INTERPARFUMS INC 10-Q

Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Information Statements in this report which are not historical in nature are forward-looking statements. Although we believe that our plans, intentions and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. In some cases, you can identify forward-looking statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will” and “would” or similar words. You should not rely on forward-looking statements because actual events or results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors. These factors include, but are not limited to, the risks and uncertainties discussed under the headings “Forward Looking Statements” and “Risk Factors” in Inter Parfums’ annual report on Form 10-K for the fiscal year ended December 31, 2022, and the reports Inter Parfums files from time to time with the Securities and Exchange Commission. Inter Parfums does not intend to and undertakes no duty to update the information contained in this report. Overview We operate in the fragrance business, and manufacture, market and distribute a wide array of fragrances and fragrance related products. We manage our business in two segments, European based operations and United States based operations. Certain prestige fragrance products are produced and marketed by our European operations through our 72% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 28% of Interparfums SA shares trade on the NYSE Euronext. We produce and distribute through our European operations, fragrance products primarily under license agreements with brand owners, and European based fragrance product sales represented approximately 74% and 73% of net sales for the three months ended March 31, 2023 and 2022, respectively. We have built a portfolio of prestige brands, which include Boucheron, Coach, Jimmy Choo, Karl Lagerfeld, Kate Spade, Lanvin, Moncler, Montblanc, Rochas and Van Cleef & Arpels , whose products are distributed in over 120 countries around the world. In addition, our exclusive and worldwide license for the production and distribution of Lacoste brand perfumes and cosmetics becomes effective in January 2024. Through our United States operations, we also market fragrance and fragrance related products. United States operations represented 26% and 27% of net sales for the three months ended March 31, 2023 and 2022, respectively. These fragrance products are sold primarily pursuant to license or other agreements with the owners of the Abercrombie & Fitch, Anna Sui, Donna Karan, DKNY, Ferragamo, Graff, GUESS, Hollister, MCM, Oscar de la Renta and Ungaro brands. Substantially all of our prestige fragrance brands are licensed from unaffiliated third parties, and our business is dependent upon the continuation and renewal of such licenses. With respect to the Company’s largest brands, we license the Montblanc , Coach , Jimmy Choo and GUESS brand names. Page 15 INTER PARFUMS, INC. AND SUBSIDIARIES As a percentage of net sales, product sales for the Company’s largest brands were as follows: Three Months Ended March 31, 2023 2022 Montblanc 20 % 19 % Jimmy Choo 20 % 15 % Coach 15 % 15 % GUESS 9 % 11 % Quarterly sales fluctuations are influenced by the timing of new product launches as well as the third and fourth quarter holiday season. In certain markets where we sell directly to retailers, seasonality is more evident. We primarily sell directly to retailers in France and the United States. We grow our business in two distinct ways. First, we grow by adding new brands to our portfolio, either through new licenses or other arrangements or out-right acquisitions of brands. Second, we grow through the introduction of new products and by supporting new and established products through advertising, merchandising and sampling as well as phasing out underperforming products so we can devote greater resources to those products with greater potential. The economics of developing, producing, launching and supporting products influence our sales and operating performance each year. Our introduction of new products may have some cannibalizing effect on sales of existing products, which we take into account in our business planning. Our business is not capital intensive, and it is important to note that we do not own manufacturing facilities. We act as a general contractor and source our needed components from our suppliers. These components are received at one of our distribution centers and then, based upon production needs, the components are sent to one of several third party fillers, which manufacture the finished product for us and then deliver them to one of our distribution centers. As with any global business, many aspects of our operations are subject to influences outside our control. We believe we have a strong brand portfolio with global reach and potential. As part of our strategy, we plan to continue to make investments behind fast-growing markets and channels to grow market share. Our reported net sales are impacted by changes in foreign currency exchange rates. A strong U.S. dollar has a negative impact on our net sales. However, earnings are positively affected by a strong dollar, because above 50% of net sales of our European operations are denominated in U.S. dollars, while almost all costs of our European operations are incurred in euro. Conversely, a weak U.S. dollar has a favorable impact on our net sales while gross margins are negatively affected. We address certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments and primarily enter into foreign currency forward exchange contracts to reduce the effects of fluctuating foreign currency exchange rates. Page 16 INTER PARFUMS, INC. AND SUBSIDIARIES Impact of COVID-19 Pandemic Please see our discussion of the Impact of the COVID-19 Pandemic, which is incorporated by reference to note 2 to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2023. Recent Important Events Please see our discussion of Recent Important Events, which is incorporated by reference to note 3 to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2023. Discussion of Critical Accounting Policies Information regarding our critical accounting policies can be found in our 2022 Annual Report on Form 10-K filed with the SEC. Results of Operations Three Months Ended March 31, 2023 as Compared to the Three Months Ended March 31, 2022 Net Sales: Three months ended March 31, (in millions) 2023 2022 % Change European based product sales $ 230.3 $ 182.2 26.4 % United States based product sales 81.4 68.5 18.9 % $ 311.7 $ 250.7 24.4 % Net sales for the three months ended March 31, 2023 increased 24% from March 31, 2022. At comparable foreign currency exchange rates, net sales increased 29% from the first quarter of 2022. The average dollar/euro exchange rate for the current first quarter was 1.07 compared to 1.12 in the first quarter of 2022. The current first quarter was exceptionally strong for both European and United States based operations, as net sales increased 26% and 19%, respectively, as compared to the corresponding period of the prior year. For European based operations, our largest brands, Jimmy Choo, Montblanc and Coach sales rose 63%, 28% and 24%, respectively, as compared to the corresponding period of the prior year. Our U.S. operations also had a strong start growing 19% off a high 2022 base when first quarter sales had expanded 77%. This increase was driven by the addition and extension of Donna Karan and DKNY to our portfolio and double-digit growth for Ferragamo and Oscar de la Renta, following successful brand extensions. Page 17 INTER PARFUMS, INC. AND SUBSIDIARIES During the first quarter of 2023, we debuted Jimmy Choo Rose Passion and Montblanc Signature Absolue, which contributed to the double digit brand sales gains. Many of our mid-sized brands, including Boucheron, Ferragamo, Karl Lagerfeld, and Oscar de la Renta, also achieved double digit sales gains. Additionally, we introduced brand extensions within established lines for Abercrombie & Fitch, and MCM. After the challenging lockdowns, the progressive reopening of China buoyed the Ferragamo and Anna Sui brands. As expected, the implementation of our enterprise resource planning software weighed on our quarterly results, impacting GUESS disproportionately, which was flat off a high base in 2022, but we have strong orders that we will be fulfilling during the second quarter. However, overall our first quarter started the year on a strong note, and we look forward to executing our plans for the remainder of the year. Our brands are in high demand in a robust environment for the fragrance industry. We have a large number of brand extensions across many of our brands launching throughout the year, plus Montblanc Explorer Platinum, Coach Green and Coach Love , later in the year. In sum, 2023 has all the earmarks of another superb year as the growth catalysts currently far outweigh the headwinds, most notably limited travel retail business and supply chain disruptions. Net Sales to Customers by Region Three months ended March 31, (In millions) 2023 2022 North America $ 111.2 $ 81.5 Western Europe 77.2 63.6 Asia 46.0 42.5 Middle East 25.4 24.1 Central and South America 26.2 18.3 Eastern Europe 22.5 18.0 Other 3.1 2.7 $ 311.7 $ 250.7 First quarter sales in our largest market, North America, rose 36%, followed by Western Europe and Asia/Pacific where comparable quarter sales in both regions increased 21% and 8%, respectively. Our sales in Central and South America, Eastern Europe and the Middle East were also robust, up 43%, 25% and 5%, respectively. Additionally, our travel retail business is beginning to show signs of renewed life. Gross Profit margin Three months ended March 31, (in millions) 2023 2022 European operations Net sales $ 230.3 $ 182.2 Cost of sales 74.3 60.5 Gross margin $ 156.0 $ 121.7 Gross margin as a % of net sales 67.8 % 66.8 % United States operations Net sales $ 81,4 $ 68.5 Cost of sales 34.5 31.6 Gross margin $ 46.9 $ 36.9 Gross margin as a % of net sales 57.6 % 53.9 % Page 18 INTER PARFUMS, INC. AND SUBSIDIARIES For European based operations, gross profit margin as a percentage of net sales was 67.8% and 66.8% in the first quarters of 2023 and 2022, respectively as we have benefited from our pricing actions and favorable exchange rate. We carefully monitor movements in foreign currency exchange rates as more than 50% of our European based operations net sales are denominated in U.S. dollars, while most of our costs are incurred in euro. From a gross margin standpoint, a strong U.S. dollar has a positive effect on our gross margin while a weak U.S. dollar has a negative effect. The average dollar/euro exchange rate was 1.07 in the 2023 first quarter as compared to 1.12 in the first quarter of 2022. For United States operations, gross profit margin was 57.6% and 53.9% in the first quarters of 2023 and 2022, respectively. The significant margin expansion stems from a number of factors. Firstly, for the most part, the price increases we took early 2023 weren’t offset by a higher cost of goods given our inventory coverage and FIFO accounting. Secondly, we are seeing favorable brand and channel mix, as a higher portion of our sales are being sold directly to retailers as opposed to third-party distributors. Lastly, the significant increase in sales in the first quarter of 2023 allowed us to better absorb fixed expenses such as depreciation and point of sale expenses, as compared to the corresponding period of the prior year. As previously mentioned, supply chain disruptions affecting the procurement of components, the ability to transport goods, and related cost increases have and are expected to continue to have a negative impact on sales and gross margin. While we have been addressing these issues and have implemented processes to mitigate the impact, prolonged disruption could have a material negative effect on our sales and gross margin. Generally, we do not bill customers for shipping and handling costs, and such costs, which aggregated $3.9 million and $2.7 million for the three months ended March 31, 2023 and 2022, respectively, are included in selling, general and administrative expenses in the consolidated statements of income. As such, our Company’s gross profit may not be comparable to other companies, which may include these expenses as a component of cost of goods sold. Selling, general and administrative expenses Three months ended March 31, (In millions) 2023 2022 European Operations Selling, general and administrative expenses $ 77.3 $ 69.0 Selling, general and administrative expenses as a percent of net sales 33.6 % 37.9 % United States Operations Selling, general and administrative expenses $ 35.4 $ 28.4 Selling, general and administrative expenses as a percent of net sales 43.5 % 41.5 % For European operations, selling, general and administrative expenses increased 12.0% in the 2023 first quarter, as compared to the corresponding period of the prior year, and represented 33.6% and 37.9% of net sales in the 2023 and 2022 periods, respectively. For United States operations, selling, general and administrative expenses increased 24.7% in the 2023 first quarter, as compared to the corresponding period of the prior year, and represented 43.5% and 41.5% of net sales in the 2023 and 2022 periods, respectively. As discussed in more detail below, the increased selling, general and administrative expenses as a percent of net sales are primarily the result of increases in promotion and advertising expenditures as well as the annualization impact of the structural investments in our US operations that we made throughout 2022 in order to support the new licenses of $4.0 million. Page 19 INTER PARFUMS, INC. AND SUBSIDIARIES Promotion and advertising included in selling, general and administrative expenses aggregated $35.2 million and $34.2 million in the first quarters of 2023 and 2022, respectively, and represented 11.3% and 13.6% of net sales in the 2023 and 2022 periods, respectively. Promotion and advertising are integral parts of our industry, and we continue to invest heavily to support new product launches and to build brand awareness. We believe that our promotion and advertising efforts have had a beneficial effect on online net sales. All of our brands have benefitted from newly launched and enhanced e-commerce sites in existing markets in collaboration with our retail customers on their e-commerce sites. We also continue to develop and implement omnichannel concepts and compelling content to deliver an integrated consumer experience. We anticipate that on a full year basis, promotion and advertising expenditures will aggregate approximately 21% of net sales, which is in line with pre-COVID historical averages. Royalty expense included in selling, general and administrative expenses aggregated $24.1 million for the three months ended March 31, 2023, as compared to $19.4 million for the corresponding periods of the prior year. Royalty expense represented 7.7% of net sales for both the three months ended March 31, 2023 and 2022. Income from Operations As a result of the above analysis regarding net sales, gross profit margins and selling, general and administrative expenses, our operating margins aggregated 29.0% and 24.4% for the three months ended March 31, 2023 and 2022, respectively. Other Income and Expense Traditionally, interest expense was primarily related to the financing of brand and licensing acquisitions. However, in April 2021, we completed the acquisition of the headquarters of Interparfums SA. The acquisition was financed by a 10-year €120 million (approximately $130.5 million) bank loan which bears interest at one-month Euribor plus 0.75%. Also in 2021, approximately €80 million of the variable rate debt was swapped for variable rate debt with a maximum interest rate of 2%. The swap effectively exchanges the variable interest rate to a fixed rate of approximately 1.1%. We enter into foreign currency forward exchange contracts to manage exposure related to receivables from unaffiliated third parties denominated in a foreign currency and occasionally to manage risks related to future sales expected to be denominated in a foreign currency. Gains and losses on foreign currency transactions have not been significant. Above 50% of net sales of our European operations are denominated in U.S. dollars. Interest and investment (income) loss represents interest earned on cash and cash equivalents and short-term investments. As of March 31, 2022, short-term investments include approximately $20.7 million of marketable equity securities of other companies in the luxury goods sector. In the first quarter of 2023, the Company sold these marketable securities which generated a gain of $3.1 million. Interest and investment (income) loss for the three months ended March 31, 2023, includes approximately $3.4 million of losses on such marketable equity securities. Page 20 INTER PARFUMS, INC. AND SUBSIDIARIES Income Taxes Our consolidated effective tax rate was 23.4% and 24.4% for the three months ended March 31, 2023 and 2022, respectively. The effective tax rate for European operations was 25% for both the three months ended March 31, 2023 and 2022. Our effective tax rate for U.S. operations was 12.7% for the three months ended March 31, 2023, as compared to 20.7% for the corresponding period of the prior year. Our effective tax rate differs from the 21% statutory rate due to benefits received from the exercise of stock options as well as deductions we are allowed for a portion of our foreign derived intangible income, slightly offset by state and local taxes. Other than as discussed above, we did not experience any significant changes in tax rates, and none were expected in jurisdictions where we operate. Net Income Three Months Ended March 31, 2023 2022 (In thousands) Net income attributable to European operations $ 60,565 $ 39,776 Net income attributable to United States operations 10,343 6,515 Net income 70,908 46,291 Less: Net income attributable to the noncontrolling interest 16,840 10,992 Net income attributable to Inter Parfums, Inc. $ 54,068 $ 35,299 Net income attributable to European operations was $60.6 million and $39.8 million for the three months ended March 31, 2023 and 2022, respectively, while net income attributable to United States operations was $10.3 million and $6.5 million for the three months ended March 31, 2023 and 2022, respectively. The significant fluctuations in net income for both European operations and United States operations are directly related to the previous discussions pertaining to changes in sales, gross margin, and selling, general and administrative expenses. The noncontrolling interest arises from our 72% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 28% of Interparfums SA shares trade on the NYSE Euronext. Net income attributable to the noncontrolling interest is directly related to the profitability of our European operations and aggregated 27.8% and 27.6% of European operations net income for the three months ended March 31, 2023 and 2022, respectively. Net margins attributable to Inter Parfums, Inc. as of March 31, 2023 and 2022 aggregated 17.3% and 14.1%, respectively. Page 21 INTER PARFUMS, INC. AND SUBSIDIARIES Liquidity and Capital Resources Our conservative financial tradition has enabled us to amass significant cash balances. As of March 31, 2023, we had $238 million in cash, cash equivalents and short-term investments, most of which is held in euro by our European operations and is readily convertible into U.S. dollars. We have not had any liquidity issues to date, and do not expect any liquidity issues relating to such cash and cash equivalents and short-term investments. As of March 31, 2023, short-term investments include approximately $0.7 million of marketable equity securities. As of March 31, 2023, working capital aggregated $489 million and we had a working capital ratio of 2.4 to 1. Approximately 80% of the Company’s total assets are held by European operations, and approximately $253 million of trademarks, licenses and other intangible assets are also held by European operations. The Company is party to a number of license and other agreements for the use of trademarks and rights in connection with the manufacture and sale of its products expiring at various dates through 2039. In connection with certain of these license agreements, the Company is subject to minimum annual advertising commitments, minimum annual royalties and other commitments. See Item 8. Financial Statements and Supplementary Data – Note 12 – Commitments in our 2022 annual report on Form 10-K, which is incorporated by reference herein. Future advertising commitments are estimated based on planned future sales for the license terms that were in effect at December 31, 2022, without consideration for potential renewal periods and do not reflect the fact that our distributors share our advertising obligations. The Company hopes to continue to benefit from its strong financial position to potentially acquire one or more brands, either on a proprietary basis or as a licensee. In December 2022, we entered into a long-term global licensing agreement for the creation, development and distribution of fragrances and fragrance-related products under the Lacoste brand. This new license takes effect January 2024. Cash used in operating activities aggregated $7.4 million and $23.9 million for the three months ended March 31, 2023 and 2022, respectively. For the three months ended March 31, 2023, working capital items used $84.8 million in cash from operating activities, as compared to $73.2 million in the 2022 period. Although from a cash flow perspective accounts receivable is up 22% from year end 2022, the balance is reasonable based on first quarter 2023 record sales levels and reflects reasonable collection activity as day’s sales outstanding was 69 days, down slightly from 75 days in the corresponding period of the prior year. From a cash flow perspective, inventory levels as of March 31, 2023, increased 10% from year end 2022. Although inventories include components needed to support new product launches, the overall balance is lower than historic levels due primarily to supply chain disruptions. We have been addressing this issue since the beginning of 2021, by ordering well in advance of need and in larger quantities. Since 2021, we have strived to carry more inventory overall, source the same components from multiple suppliers and when possible, manufacture products closer to where they are sold. Cash flows provided by investing activities in 2023 reflect purchases and sales of short-term investments. These investments include certificates of deposit with maturities greater than three months. Approximately $40 million of such certificates of deposit contain penalties where we would forfeit a portion of the interest earned in the event of early withdrawal. Page 22 INTER PARFUMS, INC. AND SUBSIDIARIES Our business is not capital intensive as we do not own any manufacturing facilities. On a full year basis, we typically spend approximately $5.0 million on tools and molds, depending on our new product development calendar. Capital expenditures also include amounts for office fixtures, computer equipment and industrial equipment needed at our distribution centers. Our short-term financing requirements are expected to be met by available cash on hand at March 31, 2023, and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 2023 consist of a $20.0 million unsecured revolving line of credit provided by a domestic commercial bank and approximately $28 million in credit lines provided by a consortium of international financial institutions. There was $18 million of short-term borrowings outstanding pursuant to these facilities as of March 31, 2023 and no short-term borrowings outstanding as of March 31, 2022. In April 2020, as a result of the uncertainties raised by the COVID-19 pandemic, the Board of Directors authorized a temporary suspension of the quarterly cash dividend. In February 2021, our Board of Directors authorized a reinstatement of an annual dividend of $1.00, payable quarterly and in February 2022, our Board authorized a 100% increase in the annual dividend to $2.00 per share. In February 2023 the Board of Directors further increased the annual dividend to $2.50 per share. The next quarterly cash dividend of $0.625 per share is payable on June 30, 2023, to shareholders of record on June 15, 2023. We believe that funds provided by or used in operations can be supplemented by our present cash position and available credit facilities, so that they will provide us with sufficient resources to meet all present and reasonably foreseeable future operating needs. Inflation rates in the U.S. and foreign countries in which we operate did not have a significant impact on operating results for the three months ended March 31, 2023. Page 23 INTER PARFUMS, INC. AND SUBSIDIARIES