would like to announce a few upcoming events. I will be both in Chicago and Milwaukee later this month with Piper Sandler, and Jean will be in Grasse with Jefferies at the end of the month. And in June, I will also be in Nantucket with the Jefferies at their annual consumer conference.

Speaker 3

If you're interested in attending these events, please reach out to your respective their respective sales representatives. If you have any additional questions, please contact Karen Daly from The Equity Group, our Investor Relations representative. Her telephone number and email address can be found on our most recent earnings release. We look forward to the next conference call. And thank you again, and have a great day.

Operator

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

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