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Inter Parfums Inc (NASDAQ:IPAR)
Q3 2019 Earnings Call
Nov 6, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Inter Parfums' Third Quarter 2019 Conference Call. [Operator Instructions].

It's now my pleasure to turn the call over to Russ Greenberg. Please go ahead sir.

Russell Greenberg -- Executive Vice President Chief Financial Officer and Director

Thank you. Good morning and welcome to our 2019 third quarter conference call. We will again proceed with our standard format. After I review our financial performance Jean Madar our Chairman and CEO will provide an overview of our business and share some future plans. Then we will take your questions. Before proceeding further I 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 heading 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% own French subsidiary into performs sa when we discuss our United States based operations. We are primarily referring to sales of prestige fragrance products conducted through our holy own domestic subsidiaries. The average the euro exchange rate for the 2019 third quarter is 1.11 compared to 1.16 in the third quarter of 2018. For the nine months ended September 30 2019 and 2018, the dollar euro exchange rate was 1.12 and 1.19 respectively.

As a reminder a strong U.S. dollar has a negative impact on our net sales but a positive effect on our gross profit margin. Because over 45% of net sales of our European operations are denominated in dollars while almost all costs within our European operations are incurred in euro. With regard to the current third quarter as compared to last year's net sales were $191.2 million up 7.9% from $177.2 million. At comparable foreign currency exchange rates net sales increased 9.7%. Net sales by European-based operations rose 4.2% to $143.6 million from $137.8 million. Net sales by U.S.-based operations rose 20.7% to $47.6 million from $39.4 million. Gross margin was 59.8% compared to 61.6%. SG&A expenses as a percentage of net sales were 40.7% compared to 41.9%. Operating income increased 4.8% to $36.6 million from $35 million and operating margin was 19.2% compared to 19.7%. Our effective income tax rate came in at 27.4% as compared to last year's third quarter at 28.6%.

Net income attributable to Inter Parfums Inc. increased 10.1% to $20.8 million from $18.9 million. And net income per diluted share rose 10% to $0.66 from $0.60. Thus through the first nine months of 2019 and net sales increased 7.5% to $535.7 million as compared to $498.3 million for corresponding period of the prior year. At comparable foreign currency exchange rates net sales increased 10.2% for the nine-month period. Net income attributable to Inter Parfums Inc. rose to $52.1 million an increase of 13.8% compared to $45.7 million in the same period last year. While net income per diluted share was up 13.1% to 1.64 -- to a $1.64 from $1.45. We have reviewed brand highlights in our press release and in the 10-Q that we filed yesterday so I will move on to discuss some profitability inputs. As you probably know our third quarter is historically our strongest quarter for sales due to holiday season shipments.

However more often than not our consolidated gross margin contracts a little bit in the third quarter due to the large proportion of holiday gift sets that are in our sales mix. For European operations gross profit margin was 62.8% in the current third quarter compared to last year's 64.9%. The cost of sales of our new Montblanc Explorer product line is higher than typical and those costs offset much of the gross margin benefit that we saw because of the stronger dollar. For U.S. operations gross margin was 51% as compared to 49.9% in last year's third quarter with the increase primarily attributable to greater sales of Prestige Fragrances under license. As we reported in prior quarters operating leverage is boosting our profitability. The third quarter is no exception as a 4.9% increase in SG&A expenses accompanied a 7.9% increase in net sales. In the third quarter it was European operations that reap the benefit from SG&A operating leverage as its net sales increased 4.2% while SG&A expenses rose only 0.3%.

So in the current quarter SG&A for our European operations came in at 42.1% of net sales as compared to 43.8% in last year's third quarter. With regard to U.S. operations SG&A expense rose 25% from last year's third quarter and represented 36.3% of net sales up from 35.1% in last year's third quarter. The increase is directly associated with greater sales of licensed products. Although the increase in SG&A expense outpaced sales growth in the third quarter. Through the third -- through the first nine months SG&A was 40% of net sales compared to 40.9% for that corresponding period in 2018. Promotion and advertising included in SG&A expense aggregated $28.7 million or 17.3% of net sales as compared to $27.9 million or 17.5% of net sales in last year's third quarter. As usual you can expect a big fourth quarter spend on promotion and advertising programs. So that on a full year basis promotion and advertising should aggregate approximately 21% of 2019 net sales as has been the case in the past two years.

Our financial position remains extremely strong. We closed the third quarter with working capital of $375 million including approximately $192 million in cash and cash equivalents as well as short-term investments a working capital ratio of over 3.2:1 and just $10.6 million of long-term debt. Our solid balance sheet and favorable outlook were once again the reasons why our board saw fit to again increase the dividend rate this time by 20%. Starting in 2020 our quarterly dividend will increase to $0.33 bringing the annual rate to $1.32 per share. We also raised our earnings guidance for 2019 to $1.90 per diluted share from our previous target of $1.88. This is the result of improved controls over expenses in general and leveraging sales gains over fixed expenses. As we reported yesterday due to the stronger dollar this year versus last year 2019 net sales are expected to come in as previously forecast at approximately $712 million. Guidance assumes the dollar remains at current levels.

And finally I just want you to know that we will be releasing our initial 2020 guidance on Wednesday November 20 after the close of the market. Jean please continue.

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

Thank you Russ and good morning to you all. Before moving on to our news and future plans. I just want to review the status of our markets one by one. North America our largest market remains exceptionally strong with year-to-date sales up 13.9%. Western Europe is our second largest and it has been doing well too and thus far this year sales are up 4.8%. In our first quarter conference call back in May I pointed out that we are looking for improvement in our Asian business as the year unfolds and our forecast was right. As compared to last year third quarter sales rose 8% following on the 7% second quarter sales gain. So as a result year-to-date Asian sales are likely ahead of last year. The Middle East is proving to be also a very good market for us with a nine -month sales up 25% and Eastern Europe had a respectable gain of 4.2% in sales of over first nine months of last year.

How business has been able to withstand the challenges of a volatile global market ranging from Brexit in the UK, some weather disasters around the world some terrorists, with China some riots in Hong Kong and some armed conflict in the Middle East. Now moving on to recent developments we have finalized our initial plans for the Kate Spade brand, for which we signed the license agreements in June. We have decided to retain, to popular legacy sense relief colourful and walk on the air. And we will take of the production and distribution in April. an entirely new woman said is in the works with a debuted plan for the fall 2020. North America is where brands primary market high though the Kate Spade run has successfully expanded its international presence for new stores openings, and has gained notable traction in China the significant area of opportunity for brands.

Naturally our distribution and advertising and promotional activities will follow the direction of the brand under the excellent leadership of management. Back in September we announced that we have extended our licensing arrangement with the Oscar de la Renta brand through the end of 2031 and with an additional five-year extension option which could take us to 2036. We took over distribution of the brand's fragrance portfolio in 2013. And since then we have added new scents for men and for women. We are confident in our ability to build this business further. With no looming deadlines and the support of our licensing partner at Oscar de la Renta we are now in a much better position to map out a long-term growth strategy for this iconic brand. As we mentioned in our release yesterday Montblanc and Coach will each introduce new women's scent in the first half of 2020.

And Jimmy Choo will do the same in the second half of 2020. We are also revising a sleeping beauty called Byzance by Rochas. As we previously reported we are debuting Jimmy Choo nail polish and lipstick collections in a limited number of high-end distribution markets in the first half of 2020. The only new men's program in the work is for Rochas called Lum Rochas which launched in the first half of 2020. In the coming years most of what you will see for our smaller brands our extension and limited edition. However we do have a new woman scent debuting for Boucheron in the second half. In 2020 we are confident that GUESS will be in the top 5 brands by sales in our portfolio. It might even reach #3. Building on the sales of legacy fragrance we are launching a blockbuster fragrance pillar called Bella Vita -- it's an older twilight and older perfume. And these 2 fragrance will debut for the GUESS brand domestically in the spring of 2020. But what you may find of interest is the international distribution plan.

Bella Vita perfume are aimed at the U.S. Canada and Europe and Bella Vita Eau de Toilette is targeted for sale in Asia Russia and Scandinavia. We are also confident that the spring launch of the new fragrance for Anna Sui will be a catalyst for brand sales growth and this will start in the first quarter of 2020. The Oscar de la Renta Bella family will welcome a new member with the launch of Bella Essence also in the first quarter of 2020. The long-awaited debut of our multi-scent collection for Graff will unveil in Harrods beginning in March 2020 with selective luxury distribution plans for the fall 2020. Brand extensions dominate our plans for Dunhill next year. We have also got a brand extension duo planned for Abercrombie and for Hollister. Our first direct-to-consumer e-commerce enterprise debuted this year in September with the activation of the Lily Aldridge website and their first scent called Heaven.

Advertising and promotion did not start until October. So it is too early to evaluate the potential of this business. There has been some buzz associated with the launch including a long feature story in Vogue's October print issue. We are proceeding carefully with the next Lily Aldridge scent called Summit before year-end and we are also exploring possibility for cosmetics for 2020. While there are no guarantees we continue to look into a large -- enlarging our brand portfolio. We've got the financial strength the talent the people to drive and -- to entertain transactions that are compatible with our business plan with our business model. So before moving on to your questions let me be the first one to wish you all a happy holiday season and the very best for the New Year. Also Interparfums will be a stop on the Davidson Beauty and Wellness New York bus tour on Thursday December 12. And we hope to see some of you at our offices at that time.

Now operator you can open the floor for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question today is coming from Joe Altobello from Raymond James. Your line is now live.

Joe Altobello -- Raymond James -- Analyst

Thanks, guys. Good morning. First question I wanted to ask about the guide. You raised EPS kept sales unchanged. And it does imply flat to down slightly in the fourth quarter. I know you're comping against a pretty tough base period. But the FX drag showed less in the fourth quarter than it has been in previous quarters. I'm just trying to understand that -- the dynamics in terms of the fourth quarter year-over-year implied guide?

Russell Greenberg -- Executive Vice President Chief Financial Officer and Director

Yes. Again a lot of it. What the guidance is really implying is pretty much a flat period for sales in absolute dollars. However the exchange rate fluctuation is a comparison of 1.14 last year versus 1.11 1.10 this year. From an earnings standpoint we're looking at probably plus 4% or 5%. So it's a little bit better than it appears from a -- In a constant dollar basis. And also just give us -- keep in mind that throughout the entire year we've been growing at a little bit of a better percentage. Third quarter especially came in a little bit higher on the sales side than we expected. So I think that we're just trying to be reasonable for the fourth quarter expectations.

Joe Altobello -- Raymond James -- Analyst

Okay. Because the reason I ask is if I look at the third quarter sales were up 8% on a reported basis and the exchange rate drag was about 2 points. It should be less than 2 points in the fourth quarter given where the euro is. So that's why I'm trying to understand. Was there something going on in the fourth quarter last year? Were there more launches in the fourth quarter of last year?

Russell Greenberg -- Executive Vice President Chief Financial Officer and Director

Well you had -- for the European operations you've been growing this year I mean through the first -- through the nine months somewhere around 3% or 4%. And that's really getting hit significantly as a result of the exchange rate. The growth on the U.S. side has been a lot higher. But again you've got a very difficult comp in the fourth quarter as of course we did have GUESS for the full year this year but only nine months last year.

Joe Altobello -- Raymond James -- Analyst

Okay. And then secondly if we think about 2020 I know we'll get guidance in a couple of weeks. But if you could look at the launch schedule you've got planned for next year and kind of compare it to this year it seems like there's a lot more and bigger launches next year Montblanc Jimmy Choo etc. Coach with GUESS growing pretty considerably next year. It sounds like you're implying about $100 million or more in revenue for GUESS next year. So help us to understand how you're thinking about the launch schedule for 2020 versus 2019?

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

I can try to answer Joe. Next year we're going to have a launch for Montblanc but it's a women's scent for Montblanc. But the big launch for Montblanc was this year with Explorer which is a men's scent. So the increase in sales of Montblanc in 2019 is bigger in percentage with what we're going to get from a woman scent in 2020. For Coach it will have an important launch for 2020. And this definitely will increase sales of Coach. Jimmy Choo we have something happening also in the second half. So yes with -- there's more launches in 2020 than there is in 2019. For the U.S. side of the business we have a launch for Anna Sui. We have a launch for GUESS. GUESS as I said will be -- I don't want to -- you mentioned $100 million. I don't think we're going to be that high. But definitely we're going to be -- I guess will become as I said #5 #4 or maybe #3 brand in the company. So GUESS is growing at a very fast pace. There is a big demand for GUESS products in Europe big demands for GUESS products in Middle East. We will start China next year for GUESS we're not in China yet. So we have we have a lot of plans for 2021 more on November 20 we will release the guidance. I think the company is looking at it very comfortably. Russ you want to add something?

Russell Greenberg -- Executive Vice President Chief Financial Officer and Director

No I think you covered it. I think that I'd like to leave the rest of it for the announcement on the 20th.

Joe Altobello -- Raymond James -- Analyst

Okay. Thank you, Joe.

Operator

Thank you. Our next question today is coming from Linda Bolton-Weiser from D.A. Davidson. Your line is now live.

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

Hi, So can you just -- on the launches. There are several major things as you said for 2020 I believe one of them maybe the Montblanc Explorer in 2019 was supposed to have been global all at once. And then it kind of ended up spreading out over a couple of quarters. How will all those launches go in 2020? Are any of them going to be sort of global simultaneous? Are they going to be spread over a couple of quarters? Can you give us a little...

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

Yes yes. It's a very -- thank you Linda. Yes for 2020 you're going to have -- the launches will be phased in different quarters. It's become -- so we should expect for instance the Montblanc -- the women's will start in the first half in 30% of the countries where we are and we roll out to the rest of the world. Same thing for Jimmy Choo in the second half. Same thing for GUESS. So think about it more as a gradual rollout than 1 shot.

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

And then can I also ask you haven't really mentioned much at all in your press release at least about the new Lily Aldridge model fragrance that was launched online. Can you talk about how that was? I think that was September correct? And what are your...

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

Yes. We -- I mentioned -- yes yes of course I can talk about it. But as you remember we discussed this end of last year. We look at it as an experiment as a lab. We need to understand better if we can create a business model to sell fragrance on the Internet. The first results of the Lily Aldridge comparing to the money that we have spent is lower than our expectation. We have done some advertising. The cost of acquiring the customer is quite high. But again we had it -- it was in our projections to lose some money on this program. What we'll be thinking going forward is maybe to look for talent or models or actors or singers that has a different traction of any in Lily Aldridge in a sense that we need to have a very large fan-based potential customers. So we have -- the whole team is analyzing a number. So it's a little bit early. But as we said before we are not interested in the amount of sales or in the amount of profit or losses that we'll have. It's more the creation of a model that we are interested to look at.

Russell Greenberg -- Executive Vice President Chief Financial Officer and Director

Yes. And the only thing I would add to that is we're also evaluating the correct product offerings for the fan base that we're targeting. So it is a question of really building an entire model around this potential Internet sales.

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

Okay. And then can I just ask the Jimmy Choo lipstick launch I think you said the first half. Pretty exclusive distribution I would imagine. But what are some of the specific retailers that will carry that?

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

That will be your usual suspects that all our partners all our department stores partners that we have in the world. Nothing -- it will be more department stores than chain stores for the launch. We are looking for people who are going to give us some space because we have -- we have built a special gondola to hold all our beauty products which is lip and nail. So that's what we can tell you for now.

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

Will it be Nordstrom Nordstrom in the U.S. perhaps?

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

No no.

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

Bax?

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

It is difficult for me to discuss. We are finalizing the retailers for the launch. So difficult for me to tell you now. But nothing that will surprise you let's put it this way.

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

Okay, thank you very much.

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

Thank you.

Operator

Thank you. Our next question today is coming from Wendy Nicholson from Citigroup. Your line is now live.

Wendy Nicholson -- Citigroup -- Analyst

Hi, good morning. I just first had a quick follow-up. The Lily Aldridge platform. The idea ultimately over time is to have other celebrities or models or influencers involved right? It's just that right now it's just Lily Aldridge product. Is that right? But in terms of timing of when you might introduce the next person I assume that's still a ways off. Is that fair to say?

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

Russ?

Russell Greenberg -- Executive Vice President Chief Financial Officer and Director

Yes. Again the idea here is we utilize Lily Aldridge as the first test. This was the first talent if you will. And the -- whether or not and how quickly we move forward with additional talent will really be after the full analysis of this particular model that we're working with. And whether or not the whole business model behind it is something that is worth our while for the future. So all of this is really still being analyzed and that will really determine how quickly or whether or not we're going to continue in the future.

Wendy Nicholson -- Citigroup -- Analyst

Got it. That makes sense. Can you remind us what your strategy or approach to selling on Amazon is? Coty this morning when they reported earnings on their call said that Amazon had grown dramatically and was ending up being an attractive tail. And obviously they have a different product assortment in different price points. But I'm just wondering sort of what your updated view of selling on Amazon is?

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

But we are selling on Amazon. But today it's not a major account. We look at it carefully. The idea is not to compete with all the websites of our retailers. I'm talking about macys.com sephora.com etc. So we are selling and we see sales increasing quarter-after-quarter but we will monitor this carefully.

Wendy Nicholson -- Citigroup -- Analyst

Got it. And then I just have a couple of other quick ones. Russ did you give us any directional guidance for how big you expect Kate Spade to be kind of -- and I know you're going to give guidance in a couple of weeks but just directionally how big -- how important is Kate Spade going to be next year?

Russell Greenberg -- Executive Vice President Chief Financial Officer and Director

We really have not. We've just finalized our plans where we are going to continue with 2 of their pre-existing lines which all sales will start sometime in April. And then we are really gearing up for our first launch which will happen later on in 2020.

Wendy Nicholson -- Citigroup -- Analyst

Got it. Fair enough. And then my very last question I promise. You guys are so good kind of reading the marketplace. And obviously the category generally has been sort of so contested and ultra results have been disappointing and all of that. But could you just maybe comment at a high level. I mean your growth is terrific. And is it fair to say you don't see anything sort of changing in terms of the end demand consumer demand interest in wearing fragrance etc. etc.? All full steam ahead with the exception of something like Hong Kong which is a temporary slowdown? But big high level globally the category is still healthy?

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

I can try to answer this question. Thank you for the compliment it was appreciated. But my point of view and I travel a many a part of the world and I go to stores. I talk to customers. Business is in good shape. Fragrance business is in a very good shape. And Prestige Fragrance business is even in a better shape. So the goal will be to push and to look for products that are higher end more -- a little bit more expensive than what is in the market today. So we are confident in the Middle East we are confident in Europe. There is a customer that is looking for new products from Coach new products from the Jimmy Choo luxury affordable $100 price point is what we -- this is -- how should I say you have a target price point target customer.

And even in China were we have a full team now for a launch of a new fragrance for Anna Sui. We are using all the marketing techniques of launches in China with Tmall. And the results are great. We see customers responding very clearly to our type of products. So I'm quite optimistic confident. Hong Kong was a problem -- is a problem. Our sales have been done of course over the last few months. But I was looking at ourselves since the beginning of the year we're still up in Hong Kong and we expect our business to even at the end of the year to still be up in Hong Kong. Korea is in good shape. Duty free is doing very well. We are quite optimistic.

Wendy Nicholson -- Citigroup -- Analyst

That's very helpful. Thank you so much.

Operator

Thank you Our next question is come from Steph Wissink from Jefferies. Your line is now live.

Steph Wissink -- Jefferies -- Analyst

Thanks. Good morning, everyone. Just a couple of clarification questions if I could. The first is on some of the makeup initiatives or cosmetics initiatives. Can you talk a little bit about the sourcing the order flow and any sort of distinct inventory considerations we should be mindful of? I know it's a small business but as it grows for you how should we think about the supply network relative to your core business? And then second question...

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

You're talking about -- you're talking about the Jimmy Choo cosmetics?

Steph Wissink -- Jefferies -- Analyst

Yes. That cosmetic strategy and if it is going to be deployed for any other brands that would be helpful to understand as well. And Russ just really quickly on the gross margin comments that you made. Can you help us separate the currency effect from some of the mix effects in the quarter? And then how should we think about that through the balance of the year?

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

I'm going to try to answer the first part of the question Russ you will do maybe the second part. For the cosmetics for Jimmy Choo we are sourcing everything in Europe. It's a high-end line Of lipstick and nail polish. But careful the businesses will be small. We -- what we want to achieve with color cosmetics for Jimmy Choo is to get more space for fragrance. So we are not going -- Jimmy Choo will not to become to access brand fragrance and cosmetics. We just want to try through this initiative to get a bigger space in department stores for Jimmy Choo. We are also going to test a -- beginning of next year I would say first or second quarter of 2020.

We will test in GUESS stores. We will try also some color cosmetics GUESS products in GUESS stores. This will happen around March. We think that GUESS because of their fashion statement can bring something to the picture. But again we are doing it in a very conservative way. Interparfums is known as a pure player in fragrance. But if color cosmetics can help distribution or can help to get more space in -- for fragrance we will definitely use it. So it's my part. Russ you want to answer the second part about the margin?

Russell Greenberg -- Executive Vice President Chief Financial Officer and Director

Yes just that I can clarify a little bit. I mean for the nine months ended September your overall gross margin was down a little a bit less from 500 basis points. If I were to try to break that out between the currency effect and sales mix I would say the currency effects we would have expected gross margin to be up by approximately 2%. And that was offset by the sales mix to net to the 500 basis points. That's approximately where we came out for the full year.

Steph Wissink -- Jefferies -- Analyst

Okay that's great. And then Russ one more for you is on royalty rates. As we think about your portfolio today versus the future and some of the newer licenses you've brought on have those royalty structures been relatively consistent? Or are you seeing some inflation in either the quality of the brands you're bringing in based on a royalty rate basis?

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

No. It does not seem... I'm sorry Russ.

Russell Greenberg -- Executive Vice President Chief Financial Officer and Director

No. The royalty rates have just been... Go ahead Jean.

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

I am sorry.

Russell Greenberg -- Executive Vice President Chief Financial Officer and Director

Yes. As the percentage of sales I think we're probably somewhere around 7.3% 7.4%. Either really hasn't been any significant fluctuations in royalties in quite some time. For our U.S. operations again of course because of the GUESS business it's increasing the number of sales we have that are subject to royalty. So that will -- that probably has already been factored in for the U.S. side of the business where the royalties have of course been increasing because of the greater licensed brands -- greater sales of licensed brands. But overall from the company standpoint the royalties have really been pretty consistent.

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

Russ there was no questions. But I would like us to talk about the tariffs from China. China has imposed tariffs on fragrance made in U.S.A. We are also buying some components plastic metal from China that is not subject to duties of 25%. So this war -- this trade war between the U.S. and China is costing the company some dollars. Maybe you can quantify ours. And if you can maybe explain what we are trying to do with local warehouses in China etc. Maybe Russ?

Russell Greenberg -- Executive Vice President Chief Financial Officer and Director

Yes. Certainly. Yes of course the tariffs have had a small impact on our gross margin. However I'm trying in laying out the reasons for the fluctuations I tried to go to the primary reasons. Tariffs although it sounds like a lot when somebody is adding a 25% cost to your components. The reality is is that from a combination of sharing some of the expense with some of our vendors as well as entertaining programs to help avoid some of the tariff situation. A perfect example of that is we have opened up a third-party logistics company in Asia where a lot of the product especially the GWPs or the gifts with purchase that we give away. Instead of bringing those into the United States and then export them wherever they need to go we're distributing those through this third-party logistics company in Asia and therefore avoiding the tariffs completely. So we've put together several different programs to help mitigate the effect of the overall tariffs. But as Jean mentioned it certainly is worth mentioning because it has had a little bit of an impact in the gross margin. Although as I said before we're trying to isolate the more significant areas of fluctuation.

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

Thank you.

Russell Greenberg -- Executive Vice President Chief Financial Officer and Director

Okay. Operator is there any further questions?

Operator

Our next question is coming from Hamed Khorsand from BWS Financial. Your line is now live.

Hamed Khorsand -- BWS Financial -- Analyst

Hi. So first question I have was what's changing up in GUESS as far as the demand is concerned that you think it will displace Coach as far as sales is concerned next year?

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

Displace Coach or maybe will be close to Coach. GUESS is a great -- GUESS has a great brand recognition outside of the U.S. When we presented in countries like India Indonesia Malaysia or even in Europe in Poland for instance GUESS is still considered a very relevant brand sexy fashionable. So we were -- even our sales are quite surprised by the strength of the brand outside of the U.S. So we are not -- the plans that we have is to launch a new fragrance and this will be in February or March 2020 the first real new franchise fragrance from -- done by Interparfums because before it was done by Coty. And the response that we got from the trade is very good. We positioned it a little bit higher-priced than what was done before. And it seems that the trade is accepting it. Now of course we need to make sure that the consumer will buy. But the first impression is quite good. Russ do you want to add something?

Russell Greenberg -- Executive Vice President Chief Financial Officer and Director

No. The only thing I would add because it's now the second time that people at GUESS are trying to guess -- good pun. Guess that what GUESS' sales will be in 2020. Keep in mind that in Jean's remarks they indicated that in 2020 we expect it to be one of the top 5 brands. It may get close to #3. But I don't believe that we're talking about a $100 million brand at this point in time.

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

That's it. But it has definitely the potential to be there very soon.

Russell Greenberg -- Executive Vice President Chief Financial Officer and Director

Exactly.

Hamed Khorsand -- BWS Financial -- Analyst

Okay. And for Q4 are you still expecting the product mix to be mostly gift sets?

Russell Greenberg -- Executive Vice President Chief Financial Officer and Director

There will be a continuation of some gift sets but for -- normally most of the gift sets are sold through in the third quarter. But there are some residuals. And yes it will include some gift sets but it's difficult for me to quantify that at this point -- at this time.

Hamed Khorsand -- BWS Financial -- Analyst

Okay, thank you.

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

Thank you.

Operator

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Russell Greenberg -- Executive Vice President Chief Financial Officer and Director

Okay. Thank you and thanks everybody for tuning into a call. As usual if anybody does have further questions they can contact me in my office. Once again thanks for joining us and have a great day.

Operator

[Operator Closing Remarks].

Duration: 46 minutes

Call participants:

Russell Greenberg -- Executive Vice President Chief Financial Officer and Director

Jean Madar -- Chairman Chief Executive Officer and Co-Founder

Joe Altobello -- Raymond James -- Analyst

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

Wendy Nicholson -- Citigroup -- Analyst

Steph Wissink -- Jefferies -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

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