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, 2023, and the reports Inter Parfums files from time to time with the Securities and Exchange Commission (“SEC”). 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 prestige 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 based 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 Euronext. We produce and distribute fragrance products through our European based operations primarily under license agreements with brand owners, and European based fragrance product sales represented approximately 70% and 74% of net sales for the three months ended March 31, 2024 and 2023, respectively. We have built a portfolio of prestige brands, which include Boucheron, Coach, Jimmy Choo, Karl Lagerfeld, Kate Spade, Lacoste, Lanvin, Moncler, Montblanc, Rochas and Van Cleef & Arpels , whose products are distributed in over 120 countries around the world. Our exclusive and worldwide license for the production and distribution of Lacoste brand perfumes and cosmetics became effective in January 2024. Through our United States based operations, we also market fragrance and fragrance related products. United States based operations represented 30% and 26% of net sales for the three months ended March 31, 2024 and 2023, 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, Emanual Ungaro, Ferragamo, Graff, GUESS, Hollister, MCM, Oscar de la Renta and Roberto Cavalli 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, GUESS, Donna Karan/DKNY and Ferragamo 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, 2024 2023 Montblanc 18 % 20 % Coach 15 % 15 % Jimmy Choo 15 % 20 % GUESS 10 % 9 % Donna Karan/DKNY 6 % 4 % Ferragamo 3 % 4 % 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, the United States, and Italy. We grow our business in two distinct ways. First, we grow by adding new brands to our portfolio, through new licenses, or other arrangements or outright 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. The 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 and stored directly at our third-party fillers or received at one of our distribution centers. For those components received at one of our distribution centers, based upon production needs, the components are subsequently 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 greater than 50% of net sales of our European based operations are denominated in U.S. dollars, while almost all costs of our European based 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 Recent Important Events Please see our discussion of Recent Important Events, 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, 2024. Discussion of Critical Accounting Policies Information regarding our critical accounting policies can be found in our 2023 Annual Report on Form 10-K filed with the SEC. Results of Operations Three Months Ended March 31, 2024 as Compared to the Three Months Ended March 31, 2023 Net Sales: Three months ended March 31, (in millions) 2024 2023 % Change European based product sales $ 231.0 $ 230.3 0.3 % United States based product sales 95.8 81.4 17.6 % Eliminations (2.8 ) — — $ 324.0 $ 311.7 3.9 % Net sales for the three months ended March 31, 2024 increased 4% from the three months ended March 31, 2023. At comparable foreign currency exchange rates, net sales increased 3% from the first quarter of 2023. The average dollar/euro exchange rate for the current first quarter was 1.09 compared to 1.07 in the first quarter of 2023. The current first quarter saw modest sales growth, as compared to the corresponding period of the prior year, largely due to the exceptional performance of both European and United States based operations in 2023. For European based operations, Coach grew sales by 5% while Montblanc and Jimmy Choo saw decreases in sales of 5% and 23%, respectively, as compared to the corresponding period of the prior year. This was largely driven by the substantial increases in sales of Montblanc and Jimmy Choo in the first quarter of 2023 of 28% and 63%, respectively, as compared to the first quarter of 2022. During the first quarter of 2024, we began selling the Lacoste brand, which added $20 million in sales. Sales by our United States based operations had a strong start growing 18% off a high 2023 base when first quarter sales had expanded 19%. This increase was driven by the addition and extension of Roberto Cavalli to our portfolio and double-digit growth for GUESS and Donna Karan/DKNY, following successful brand extensions and continued brand expansion. Page 17 INTER PARFUMS, INC. AND SUBSIDIARIES During the first quarter of 2024, we debuted Montblanc Legend Blue, which contributed to the continued brand strength as our largest brand. Additionally, during the first quarter of 2024, we debuted the Donna Karan Cashmere Collection , which helped the brand to see double digit growth. Many of our mid-sized brands, including Van Cleef & Arpels, Kate Spade and MCM, also achieved double digit sales gains. Additionally, we introduced brand extensions within established lines for Abercrombie & Fitch and Anna Sui. While our first quarter grew more moderately than the first quarter of 2023, we are confident in our future as we look forward to executing our plans for the remainder of 2024. Our brands are in high demand in a robust environment for the fragrance industry, and we have many exciting developments planned for the Company. We have a large number of brand extensions across many of our brands launching throughout the year, including a new flanker for the I Want Choo line planned for the second quarter of 2024, plus the first launch of an Interparfums developed blockbuster fragrance for Lacoste, later in the year. Additionally, there is a new flanker for Roberto Cavalli Signature and a new DKNY blockbuster fragrance planned for the second half of 2024. In sum, 2024 has all the earmarks of another superb year as the growth catalysts currently far outweigh the headwinds. Net Sales to Customers by Region Three months ended March 31, (In millions) 2024 2023 North America $ 108.1 $ 111.2 Western Europe 85.1 77.2 Asia/Pacific 51.8 46.0 Central and South America 34.4 26.2 Middle East and Africa 27.1 28.6 Eastern Europe 17.5 22.5 $ 324.0 $ 311.7 First quarter sales in Western Europe rose 10%, followed by Asia/Pacific and Central and South America where comparable quarter sales in both regions increased 13% and 31%, respectively. Our sales in North America decreased slightly by 3% as the first quarter of 2023 saw large increases due to the new product launches previously discussed. While our sales in North America saw minimal decreases, the region is still strong and is our largest region across the Company. Additionally, our travel retail business is continuing to show signs of renewed life. Eastern Europe was adversely impacted by sourcing constraints in certain countries which resulted in sales shifting from the first quarter into the second quarter of 2024. Page 18 INTER PARFUMS, INC. AND SUBSIDIARIES Gross Profit margin Three months ended March 31, (in millions) 2024 2023 European based operations Net sales $ 231.0 $ 230.3 Cost of sales 83.2 74.3 Gross margin $ 147.8 $ 156.0 Gross margin as a % of net sales 64.0 % 67.8 % United States based operations Net sales $ 95.8 $ 81.4 Cost of sales 39.6 34.5 Gross margin $ 56.2 $ 46.9 Gross margin as a % of net sales 58.7 % 57.6 % The Company’s gross profit margin as a percentage of net sales was 62.5% for the three months ended March 31, 2024 as compared to 65.1% for the three months ended March 31, 2023. The decrease was driven by unfavorable segment, geographic and channel mix, as well as increased trade spending to support our business in the absence of significant innovation. We also incurred slight cost inflation on the raw materials we purchased in 2023. We expect many of these adverse impacts to be non-recurring and should normalize over the balance of the year. For European based operations, gross profit margin as a percentage of net sales was 64.0% and 67.8% in the first quarters of 2024 and 2023, respectively. European based operations were impacted by geographic and channel mix, as well as increased trade spending to support the business in the absence of significant new innovation in the first quarter of 2024. Additionally, cost inflation impacts on raw materials purchased in Europe were more significant as energy costs rose in the region. We expect many of these adverse impacts to be non-recurring and should normalize over the balance of the year. For United States based operations, gross profit margin as a percentage of net sales was 58.7% and 57.6% in the first quarters of 2024 and 2023, respectively. Similar to 2023, gross margins continued to expand behind strong cost containment efforts as well as a more favorable brand and channel mix, as a higher portion of our sales are being sold directly to retailers as opposed to third-party distributors. Additionally, the significant increase in sales in the first quarter of 2024 allowed us to continue to absorb fixed expenses such as depreciation and point of sale expenses, as compared to the corresponding period of the prior year. Generally, we do not bill customers for shipping and handling costs, and such costs, which aggregated $2.5 million and $3.9 million for the three months ended March 31, 2024 and 2023, 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. The improvement in shipping and handling costs in the first quarter of 2024 as compared to corresponding period in 2023 was a direct benefit of lower transportation costs seen globally. Page 19 INTER PARFUMS, INC. AND SUBSIDIARIES Selling, general and administrative expenses Three months ended March 31, (In millions) 2024 2023 European based operations Selling, general and administrative expenses $ 90.4 $ 77.3 Selling, general and administrative expenses as a percent of net sales 39.1 % 33.6 % United States based operations Selling, general and administrative expenses $ 44.0 $ 35.4 Selling, general and administrative expenses as a percent of net sales 46.0 % 43.5 % The Company’s selling, general and administrative expenses as a percentage of net sales was 41.5% for the three months ended March 31, 2024 as compared to 36.1% for the three months ended March 31, 2023. The increase was largely driven by increased spending on promotional and advertising activities in the first quarter of 2024 as compared to the prior year period. Additionally, starting in 2024, the Company began to amortize the cost of the Lacoste license which represented $1.6 million during the first quarter. These costs will be incurred quarterly over the remaining life of the license. For European based operations, selling, general and administrative expenses increased 16.9% for the three months ended March 31, 2024, as compared to the corresponding period of the prior year, and represented 39.1% and 33.6% of net sales in the 2024 and 2023 periods, respectively. As discussed above, this increase is driven by increased promotion and advertising spending as well as the impact of the amortization of the Lacoste license. For United States based operations, selling, general and administrative expenses increased 24.5% for the three months ended March 31, 2024, as compared to the corresponding period of the prior year, and represented 46.0% and 43.5% of net sales in the 2024 and 2023 periods, respectively. As discussed in more detail below, these fluctuations are primarily from variations in promotion and advertising expenditures. Promotion and advertising included in selling, general and administrative expenses aggregated $48.3 million and $35.2 million in the first quarters of 2024 and 2023, respectively, and represented 14.9% and 11.3% of net sales in the 2024 and 2023 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 a beneficial effect on sales. Historically, the Company incurred the majority of our promotional and advertising expenditures in the second half of the year. Beginning in 2024, the Company implemented a strategy to increase spending in the first half of the year to better support and drive business growth throughout the year. Additionally, as the first quarter of 2024 saw a lighter innovation program than prior years, the Company focused on increasing promotional and advertising spending to support the continued success of our existing brands and to support the initial launch of our new brands, Lacoste and Roberto Cavalli. We also continue to develop and implement omnichannel concepts and compelling content to deliver an integrated consumer experience. Long term, we continue to anticipate that on a full year basis, promotion and advertising expenditures will aggregate approximately 21% of net sales. Royalty expense included in selling, general and administrative expenses aggregated $27.2 million for the three months ended March 31, 2024, as compared to $24.1 million for the corresponding periods of the prior year. Royalty expense represented 8.4% and 7.7% of net sales for the three months ended March 31, 2024 and 2023, respectively. This increase was primarily driven by unfavorable brand mix. Page 20 INTER PARFUMS, INC. AND SUBSIDIARIES 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 21.0% and 29.0% for the three months ended March 31, 2024 and 2023, respectively. Other Income and Expense Interest expense is primarily related to the financing of brand and licensing acquisitions. In December 2022, to finance the acquisition of the Lacoste trademark, the Company entered into a $54.1 million (€50 million) four-year loan agreement. The loan agreement bears interest at EURIBOR-1 month rates plus a margin of 0.825%. This variable rate debt was swapped for variable interest rate debt with a maximum rate of 2% per annum. Additionally, in April 2021, we completed the acquisition of the headquarters of Interparfums SA. The acquisition was financed by a 10-year approximately $129.7 million (€120 million) bank loan which bears interest at one-month Euribor plus 0.75%. Approximately $86.5 million (€80 million) of the variable rate debt was swapped for fixed interest rate debt with a maximum interest rate of 2% per annum. The swap effectively exchanges the variable interest rate to a fixed rate of approximately 1.1%. Long-term debt including current maturities aggregated $145.0 million and $157.5 million as of March 31, 2024 and December 31, 2023, respectively. 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. Greater than 50% of net sales of our European based operations are denominated in U.S. dollars. Gains and losses in derivatives designated as hedges are accumulated in other comprehensive income and gains and losses in derivatives not designated as hedges are included in (gain) loss on foreign currency on the accompanying consolidated income statements. Such gains and losses were immaterial in the three months ended March 31, 2024 and 2023. Interest and investment income represents interest earned on cash and cash equivalents and short-term investments. As of March 31, 2024, short-term investments include approximately $10.4 million of marketable equity securities of other companies in the luxury goods sector. In the first quarter of 2023, the Company sold marketable securities which generated a gain of $3.1 million. The Company purchased additional marketable securities throughout 2023 and in the first quarter of 2024, which generated unrealized gain of $0.9 million during the first quarter of 2024. Income Taxes Our consolidated effective tax rate was 23.9% and 23.4% for the three months ended March 31, 2024 and 2023, respectively. The effective tax rate for European based operations was 25% for both the three months ended March 31, 2024 and 2023. The effective tax rate for United States based operations was 17.7% for the three months ended March 31, 2024, as compared to 12.7% 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. Page 21 INTER PARFUMS, INC. AND SUBSIDIARIES Net Income Three Months Ended March 31, 2024 2023 (In thousands) Net income attributable to European based operations $ 44,940 $ 60,565 Net income attributable to United States based operations 9,527 10,343 Eliminations (1,164 ) — Net income 53,303 70,908 Less: Net income attributable to the noncontrolling interest 12,255 16,840 Net income attributable to Inter Parfums, Inc. $ 41,048 $ 54,068 Net income attributable to Inter Parfums, Inc. was $41.0 million for the three months ended March 31, 2024 as compared to $54.1 million for the corresponding period of the prior year. Net income attributable to European based operations was $44.9 million and $60.6 million for the three months ended March 31, 2024 and 2023, respectively, while net income attributable to United States based operations was $9.5 million and $10.3 million for the three months ended March 31, 2024 and 2023, respectively. The significant fluctuations in net income for both European based operations and United States based 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 Euronext. Net income attributable to the noncontrolling interest is directly related to the profitability of our European based operations and aggregated 27.3% and 27.8% of European based operations net income for the three months ended March 31, 2024 and 2023, respectively. Net profit margins attributable to Inter Parfums, Inc. as of March 31, 2024 and 2023 aggregated 12.7% and 17.3%, respectively. Liquidity and Capital Resources Our conservative financial tradition has enabled us to amass significant cash balances. As of March 31, 2024, we had $97 million in cash, cash equivalents and short-term investments, most of which are held in euro by our European based 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, 2024, working capital aggregated $530 million and we had a working capital ratio of 2.8 to 1. Approximately 79% of the Company’s total assets are held by European based operations, and approximately $248 million of trademarks, licenses and other intangible assets are also held by European based operations. Page 22 INTER PARFUMS, INC. AND SUBSIDIARIES The Company is party to a number of licenses 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 most 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 2023 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, 2023, 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 July 2023, we entered into a global licensing agreement for the creation, development and distribution of fragrances and fragrance-related products under the Roberto Cavalli brand. Our rights under this license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry. This license took effect in July 2023, and we began shipping products in February 2024. 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. Our rights under this license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry. This license took effect and products started to ship in January 2024. Cash used in operating activities aggregated $52.0 million and $7.4 million for the three months ended March 31, 2024 and 2023, respectively. For the three months ended March 31, 2024, working capital items used $111.7 million in cash from operating activities, as compared to $84.8 million in the 2023 period. Although from a cash flow perspective, accounts receivable is up 20% from year end 2023, the balance is reasonable based on first quarter 2024 record sales levels and seasonality of the business. Although day’s sales outstanding was 73 days, up from 71 days in the corresponding period of the prior year, we are still seeing strong collection activity and do not anticipate any issues with collections of accounts receivable. From a cash flow perspective, inventory levels as of March 31, 2024 increased 9% from year end 2023 in support of our overall sales growth. 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 2024 reflect purchases and sales of short-term investments. These investments consist of certificates of deposit with maturities greater than three months, marketable equity securities and other contracts. At March 31, 2024, approximately $2.0 million of certificates of deposit contain penalties where we would forfeit a portion of the interest earned in the event of early withdrawal. 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. Page 23 INTER PARFUMS, INC. AND SUBSIDIARIES Cash flows used in financing activities in the first quarter of 2024 reflect issuances and repayments of debt and payment of dividends to stockholders. Our short-term financing requirements are expected to be met by available cash on hand at March 31, 2024, and by short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 2024 consist of a $25.0 million unsecured revolving line of credit provided by a domestic commercial bank and approximately $8 million in credit lines provided by a consortium of international financial institutions. There was $8.3 million of short-term borrowings outstanding pursuant to these facilities as of March 31, 2024 and $18.0 million outstanding as of March 31, 2023. In February 2023, the Board of Directors authorized an annual dividend of $2.50 per share. In February 2024, the Board of Directors further increased the annual dividend to $3.00 per share. The next quarterly cash dividend of $0.75 per share is payable on June 28, 2024, to shareholders of record on June 14, 2024. 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 impact operating results for the three months ended March 31, 2024, as they resulted in slightly higher costs of inventory and were not fully offset by price increases we passed onto our respective customers or operating efficiencies. Page 24 INTER PARFUMS, INC. AND SUBSIDIARIES