Inter Parfums, Inc. (NASDAQ:IPAR) Q4 2023 Earnings Call Transcript
Inter Parfums, Inc. (NASDAQ:IPAR) Q4 2023 Earnings Call Transcript February 28, 2024
Inter Parfums, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Inter Parfums, Inc. 2023 Fourth Quarter and Full Year Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to turn the call over to Karin Daly, Vice President at the Equity Group and Inter Parfums's Investor Relations Representative. Thank you. Please go ahead.
Karin Daly: Thank you, Diego. Joining us on the call today will be Chairman and Chief Executive Officer, Jean Madar; and Chief Financial Officer, Michel Atwood. On behalf of the Company, I would like to note that this conference call may contain forward-looking statements, which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from projected results. These factors may be found in the Company's filings with the Securities and Exchange Commission under the headings Forward-Looking Statements and Risk Factors in their most recent annual report on Form 10-K. Forward-looking statements speak only as of the date on which they are made and Inter Parfums undertakes no obligation to update the information discussed.
As a reminder, the Company's consolidated results reflect its two business segments, European-based operations and United States-based operations. Certain prestige fragrance products are produced and marketed by their European-based operations through its 72% owned French subsidiary Inter Parfums, S.A. When the Company refers to their U.S.-based operations, they are talking about their wholly-owned subsidiary. It is now my pleasure to turn the call over to Mr. Jean Madar. Jean, you may begin.
Jean Madar: Thank you, Karin. Good morning, everyone, and thank you for participating in today's call. We are seeing ongoing momentum in the fragrance market, particularly within the prestige and premium categories in which we play. Much of the growth we have seen can be attributed to premiumization as consumers are increasingly seeking high-quality and higher-concentration fragrances in today's market. The ongoing demand in our prestige portfolio of brands led to a record net sales of $1.3 billion in 2023, an increase of 21% compared to 2022. At comparable foreign currency exchange rate, net sales increased 20% in 2023, of which 5% was related to new brands. Similar to 2022, our successful growth during the year was attributable to our established brands and our new product pipeline dominated by extensions.
Sales for each of our largest brands, Jimmy Choo, Montblanc and Coach rose above $200 million for the year, representing 49% of our total sales. Our fourth largest brand, GUESS, grew sales by a robust 23% and with a strategically planned pipeline of innovation, we believe GUESS is well on its way to also surpassing $200 million in sales in the coming years. In our European-based brands, there were also significant gains made by our midsize brands in 2023, including Rochas, Karl Lagerfeld, Van Cleef & Arpels, increasing, respectively, 11%, 24% and 12%. As you may recall, Donna Karan/DKNY joined us in July 2022. This explains the significant 200% growth in 2023. We anticipate that the substantial growth rate will normalize, but will remain healthy and the brand will well exceed $100 million in sales in 2024 as it continues to benefit from our expertise.
Relative to our newest brands. We began shipping Lacoste fragrance in January of this year after rebooting the brand's existing fragrance portfolio and creating all new freshly developed goods for our retail partners and consumers alike. Our Cavalli fragrance reboot coincides with the fashion house renaissance efforts to revamp the powerful creativity of [Veraparo] while opening new stores and increasing visibility. We have blockbuster launches in the works for both brands later this year. As you may recall, our entry into Italian operations in 2021 was strategically timed, coinciding with the signing of a Ferragamo license. This decision, I think, was well funded as the Italian fragrance market witnessed a plus 12% sales growth in 2023. In fact, Ferragamo fragrance sales outperformed the market, achieving 21% sales growth in the last year.
Cosmetic Italia noted that they expect to see similar sales expansion in 2024. While we have seen new entrants into the Italian market across the industry recently, driving healthy competition. We are confident our Italian affiliate will take advantage of the booming demand in Italy and across its borders. We have also leveraged this new affiliate to serve as an anchor point to attract other Italian brands and increase company scale. After starting to distribute all the brands from the United States-based operation in January 2023, our team in Italy has also started to distribute the brands from our European-based operation since January 2024. With our Italian operations managing our distribution for both segments, we will expand cross-company synergies in that market and continue to improve gross margin as we sell directly rather than through a distributor.
The team in Italy also started shipping Roberto Cavalli fragrance at the beginning of February 2024 and we look forward to fully capturing the potential of this brand. Abercrombie & Fitch also achieved significant sales growth of 25% in 2023, in part due to the sustained popularity of their legacy scents. Our initial success in the Phase 1 distribution rollout of Fierce was a leading contributor to the brand's growth in the back half of the year and we expect to see further sales expansion as we commence Phase 2 in the first quarter of this year. On another note, I've spent a lot of time traveling to meet with retailers, buyers and wholesalers across the globe. 2024 is off to a great start. In fact, I recently visited Mexico to meet with buyers and I was very encouraged by what I saw, including empty shelves representing healthy sellout, particularly for Ferragamo, Montblanc, GUESS and DKNY.
With the holiday season behind us and strong reorders, we are enthusiastic of the growth prospects in that region. Turning to our stimulating pipeline of innovation. During the first quarter of 2024, we debuted new fragrance collection for Moncler. We introduced five new ultra-luxurious unisex fragrances called Les Sommets Moncler and we developed also a premium quartet of eaux de parfum for Donna Karan/DKNY called Cashmere Collection there is layers and more concentrated fragrance were unveiled in conjunction with the relaunch of Donna Karan/DKNY fashion business and the reveal of the spring 2024 campaign. These premium fragrances debuted in more than 200 department stores across the United States. We have an invigorating lineup of products set for the balance of 2024.
In addition to the new blockbuster fragrance for Cavalli, Lacoste, I mentioned earlier, there is a new GUESS fragrance planned for the second quarter as well as one more flanker in the first quarter. Extensions of Jimmy Choo, I Want Choo, Montblanc, Legend, Coach Dreams and Roberto Cavalli's Signature are set to debut throughout the year. Furthermore, brand extension are also in the works for Ferragamo, MCM, Abercrombie, Hollister and Oscar de la Renta. With ongoing innovation in the development and marketing of our portfolio of fragrances, coupled with the overall strength in the fragrance market, we are poised for a dynamic year ahead. We have successfully onboarded over 80 new team members just for our United States-based operations, exemplifying our unwavering commitment to developing robust operations capable of effectively managing and optimizing our diverse portfolio of prestige brands.
In the ever-changing world of beauty, fragrance innovation is at the forefront for our brand ethos. With category penetration on the rise in the United States and in Asia and the continued shift towards more premium fragrances, we believe that the consumers' heightened appreciation and curiosity for fragrances will be a competing force for the future. I will now turn the call over to Michel for a more detailed financial review. Michel? Michel?
Operator: Mr. Atwood, you may be muted. Go ahead.
Michel Atwood: I'm sorry. Thank you, Jean, and good morning, everyone. As we reported yesterday, consolidated net sales grew 6% in the final quarter, reflecting 13% and 2% growth in our U.S.-based and European-based operations, respectively. For the full year, we are pleased to have achieved record sales and earnings results. As previously disclosed, the quarterly growth rate in comparison to the full year reflects the elevated sales baseline from the preceding year. Compared to 2019, which was a much stabler year, our sales were up 85% both for the fourth quarter and the full year 2023. On a consolidated basis, gross margin expanded 30 basis points from the fourth quarter of 2022 to 64.7%, leading to a full year gross margin of 63.7%, broadly in line with the prior year, with higher selling prices and channel product mix offsetting the inflation headwinds and segment mix.
In 2023, European operations gross margin eroded by 100 basis points from 68.2% to 67.2%. However, as previously disclosed, the bulk of the erosion was attributed to the inventory write-off in the second quarter. Excluding this impact, gross margins would only have eroded by 20 basis points, with pricing and regional mix almost entirely offsetting higher inflationary costs in Europe. U.S.-based operations gross margin, on the other hand, continued to expand significantly from 54.7% in 2022 to 57% in 2023. The U.S. margin expansion stems from several factors, including price increases we took early in 2023 that were not fully offset by higher costs of goods, due in part to our ongoing cost containment efforts. We also had favorable brand and channel mix as the larger portion of our higher-priced fragrances are being sold directly to retailers as opposed to third-party distributors.
An example of that is what Jean explained is happening in Italy, but we're also seeing that in the U.S., with the U.S. market growing faster than the rest of the other regions. And then lastly a significant increase in sales in 2023 which has allowed us to absorb fixed costs, namely manufacturing and depreciation of tooling. As expected selling and general, administration expenses as a percentage of net sales were 59% for the quarter, which is 450 basis points higher than the prior year period, mainly due to higher promotion and advertising spending. For the full year, SG&A expenses as a percentage of net sales were at 44.6% compared to 45.3% in 2022. This decrease was largely driven by continued sales growth during 2023, allowing for better absorption of fixed operating costs and favorable segment mix.
As previously disclosed, we continued to invest heavily in A&P to build brand awareness, remain competitive and sustain our growth. During the year, we dedicated 19.7% of net sales to advertising and promotion, and while we again spent a lower target A&P of 21% of net sales, due in part to higher expected sales growth, we continue to deliberately converge towards this figure. In fact, in the critically important fourth quarter of 2023, spending was 23% higher than in the prior year period, representing 33% of net sales, up from 28% in the fourth quarter of 2022. As you know, our fourth quarter we typically spend double what we spend in the other quarters. Royalty expenses are included in SG&A and average approximately 8% in 2023, generally in line with the last three years.
And finally, our operating margins aggregated to 19.1% for 2023 or 120 basis points improvement from 2022. We closed the year with working capital of $514 million, including approximately $183 million in cash and cash equivalents and short-term investments, resulting in a working capital ratio of 2.6 to 1. Our long-term debt at December 31, 2023, was $128 million associated with the Paris headquarters and Lacoste license acquisitions were our two main investments on the last couple of years. From a cash flow perspective, accounts receivable was up 19% from year-end 2022. The balance is reasonable based on 2023 record sales levels and reflects a strong collection activity as day sales outstanding decreased slightly to 60 days in 2023 as oppose to - as compared to 64 days in 2022.
Additionally, inventory levels are up 25% from year-end 2022, of which inventory days on hand increased to 249 days in 2023 from 231 days in 2022. This increase was fully anticipated and is primarily explained by the buildup of inventory related to the newly acquired licenses for Lacoste and Cavalli, which began shipping to customers in 2024. We expect inventories to start normalizing now that we have sales and this inventory in our base. And finally touching on our 2023 execution and 2024 guidance, not only did we surpass our sales target of $1.3 billion in 2023 and achieve our all-in bottom line goal of $4.75 earnings per diluted share, but on an adjusted basis and excluding the one-time tax assessment undergone by our European operations, we largely beat our bottom-line guidance and achieve $4.82 earnings per diluted share, representing a growth of 22%.
For 2024 guidance, as we reaffirmed in yesterday's earning release, the fragrance market, particularly in the prestige and luxury category remains robust. This, coupled with healthy stock and trade level gives us the confidence we can continue to grow and achieve approximately 10% annual sales growth to $1.45 billion. We expect first-half growth to be a more modest high single digit due to the seasonality of our pipeline of innovation and the sell-in of the newest brands of our portfolio. However, we expect double-digit growth in the second half. This will lead to an 8% increase in earnings per dude and share to $5.15. Of note, included in our guidance, the Lacoste non-cash amortization impact of the acquisition cost is expected to reduce our 2024 earnings per diluted share by approximately $0.11.
Excluding this impact, we are projecting EPS growth of 11% versus 2023. While we are confident in the strength of the market and our ability to gain share with our overall portfolio, we've always remain - we've always taken a conservative stance in our guidance. And this year we are particularly keen on being cautious, especially in light of the ongoing conflicts in the Middle east and in Eastern Europe. Given the potential for volatility and the lack of visibility at this time, we will revisit the subject of guidance as the year progresses and as we attain greater clarity on the market and the successful offtake and expansion of our two new licenses. Lastly, as announced in our press release, given our strong results, future prospects and robust financial standing, our Board of Directors authorized the company to continue to purchase up to 130,000 shares through 2024.
They also approved a 20% increase in the annual dividend to $3 per share from $2.50 per share. The next quarterly cash dividend of $0.75 per share is payable on March 29 to shareholders of record on March 15, 2024. With that operator, please open the line for questions.
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