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Inter Parfums Inc (IPAR 1.26%)
Q1Â 2019 Earnings Call
May. 7, 2019, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings and welcome to the Inter Parfums First Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Russell Greenberg, Executive Vice President and CFO. Thank you sir, you may begin.
Russell Greenberg -- Executive Vice President, Chief Financial Officer & Director
Thank you, operator. Good morning and welcome to our 2019 first quarter conference call. We will follow our regular format. I will start the call with a discussion of our financial results and then Jean Madar, our Chairman and CEO, will provide an overview of our business and share some of our plans for the future. Then, we will take your questions.
Before proceeding further, I just want to remind listeners 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 include but are not limited to the risks and uncertainties discussed under the headings Forward-Looking Statements and Risk Factors in our Annual Report on Form 10-K and the reports we file from time to time with the Securities and Exchange Commission. We do not intend to and undertake no duty to update the information discussed. When we refer to our European-based operations, we are primarily talking about sales of prestige fragrance products conducted through our 73% owned French subsidiary, Inter Parfums S.A. When we discuss our United States-based operations, we are primarily referring to sales of prestige fragrance products conducted through our wholly owned domestic subsidiaries.
As I review our first quarter, please keep in mind that the dollar-euro exchange rate was 1.14 compared to 1.23 in the first quarter of 2018. In general, our reported net sales are impacted by changes in foreign currency exchange rates. A strong US dollar has a negative impact on our sales but a positive effect on our gross profit margin. And the reason for that is because over 45% of the net sales of our European operations are actually denominated in dollars while almost all costs of our European operations are incurred in euro.
With regard to the current first quarter compared to last year's first quarter, net sales were $178.2 million, up 3.8% from $171.8 million. At comparable foreign currency exchange rates, net sales actually increased 7.4%. Sales by European-based operations declined 3.8% to $143.7 million from $149.5 million. Sales by US-based operations rose 54.8% to $34.5 million from $22.3 million. Gross margin was 61.6% of net sales compared to 61.5% of net sales in the prior first quarter.
SG&A expenses as a percentage of net sales were 42.9% compared to 43.8%. Operating income increased 9.5% to $33.3 million from $30.4 million. Operating margin was 18.7%, compared to 17.7%. Our effective income tax rate was 27.4% compared to 30.5%. Net income attributable to Inter Parfums increased to $18.9 million, up 18.8% from $15.9 million and net income attributable to Inter Parfums Inc. per diluted share rose 17.6% to $0.60 from $0.51 in last year's first quarter.
In our press releases, as we have already discussed the major contributors to our sales growth, namely the Montblanc, Jimmy Choo and Guess brands, I'm going to move on to profitability inputs. Gross margin for European operations was 63.2% in the current first quarter compared to 63% in the same period last year. Offsetting the gross margin benefit that we saw attributable to the stronger average dollar/euro exchange rate were higher than typical costs that were associated with the production of our Montblanc Explorer, which we launched in the first quarter of 2019.
For US operations, gross profit margin was 55.1% and 55.4% in the first quarters of 2019 and '18 respectively. Increasing sales of higher margin prestige products under license have had a profound impact on the profitability of our US operations. In addition to a slight increase in overall gross margin, our operating margin has benefited from SG&A operating leverage that accompanies increased sales. As I just noted, consolidated SG&A expense was $42.9% of net sales compared to 43.8% in last year's first quarter.
For European operations, SG&A expenses declined 4.4% on a 3.8% drop in net sales and represented 42.5% of sales in 2019 as compared to 42.8% of net sales in last year's first quarter. For US operations, with sales up 54.8%, SG&A expense increased only 36.5% in 2019, and it represented 44.7% and 50.8% of first quarter net sales in 2019 and '18 respectively.
Promotion and advertising, which is included in SG&A expenses, aggregated 15.4% of net sales for the 2019 period, slightly less than the 15.6% in last year's first quarter. 21% remains of our 2019 full-year target for promotion and advertising as a percentage of sales.
The only significant non-operating item that impacted the bottom line was the reduction in the corporate income tax rates in both the United States as well as in France. Our financial position remains extremely strong. We entered the second quarter with working capital of $387 million, including approximately $228 million in cash, cash equivalents and short-term investments, with a working capital ratio of over 3.121, and only $39.6 million of long-term debt including current maturities. As we announced last month, we are looking for 2019 net sales to come in around $712 million, resulting in net income attributable to Inter Parfums per diluted share of $1.88. As always, guidance assumes that the dollar remains at current levels.
Jean, please continue.
Jean Madar -- Chairman of the Board, Chief Executive Officer & Co-Founder
Thank you Russ and good morning to you all. As we reported, we achieved sales growth in our two largest markets with comparable quarter sales growth of 8.5% and 12.7% in North America and Western Europe. The Middle East performed also well with first quarter sales growth of 22.9%, but our third largest market, Asia, experienced a 9.3% comparable quarter decline primarily due to lower sales of Lanvin products. However, we expect better comparisons for Asia in the coming quarters with the launches of Lanvin, A Girl in Capri and Anna Sui, Fantasia Mermaid, a new fragrance.
On our last conference call, I noted that we are in a very good position with respect to Asia and we continue to expect growth in the region for 2019. Our third Montblanc pillar, Montblanc Explorer was our major first quarter launch and factored prominently into the 9.9% increase in brand sales. The global rollout is still under way, so we expect favorable comparisons for the brand in the second quarter.
I am also pleased to report that we do not see any material cannibalization resulting from this new entrant, because we are being very careful to develop end market products that layer on rather than replace sales. We look for Montblanc to be our biggest percentage gainer in 2019.
Jimmy Choo fragrance sales rose 25.7% in the first quarter, which was attributable to the brand's legacy fragrance as well as reintroduction of a Jimmy Choo floral flanker. But more importantly was due to the lasting appeal of the brand's men's and women's fragrance collection.
Later in the year, we have a new men's line introducing for our Jimmy Choo brand along with new interpretation of Jimmy Choo Blossom, Illicit and L'eau. In 2020, we will have a new women's pillar in the works and we plan to enter the beauty arena with lipstick and nail polishes for Jimmy Choo.
2019 is a year of consolidation for Coach following last year's 73% sales growth. For Coach, we are relying on established sense and the introduction of a second floral flanker to sustain brand sales in 2019 as we have prepared -- as we prepare for a major women's fragrance launch in 2020.
A Girl in Capri is our new Lanvin scent and is debuting this month, and for Rochas Moustache our first creation for men is currently rolling out. Also introduced a limited edition seasonal scent for Rochas brand and our further interpretation of Rochas brand was in line, Couture is also unveiling. We are working on an entirely new Rochas women's scent, which may debut late this year or in early 2020.
With regard to US-based products, for Guess, we are expanding existing pillars, starting with 1981 Los Angeles where domestic distribution of a dual fragrance will begin later this spring followed by an international rollout in the fall. Toward year-end, the product called Seductive Noir, which is also brand extension dual men's and woman 's fragrance, will begin the domestic rollout with international distribution coming next year, and for 2020, we are developing a new upscale blockbuster women's scent for Guess and we are anticipating a spring release. Regarding Anna Sui Fantasia Mermaid, debuted last month, and we are very pleased with its performance so far. We have a number of other flankers for the brand unveiling called Sweet Dreams and Serenity Wish with distribution focused throughout Asia. In 2020, Anna Sui brand has a major launch planned for our new fragrance family called Sky. Regarding Oscar de la Renta, we have added Bella Rosa to the Bella Blanca family, which accounted for much of the first quarter sales gain and Bella Essence will join this fragrance family next year.
Let me bring you up to date on Dunhill, because we have moved things up since our last conference call. For Dunhill, our new fourth scent signature collection debuted at Harrod's in April, with a global rollout beginning in this quarter. We also have a product called Century Blue, a flanker for the Century line debuting this year. For Abercrombie & Fitch, our new dual called Authentic just launched at UK duty-free stores in April and now global distribution is under way.
We also expanded the (inaudible) Abercrombie & Fitch fragrance family with a flanker called First Instinct Sheer.
With regard to our newest brands, we are far along in the creation of women's multi-scent collection for Graff. It still looks like late 2019 for the initial launch and the Lily Aldridge program is also moving forward and our timetable anticipates that the first scent which is to be sold exclusively via e-commerce will debut this September. As I noted, in addition to the two new men's scents from Montblanc and Jimmy Choo, we're relying on the strength of legacy fragrances and brand extensions and flankers to fuel our anticipated 2019 sell-through.
Now operator, you can open the floor for questions.
Questions and Answers:
Operator
Thank you. The floor is now open for questions. (Operator Instructions) Our first question is coming from Joe Altobello of Raymond James. Please go ahead.
Joe Altobello -- Raymond James -- Analyst
Thanks, hi guys, good morning. I guess first, I just want to start is on the overhead leverage and Russ you mentioned this earlier, pretty impressive in the quarter and I think a lot of that was on the US side. I'm curious, how sustainable is that given I would imagine you guys are not expecting 55% top line growth for that segment going forward, simply as you lap Guess.
Russell Greenberg -- Executive Vice President, Chief Financial Officer & Director
No, certainly, nobody's expecting to continue to grow at that level. The Guess license began in Q2 of 2018. So, this was really the last quarter that had a relatively simple comparison from a sales standpoint. However, the level of the operating margins that were achieved are somewhat sustainable. The reality is that when you have such a large increase in sales, you are gaining a tremendous amount of leverage of the SG&A expenses. So, the type of levels that we're seeing are sustainable for the future, meaning we don't have to add a lot of SG&A expense to support the current sales level that we're at.
So, as we continue to report sales, similar levels or increases, we should be able to continue to gain a little bit on the operating leverage from the US operations.
Joe Altobello -- Raymond James -- Analyst
Okay, that's helpful. And if I could follow-up, any early insights into the Abercrombie Authentic launch? How receptive have retailers been to that thus far?
Jean Madar -- Chairman of the Board, Chief Executive Officer & Co-Founder
Well, we made all our presentation, then we are actually shipping the products to most of the markets. The reaction has been quite good because the product is very co-relevant with image of Abercrombie and (inaudible) fulfillment have been very well accepted.
We knew that one because we did some consumer tests before launching, so we are expecting some strong sales from Abercrombie Authentic this year,
Joe Altobello -- Raymond James -- Analyst
Thank you, guys.
Russell Greenberg -- Executive Vice President, Chief Financial Officer & Director
Thank you.
Jean Madar -- Chairman of the Board, Chief Executive Officer & Co-Founder
Thank you very much, Joe.
Operator
Thank you. Our next question is coming from Stephanie Wissink of Jefferies. Please go ahead.
Ashley Hogan -- Jeffferies -- Analyst
Hi. This is Ashley Hogan on for Steph Wissink. Thanks for taking our question.
We wanted to unpack the channel performance between department stores and specialty multi and then Is there any other new distribution, we should be aware of?
Jean Madar -- Chairman of the Board, Chief Executive Officer & Co-Founder
I didn't quite get that, can you repeat that please?
Ashley Hogan -- Jeffferies -- Analyst
Yes. We wanted to unpack the channel performance between department stores and then specialty multi, and then just a follow-up, is there any new distribution that we should be aware of?
Jean Madar -- Chairman of the Board, Chief Executive Officer & Co-Founder
No, there is no new distribution per se. We continue to sell our products in independent -- in Europe, it's mostly independent perfumeries or chain of perfumeries such as (inaudible) or Douglas. In the US, it's mostly department stores and also (inaudible) largest account being Macy's, and in Asia, it's a mix of department store and of course e-commerce because our e-commerce part of our Asian business is growing at a very fast pace, just finished a meeting with our distributor in China and since 20% of our business in China is done through e-commerce. That's all I can tell you.
Ashley Hogan -- Jeffferies -- Analyst
Okay great. Thank you.
Jean Madar -- Chairman of the Board, Chief Executive Officer & Co-Founder
Thank you.
Russell Greenberg -- Executive Vice President, Chief Financial Officer & Director
Thank you.
Operator
Thank you. Our next question is coming from Hamed Khorsand of BWS Financial. Please go ahead.
Hamed Khorsand -- BWS Financial -- Analyst
Hi. So Russ, I guess this question is for you. What's changed in the business significantly because the message you're sending on this call is something I've brought up in the past. In the past, you talked about the operating leverage and is still being far away, but today it's the focus point of today's call. So what's dramatically changed that this message is what you're trying to project today?
Russell Greenberg -- Executive Vice President, Chief Financial Officer & Director
Well, I think it's very clear that the signing of of the GUESS license last year, when you have a brand that's going to bring you know somewhere close to $50 million to an existing business that was running a little bit under a $100 million, clearly is a little bit of a game changer from a profitability standpoint. In our business and our operations, there's a lot of variable expenses. The fixed expenses, which is primarily salary related and infrastructure is something that is very leverageable. So when you take a brand and you can increase your sales by $20 million or $30 million or $40 million over a relatively short period of time, you're going to be able to expand that operating margin. And that's exactly what we've seen here in the first quarter.
If you look at some of the details, we did file our quarterly report and you can see that from the US operations, we were practically at a break even in last year's first quarter, which is usually a very mild quarter, but here with sales increasing 54%, the US operations generated close to $2 million to $3 million in profits let alone operating leverage. So that's where we see the future. At this point in time, we don't have to add a lot of money to our infrastructure and the increase in sales is going to support further expansion of our operating margins.
Hamed Khorsand -- BWS Financial -- Analyst
And can your current infrastructure handle any expansion as far as the portfolio is concerned.
Russell Greenberg -- Executive Vice President, Chief Financial Officer & Director
Absolutely, we are constantly evaluating and looking at other opportunities on both sides of the Atlantic. It's not just the US operations, we're doing the same thing in the European side of our business. We absolutely can add additional brands, additional licenses to our portfolio with a minor or relatively small increase in the SG&A side -- in the SG&A expenses.
Hamed Khorsand -- BWS Financial -- Analyst
Okay. And then any have plans to expand Rochas' market exposure this year?
Russell Greenberg -- Executive Vice President, Chief Financial Officer & Director
I think we started to do that not just this year but even last year. You know Rochas was primarily a brand that was sold in Western Europe primarily Spain and France. We've moved it out into about nine to 10 other jurisdictions throughout Western Europe. And I think that that plan will continue as time goes on.
Hamed Khorsand -- BWS Financial -- Analyst
Okay. Thank you.
Russell Greenberg -- Executive Vice President, Chief Financial Officer & Director
Thank you, Hamed.
Operator
Thank you. At this time, I'd like to turn the floor back over to management for any additional or closing comments.
Russell Greenberg -- Executive Vice President, Chief Financial Officer & Director
Okay. Thank you and thank you all for being on the call. Thank you for your questions. Just before signing off, I would like you to know that on May 13th, just next week, I will be presenting at the City Consumer staples Access Day, here in New York. And on May 30th, I will be at the D.A. Davidson Consumer Conference in Chicago. And then of course, on June 19th, I will be at the Jefferies Consumer Conference in Nantucket. Thank you for tuning into our conference call. And as always ,if you have further questions, please contact me at my office. Have a great day and thank you once again.
Jean Madar -- Chairman of the Board, Chief Executive Officer & Co-Founder
Thank you very much.
Operator
Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time and have a wonderful day.
Duration: 25 minutes
Call participants:
Russell Greenberg -- Executive Vice President, Chief Financial Officer & Director
Jean Madar -- Chairman of the Board, Chief Executive Officer & Co-Founder
Joe Altobello -- Raymond James -- Analyst
Ashley Hogan -- Jeffferies -- Analyst
Hamed Khorsand -- BWS Financial -- Analyst
