Q3 2023 Inter Parfums Inc Earnings Call
Participants
Jean Madar; Co-Founder, Chairman & CEO; Inter Parfums, Inc.
Ashley Elizabeth Helgans; Equity Analyst; Jefferies LLC, Research Division
Hamed Khorsand; Principal & Research Analyst; BWS Financial Inc.
Korinne N. Wolfmeyer; VP & Senior Research Analyst; Piper Sandler & Co., Research Division
Linda Ann Bolton-Weiser; MD & Senior Research Analyst; D.A. Davidson & Co., Research Division
Karin Daly
Presentation
Operator
Greetings, and welcome to the Inter Parfums Inc. Third Quarter 2023 Conference Call and Webcast. (Operator Instructions) As a reminder, this conference is being recorded. At this time, I'd like to turn the call over to Vice President at the Equity Group and Inter Parfums' Investor Relations representative, Karin Daly.
Karin Daly
Thank you, Daryl. Joining us on the call today will be Chairman and Chief Executive Officer, Jean Madar. 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 or subsequent quarterly filings on Form 10-Q.
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, Inter Parfums' consolidated results reflect their 2 business segments, European-based operations and United States-based operations. Certain prestige fragrance products are produced and marketed by European-based operations through their 72%-owned French subsidiary, Interparfums SA.
It's now my pleasure to turn the call over to Jean Madar. Jean, you may begin.
Jean Madar
Thank you, Karin. Good morning, everyone, and welcome to our third quarter conference call. Sadly, Michel's mother passed away yesterday and understandably, he is unable to join us this morning. So I will try my best to cover his financial remarks. Of course, we can arrange follow-up calls upon his return as needed. And of course, I will be able to also, as I'm in New York, to answer questions if you have after the call.
So the strength of the global fragrance market is still compelling but no longer growing at double-digit rates from the last 2-plus years. Fortunately, and by design, our year-to-date sales growth of 27% clearly indicates our ability to outperform the industry and gain market share. The success of our newer brands has been a growth catalyst for us, along with the excellent sell-through of our legacy brands, which we have enriched with innovative extensions rather than major new product launches.
Our production and distribution partners are operating efficiently and effectively to ensure that the omnichannel pipeline of fragrance sellers throughout the world are well stocked with our merchandise. These drivers produced record third quarter net sales, up 31% to $368 million, which set a new record for quarterly net sales in our 35-plus years as a public company. For the quarter, foreign exchange rates favorably impacted our net sales by 4%, and new brands represented 7% of the growth, leading to strong organic growth of 20% compared to the prior year period.
Diving into detail of our business market for the third quarter, North America, our largest market, grew sales 29%, followed by Western Europe, our second largest region, with 24% growth. We also have seen a steep increase in sales in our smaller markets, particularly in Eastern Europe, the Middle East and Latin America, Eastern Europe at 73%, Middle East at 48% and Latin America at 42% growth in the quarter. This is primarily related to a smaller base of sales, coupled with ongoing recovery growth as economy began to normalize.
Asia Pacific, our third largest market, saw growth of 20% in the latest 3-month period, driven by sales in Australia and New Zealand. As mentioned in the earnings release yesterday, we continue to see a good sellout in China, namely for Coach, Montblanc and Ferragamo, enabling us to manage down our stocking trade levels, which we expect will provide a favorable tailwind in 2024. For the balance of 2023, we continue to anticipate only modest sales growth in China. Please be reminded that China currently represents only a very small portion of our business. And as always, we stand ready to take on this immense market opportunity when the time is right.
With respect to our European-based operations, net sales increased 18% during the quarter, primarily driven by our top-performing brands, which are Coach and Montblanc, with sales increasing 32% and 20%, respectively compared to the prior year period. Coach fragrance were in high demand during the quarter across nearly all the brand's fragrances, and we enriched the feminine fragrance with Coach Green and Coach Love. Montblanc Fragrance saw solid performance of Montblanc Legend and Explorer franchises, with an additional boost from the extension launched earlier this year, Montblanc Legend Platinum.
Our owned brands also continued to generate strong sales. Rochas fragrance sales grew 21% during the quarter, surpassing $30 million year-to-date in 2023, with strength in the Eau de Rochas line and momentum from Rochas Girl Life. Lanvin, the other owned brand, in the absence of any major launches, grew sales by 6% during the quarter.
Moving into our U.S.-based operations. Net sales grew 64% in the quarter on top of a 45% growth achieved in the same period last year. Donna Karan, DKNY fragrance sales increased 200% compared to the third quarter of 2022, having joined our portfolio in July of last year. This fashion house duo has become our second largest U.S.-based brand in only 1 year under our expertise. In August, we introduced our first brand extension for DKNY called Be Delicious Orchard St, a vibrant scent, which capture the energy of New York City Lower East Side, and the early returns are very promising. We are on track to launch a new blockbuster fragrance for DKNY next summer.
GUESS fragrance sales increased 59% during the quarter, primarily driven by the continued demand of all fragrance lines, with significant growth builds upon the 45% sales increase in last year's third quarter. Growing demand for GUESS fragrances has been sparked by the rising popularity of GUESS fashion across the globe, particularly within the U.S., within Asia Pacific and also Europe.
As we reported a few weeks ago, we recently launched the GUESS Originals trio of gender-inclusive fragrances and are now rolling out GUESS Bella Vita Paradiso. We have been working tirelessly on innovation for GUESS to ensure we capture the successful momentum of the brand. We have a rich pipeline of fragrances planned for 2024, including a new pillar of launch for GUESS, in addition to GUESS [Amore, Elements, Wamuten So] and Sexy Skin metallic.
Even in the absence of a new product launch, first quarter Ferragamo fragrance sales were very strong, increasing 55% compared to the same period last year due to the legacy scents, coupled with sister scents, Signorina and (inaudible) collections that debuted earlier this year. Beyond the brand's Italian borders, Ferragamo fragrances are strong seller in the Americas. New products are in the pipeline for Ferragamo in 2024. By the way, in 2 years since we commenced operations in Florence, Italy, we now have about 60 management and staff members and are expanding our brand footprint with Cavalli, but also, our Italian affiliate will be distributing all our brands in Italy.
As mentioned in the first quarter sales release, we initiated Phase 1 of the Abercrombie & Fitch Fierce distribution rollout. While we began with only introductory distribution in select markets of this iconic fragrance during the first quarter, we are on track to commence the majority of the Phase 1 distribution rollout in Europe before year-end and launch Phase 2 in Asia Pacific and Latin America during 2024.
And lastly, touching on Roberto Cavalli and Lacoste, our 2 most recent license agreements. For Roberto Cavalli, we are set to begin shipping fragrance product in January 2024, and we plan to launch our first extension of Cavalli in the summer 2024. Of note, we did not buy the prior licensee's leftover inventory. Instead, we curated the collection and produced entirely new fresh goods.
Also, we partnered with one of the top luxury retailers and distributors in the Middle East, a concentrated market for the brand to further expand the brand. We also have summer [Animation] hair and body fragrance mist and Just Cavalli due on track to see shelves early and mid-summer, respectively. The Lacoste license will take into effect in January 2024. And we have been using the time since the license was signed to develop go-forward strategies. And like Cavalli, we did not buy any existing inventory.
The fragrance industry remains competitive as new market participants enter the category. We are not surprised by the increased competition, as we believe there are 4 significant attractive elements. Number one, I think, is growth. The fragrance market has grown tremendously and is expected to continue to grow in the upper single digits with new consumers entering the category and existing consumers building out their fragrance wardrobe.
The second point is resiliency. Resiliency is a very attractive element. We consider it to be generally recession-proof as other beauty and consumer segments are hit harder when faced with macroeconomic instability. This is reflected in our successful almost 4 years of history. The third attractive element is the desirability. Fragrances have a desirable entry price point for consumers who want to invest in their favorite luxury brands without having to purchase the higher-priced luxury goods.
And last, the demand. As new consumers enter the category, it is often rare to see this new consumer exit the fragrance market. So from a license perspective, while we actively scout for opportunities to add new brands that further complement our prestige portfolio, we also find that brand owners tend to seek us out because of our size, our expertise and excellent track record that underserved brand owners are often looking for. Our portfolio, both in legacy and new brands, is in high demand across the globe. Additionally, all of our brands have benefited from newly launched and enhanced e-commerce site in existing markets in collaboration with our retail customers on their e-commerce site.
In fact, our retail sales in the Amazon premium beauty category, an invitation-only prestige platform, have soared by an impressive 149% year-to-date through October. The remarkable growth is largely attributed to the successful launches of some of our key franchises, such as Donna Karan and DKNY. We are also developing and implementing omnichannel concepts and compelling content to deliver an integrated consumer experience. Coupled with our ongoing innovation, we are confident in our ability to continue to outpace the overall fragrance market through the end of the year.
So now I will turn to our financial performance. So I will do it for the first time myself because Michel, as I said before, is not able to join us. So let's try. On a consolidated basis, gross profit increased 29% to $235 million. Within our European-based operations, gross margin declined 90 basis points, primarily due to an unfavorable product mix as we shipped more gift sets in this quarter compared to prior year. On a year-to-date basis, gross margin declined only modestly due to the onetime expense related to inventory as we reported in the second quarter. Excluding this onetime adjustment, gross margin will have been in line with the 9-month period last year.
In our U.S.-based operations, third quarter gross margin expanded approximately 190 basis points from the prior year period, driven by price increases that more than offset inflationary impacts on components that we are used for production during the quarter, coupled with ongoing favorable brand and channel mix. Additionally, with our net sales outperformance, we are better able to absorb fixed expense such as depreciation and point-of-sale expenses than at this time last year.
SG&A as a percentage of net sales declined to 40.2% from 41.9% in the quarter. On a year-to-date basis, SG&A also declined to 190 basis points to 39.8% from 41.7% in the prior year period. In our European-based operations, third quarter SG&A increased 18%, which is comparable to the increase in net sales and generally in line as a percentage of net sales from the prior year period. In our U.S.-based operations, SG&A increased 44% on a 64% increase in net sales.
Promotion and advertising are integral part of the fragrance and beauty industry, and we have and we will continue to invest heavily to support new product launches, our strongest sellers and to build brand awareness. Promotion and advertising aggregated $62.8 million and $152.6 million for the current third quarter and for the 9-month period as compared to $44.8 million and $125 million for the corresponding periods of the prior year. Promotion and advertising represented 17.1% and 15.4% of net sales for the current 3- and 9-month period, respectively, as compared to 16% and 16.1% for the corresponding periods of 2022.
As a reminder, as part of our strategy, the fourth quarter is typically the heaviest period for promotion and advertising, and we continue to expect to deploy 21% of net sales annually, which allocates approximately the same level of promotion and advertising year-to-date to the fourth quarter alone. Royalty expenses are included in SG&A, which ticked down slightly from the prior year period to 7.8% of net sales for the quarter, again due to changes in brand mix. Our operating margins aggregated 23.7% and 23.5% for the current 3- and 9-month period as compared to 23% and 22% for the corresponding period of 2022.
We closed the third quarter with working capital of $514 million, including approximately $184 million in cash and cash equivalents and short-term investments, maintaining our working capital ratio of 2.41. We closed the quarter with $129 million of long-term debt associated with the Paris headquarters and Lacoste license acquisition.
From a cash flow perspective, accounts receivable is up 49% from December 31, 2022, quite reasonable based on 2023 record level sales, and reflects the combination of high volume of shipments towards the end of the third quarter as well as some payment schedules extended going into the holiday season. Additionally, strong collection activity resulted in days sales outstanding decreasing to 72 days at the close of the quarter from 80 days at this time last year.
Inventory levels at September 30 increased 26% from year-end 2022 in support of our exponential sales growth. We have learned an important lesson from the supply chain issues experienced during the pandemic, and we have aimed to carry more inventory overall, source components from several suppliers and manufacture products closer to where they are sold to ensure we protect our service levels.
And finally, turning to our full year 2023 guidance. As we announced in yesterday's release, we are affirming our full year 2023 net sales guidance of $1.3 billion or growth of 20% from fiscal year 2022 despite geopolitical tension and a very high fourth quarter 2022 base. We are also -- excuse me, we are increasing earnings per diluted share guidance to $4.75 from our prior estimate of $4.55, which represents growth of 26% from the $3.78 for fiscal year 2022, thanks in great part to the operating leverage afforded by our significant growth. We expect to announce our initial guidance for full year 2024 later this month.
So with that, operator, you can open the floor for questions.
Question and Answer Session
Operator
(Operator Instructions) Our first questions come from the line of Linda Bolton-Weiser with D.A. Davidson.
Linda Ann Bolton-Weiser
I was wondering with regard to your comments on China that your POS grew, and so you could work down some retail inventory. How do you feel about your current levels of retail inventory there in China? Do you think there's more reduction that needs to happen? Or are things in a good condition right now?
Jean Madar
Thank you, Linda. So regarding China, this is something that we monitor on a weekly basis. We ask our distributors to give us an idea on the most important accounts like Sephora and department stores and also the different digital operators. We are in a much better shape than before, and we see an improvement week after week, quarter after quarter.
We think that the inventory will be in at a normal level when we start the year in 2024. But again, with China, you know we have been always super conservative. And I think we've been right to be like that because it's a big country and things are changing super fast. So we'll take also, even for next year, a conservative approach. But I can definitely notice an improvement in the inventory, that's all.
Linda Ann Bolton-Weiser
Great. And then without Michel here, I'm not sure if you can answer this.
Jean Madar
I'm going to try. I'm going to -- it's my first. So be nice with me. Just tell me, I will try to answer. But again, if I'm -- if I don't know, I will tell you, I don't know, and we'll ask someone in the company to answer you in the next couple of hours. But go ahead, Linda.
Linda Ann Bolton-Weiser
Yes. My question is just with the level of advertising that you're guiding to in the fourth quarter, it does look like gross margin is implied to be sort of improved sequentially. So I would think it would be higher in the fourth quarter versus third quarter because of less gift sets. Does that sound reasonable to you that it should be higher in the fourth quarter?
Jean Madar
No, I think you can -- for gross margin, I prefer that you use the same margin as the first 3 quarters. You don't -- it shouldn't be higher. But as I said, we will spend a very big amount of money in advertising in the fourth quarter to ensure the sell-through at store level.
Linda Ann Bolton-Weiser
Okay. And then just my final question is about -- I know you don't want to get detailed into 2024 yet, but I'm thinking that Roberto Cavalli and Lacoste can together add $100 million of revenue roughly. Is that about in the ballpark range?
Jean Madar
If Michel were here, he will say he cannot answer because we don't have but I think that, look, Lacoste has been in the fragrance business, and we have disclosed already how much we were doing with the former licensee, Cavalli also. So I think that it's a fair number to use for now.
Linda Ann Bolton-Weiser
Okay. Thank you very much, Jean. Thank you. I appreciate it.
Operator
Our next questions come from the line of Ashley Helgans with Jefferies.
Ashley Elizabeth Helgans
Some of your competitors are still taking price. Can you just talk a little bit about where you are in your current pricing journey? And then if you think consumers...
Jean Madar
You're talking about pricing?
Ashley Elizabeth Helgans
Yes, yes, pricing. Yes, where you guys are with your pricing journey. And if you think consumers are going to start pushing back on price at all? And then maybe any updates you can give us on the travel retail channel.
Jean Madar
Okay. Let's try on pricing. We took a modest pricing earlier in 2023, something around 5%, which more than offset inflationary expenses during the quarter. And we do not expect to take further pricing actions at this time. But because like you said, we think that some consumers will eventually resist this price increase that, by the way, has been going on for the last 2 years. So we think that our pricing is at the right level.
And we will not -- except maybe for certain particular SKU, we'll position it a little bit higher, but this is more for marketing reason, not to offset any inflationary expense. So that's about pricing. And you wanted to talk about the travel retail. This is your second question?
Ashley Elizabeth Helgans
Yes.
Jean Madar
We see definitely a big improvement for us in travel retail, but again, as opposed to our larger competitors, our business is -- our base is small on travel retail, we were roughly at 5% in the beginning of the year, and we are trending now something around 7% or 8%. So definitely improvement, definitely more traffic in the airports. I mean, everybody is traveling, and you can see that business is definitely more active.
So we have -- we are quite optimistic for travel retail worldwide. If your question is more about travel retail in China, this is, I will say, enough a point also where we want to be conservative, and we are not putting big numbers for travel retail in China or for Chinese travelers. That's what I can tell you for now.
Operator
Our next questions come from the line of Korinne Wolfmeyer with Piper Sandler.
Korinne N. Wolfmeyer
Congrats on a good quarter. I'd like to just touch on the guide for the year. I mean, obviously, a pretty big step down in the top line growth for Q4, and I know there's some really challenging comps, but can you just provide any color on maybe why you're not pushing a little bit higher for Q4 and kind of what you're baking into the guidance for the remainder of the year?
And then maybe how we should think about the trajectory into 2024? I understand Michel's not here. So I appreciate any color you can provide.
Jean Madar
I can try. But I knew that you were going -- someone was going to ask me this question. We have decided to keep the level of sales at -- because as you said in your question, we are against a very strong fourth quarter last year. We have increased the EPS numbers because of the results of the third quarter, of course. But we want to maintain this prudence in our numbers. There is some instability in the world, as you know, 2 weeks ago, a war started in a very important region for perfume, which is the Middle East. So we have to be prudent. And that's why we prefer to stay conservative in our guidance. That's what I can tell you for now.
Korinne N. Wolfmeyer
And then on the advertising and marketing spend, I mean, you're still planning for that to be fairly heavy. What is your willingness if we do start to see a heavier slowdown in the top line, what is your willingness to maybe pull back on that spend to preserve the profitability of the business? Or is that something that you're going to continue to invest in even if the top line gets a little more pressure?
Jean Madar
Yes. We will continue to invest. This investment is to ensure that all our retail partners sell out what we shipped them. So we did great in the third quarter because we shipped a lot, a lot of products, and it's absolutely necessary to maintain or to increase all our expenses to make sure that our retailers worldwide have a great sell-through and we can replenish inventory coming first quarter next year. .
So it will be a very short-term vision to reduce advertising to show a little bit more profit. No, we are here for the long term, and we are here to gain market share. So I'm convinced that this is the right thing to do.
Operator
Our next questions come from the line of Hamed Khorsand with BWS Financial.
Hamed Khorsand
Just wanted to see what kind of spending changes have you seen at the retail level going into the holidays? And are you assuming that the retailers are as much stocked as they were last year? Or do you think there's ample room for them to do reorders in Q4?
Jean Madar
A good question. This is also something that we are monitoring on a daily basis. Retailers are quite prudent. They are not taking massive inventory. We are delivering daily. I was with many retailers in the last couple of weeks, and we have -- they have given us a lot of smaller orders, but more sequenced in order for, I guess, to receive products in a cadence that is on a weekly basis.
And that's what we are doing. So they are not -- they don't have a huge amount of stock, but they are continuing to buy. And we have, I think, orders to ship up to Christmas. So I think it's a prudent attitude from retailers, but I do not see any issue with their inventory level.
Hamed Khorsand
Okay. And my other question was for next year, other than Cavalli and Lacoste, what are you focused on as being important events for -- into perfume next year?
Jean Madar
So of course, Cavalli and Lacoste are the new brand in the portfolio, but we are going to concentrate on the 5 biggest franchise in the portfolio. Number one is being Montblanc and Coach and Ferragamo and Jimmy Choo and GUESS. So these 5 brands will represent maybe 70% of the sales, and we will continue to invest. And what is very important is that this 5 big franchise will all have a blockbuster in 2024, where for 3 out of 5, we didn't launch any blockbuster in 2023.
So this is positive. In a couple of weeks, we're going to give the sales guidance for 2024. We are optimistic but prudent because, again, the world conditions, these tensions also are not great for business, and we have to take this into account, of course.
Operator
We have reached the end of our question-and-answer session.
Jean Madar
I hope I was able to answer the right way. But again, I repeat, if there is more info that you need, we will be happy to have Michel's team answer, you just have to call the office. I'm sorry, operator, yeah, you wanted to say something else? No?
Operator
No, I was just going to hand the call back over to you for closing comments.
Jean Madar
Okay. So before I end the call, I wanted to touch again on recent geopolitical tensions. As a global business with over 2,200 touch points across the globe, we do everything we can to help support our manufacturers and distributors. At Inter Parfums, we are in support of humanitarian efforts and the innocent people experiencing so much pain. We condemn the terrorist attacks in Israel, and we'll continue to work to find more ways to provide support to our partners, consumers and all those affected by this war. We hope for a pathway to peace soon.
And as I said, if you have additional questions, please contact Karin Daly from the Equity Group, our Investor Relations counsel. Her telephone number and her address can be found on our most recent earnings release.
Since this is our last conference call of the year, Michel and I hope you have a safe and pleasant holiday season and a prosperous New Year. We look forward to the next conference call. Thank you very much, and have a good day.
Operator
Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.
