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Inter Parfums Inc (IPAR -0.45%)
Q3Â 2020 Earnings Call
Nov 10, 2020, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by. Greetings and welcome to the Inter Parfums Third Quarter 2020 Earnings Conference Call. [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 Chief Financial Officer of Inter Parfums. Thank you, sir. You may begin.
Russell Greenberg -- Chief Financial Officer
Thank you, operator. Good morning and welcome to our 2020 third quarter conference call.
As usual, I must again read the following. 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 for the year ended December 31, 2019, the Quarterly Report on Form 10-Q for the third quarter ended September 30, 2020, and other 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.
And, of course, just a reminder, 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, Interparfums SA. When we discuss our US-based operations, we are primarily referring to the sales of prestige fragrance products conducted through our wholly owned domestic subsidiaries.
Because of the recent weakness in the value of the dollar versus the euro, I would also like to remind listeners that a weak US dollar has a favorable impact on our net sales, while gross margins are negatively affected. This is because over 40% of net sales of our European operations are denominated in US dollars, while almost all costs of those operations are incurred in euro. The average dollar-euro exchange rate for the third quarter was $1.17 as compared to $1.11 in the third quarter of 2019. That also compares to the $1.10 in the second quarter of 2020.
Needless to say, we were very pleased with our third quarter results. Rather than reread the news release that we issued yesterday afternoon, let me tell you what we think are the important takeaways. On a 16% decline in comparable quarter sales and a weaker dollar, our gross margin expanded 70 basis points. SG&A rose only 30 basis points, yielding a 30 basis point improvement in our operating margin.
Even with social distancing restrictions, the reopening of stores brought customers back. And to add to that, a swelling e-commerce sales by our retail and e-tail customers. As a result, our sales increased in each month since April. Admittedly, the 2020 second quarter was an aberration, but humanly, as I compare the third quarter to the lows of the second quarter. Third quarter sales increased 224%, and despite the headwind of the nearly 6% decline in the average euro-dollar exchange rate, gross margin rose 630 basis points. Positive leverage resumed in our third quarter operating margin, which came in at 19.5%, which actually slightly exceeded the 19.2% achieved in the corresponding period of the prior year.
For our European operations, the third quarter gross profit margin was 62.4% as compared to 62.8% in last year's third quarter, with the weakened dollar responsible for most of that decline. As we discussed on our last conference call, the assumption of a return liability for products sold by a former licensee of a brand license, which we acquired in 2019 put a drag on the nine-month gross profit margin, which came in at 62.3% in the current period versus 64.7% through the first nine months of 2019.
For our US operations, third quarter gross profit margin was 52.5% up from 51% in the prior year's third quarter, and that modest improvement was basically attributed to product mix.
Without furloughing or discharging employees and without compromising our business plans or future growth prospects, we were able to cut expenses, rightsizing our operations to the lower sales volume. As we reported yesterday, SG&A expenses were reduced by 15.4% as compared to last year's third quarter and represented 41% of net sales, just slightly more than the 40.7% in the third quarter of 2019.
For European operations, SG&A expenses declined 11.4% on a 9.6% drop in sales. And for our US operations, which carry a higher fixed costs that are more difficult to leverage as efficiently as those of our European operations. For our US operations, SG&A expenses decreased 29.2% on a 35.1% decline in net sales.
We continue to support existing lines with promotion and advertising, but at a much reduced level, cutting approximately $11 million out of the expense column, and as a result, promotion and advertising represented 10.9% of current quarter net sales as compared to 15% in last year's first -- third quarter.
Also, as I mentioned on our last call, our licensors have been very cooperative and accommodating during this period, waving or significantly reducing 2020 minimum royalty guarantees. Royalty expense represented 7.3% of net sales for the current third quarter as compared to 7.4% in last year's third quarter.
Our effective tax rate for European operations came in at 28% for the nine months ended September 30, 2020, as compared to 30% for the corresponding period of the prior year, and that reduction is due to favorable tax rates in other jurisdictions where our European operations also conduct business, such as Singapore, Switzerland and the United States. As a result of the true-up of our 2019 tax accrual, for US operations, income taxes resulted in a nominal benefit for the nine months ended September as compared to an expense of approximately 16.6% for the corresponding period of the prior year.
Thus far in 2020 accounts receivable haven't been -- has not been a serious issue as much of our receivables were covered by insurance. While accounts receivable is up considerably since mid-year, the upturn in sales explains the cause. But the important part of this discussion is the improvement in collection activity as days sales outstanding dropped to 78 days as compared to 84 days in last year's third quarter.
Our balance sheet remains strong. We closed the quarter with working capital of $442.1 million, including approximately $204 million in cash, cash equivalents and short-term investments. We have a working capital ratio of 4.5:1 and $49 million in untapped credit facilities with only $19.4 million of long-term debt, which includes the borrowings made in connection with our recent equity stake in the parent company of origines-parfums.fr.
Now, I will return the call over to Jean for a closer look at how we are doing and what we are doing. Jean?
Jean Madar -- Chairman
Yeah. Thank you, Russ, and good morning, everyone. As we reported, business has rebounded far better than our best expectations. For European operations, the third quarter rate of decline in sales slowed to 9.6%, which is quite good. Not surprisingly, most of our larger brands had declining comparable quarter of sales, but we had two exceptions, Coach and Lanvin. Coach fragrance sales have benefited from the introduction of Coach Dreams earlier this year, while Lanvin fragrance sales have been doing exceptionally well in two markets where the brand is very popular, Asia and Eastern Europe. Unlike European operations, none of our US-based brand had a major product launch in 2020, and as a result, its sales declined 35% from last year's third quarter.
It is time to look forward. 2021 looks to be a very big year for us. In addition to flankers, limited addition and gift collections, we have a number of major launches. Our largest brand, Montblanc, is adding Explorer 2 to a fragrance family and the brand also has a woman signature scent in the work.
For Jimmy Choo, we launched a product called I Want Choo, is scheduled for Winter 2021. And we also have new scents for Rochas and for Lanvin, both for women's coming to market later in the year. In addition, we are very excited about our first-ever Kate Spade fragrance launch, which we'll unveil in early in 2021.
For US operation, we will start the year with the launch of MCM first women's fragrance targeting Gen Z and Millennials, rolling out in the first and second quarters. I think you would be impressed by the bottle design, which was inspired by the iconic MCM backpack.
Our new Oscar de la Renta fragrance called Alibi will also debut in the first quarter, and similarly, its package design draws from the Oscar de la Renta Alibi bag.
The new Hollister duo called Canyon Escape comes to market in the first quarter, and highly anticipated Bella Vita the initial blockbuster for GUESS will launch in the Spring. The new blockbuster pillar for Abercrombie is in the pipeline for the second quarter and we'll relaunch the Graff Lesedi La Rona collection in the second quarter. In the third quarter, we will debut the new Anna Sui Sky in Asia. And so, this is for the products.
Regarding numbers, on very -- on December 2, we will announce our 2021 guidance.
We recognized that the post-pandemic retail world will be different. In fact, it already is. The challenges we face include store closings, restructurings, bankruptcies, destocking, and stricter working capital control, and that is coupled with the usual issues and concerns, such as currency volatility, supply chain interruptions, tariff, changes in regulation. But we have always been able to adjust and solve the problems at hand.
That brings me to a discussion on travel retail because we've had a lot of questions on travel retail. And as you know, it has been an important part of our business. With international travel severely restricted, the duty free segment has nearly ground to a halt. The resumption of brick-and-mortar stores and the e-commerce boom has helped fill that gap.
But I would like briefly to explain why we may -- you may have read about the surge in travel retail sales in China, specifically in Hainan, an island in China. To encourage Chinese people to shop in Chinese businesses, River [Phonetic] and South Korea, for example, the Chinese government has lifted restrictions on purchase limitation. So some Chinese people are buying large amount of goods bringing them back to their locals and selling them. It's travel retail but not international duty free shopping. Our products are sold there but fragrance represents really a small fraction of the beauty products. Chinese customer would buy more skincare than fragrance. But I will come back, if you have questions on that.
Just one last thing before we move to questions, Inter Parfums will present virtually at the Jefferies Retail and Brand Summit 2020 on Thursday, December 3, as well as at Davidson -- D.A. Davidson Consumer Growth Conference on March 3 of next year.
So now, operator, you can open the floor for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Joe Altobello with Raymond James. Please proceed with your question.
Joseph Altobello -- Raymond James -- Analyst
Thanks. Hey, guys. Good morning. So first question kind of big picture. How do we think about the global fragrance market in '21? If we assume that we do make some substantial progress on the virus and there will be more travel and people going out. At the same time, your launch schedules, it's pretty busy and I would think it's the same for almost every other fragrance company that's been delaying launches throughout this year. So, in a year with so many launches, both yourselves and others, is there a fear that some of those launches get crowded out? And also, are there any operational or supply chain issues that you guys foresee with all of these launches going on at once? Thank you.
Jean Madar -- Chairman
Thank you, Joe, for your question. Regarding the calendar of launches for next year, we are very ready for these launches because some of them should have happened this year and we just delayed them. So, from a supply chain point of view, inventory and execution point of view, I'm not worried at all. As I said before, it's maybe one of this unusual year where we have almost a major launch on every brands that we have, Jimmy Choo, Rochas, Montblanc, Van Cleef and as we GUESS, I can name all of our brands will have a blockbuster. So it's quite unusual.
The reaction of the trade, of course, we have presented all these products is quite good. But again, the lack of visibility that we have will make us be, of course, conservative in our approach when we're going to give you some projections on early December for next year. We think that if countries stay open, we'll have no problem to deliver a great year. But if it's like it is today where France is now locked up, UK is closed, maybe they will reopen just before Christmas, it would be very difficult to achieve what we want to do. But the -- we are optimally -- we are cautiously optimistic, we will -- we have big plans in terms of advertising spending. So everything is in place.
The third quarter was really reassuring for everybody, but we were sure internally that, of course, we did lose our touch, but it's really reassuring to see that we did a very good first quarter beating the street, of course. And the first numbers that we have for the beginning of the fourth quarter is also better than anticipated. So, we are OK, but difficult to have bigger visibility.
Russ, do you want to add something?
Russell Greenberg -- Chief Financial Officer
Yeah. I just want to stress, I -- the -- there really is no issues, as Jean mentioned, with respect to supply chain because we've even had additional time in order to get products ready for the launch and to actually show the products to our distribution network around the world.
The only other thing that I'd like to address is the fact that a substantial influx of new launches is not unusual for the fragrance industry. Even in normal times, in any one year, you could have anywhere from 1,000 to 1,500, if not, even more than that new launches. I think it will be a little exaggerated, especially since, not only Inter Parfums, but many of our competitors have also delayed certain launches. But I don't think that that is something that is very, very unusual for this industry. So, we are looking forward to it. And as Jean said, if things, with respect to the pandemic subside a little bit, we don't get much worse than they are today, we are cautiously optimistic for the future.
Joseph Altobello -- Raymond James -- Analyst
That's very helpful, guys. Thank you. And maybe if I could shift gears a bit to SG&A, especially for you, Russ, you mentioned in the quarter the SG&A reduction year-over-year. But if you look at the details, it was mostly I can see in royalties. In fact, I think your overheads were actually up modestly year-over-year and up substantially quarter-over-quarter. So, was that some catch-up from Q2 or is the $35 million to $36 million a quarter in terms of overheads a good run rate to use for the future?
Russell Greenberg -- Chief Financial Officer
Interesting. Your numbers are pretty close to right on. As a matter of fact, we reported SG&A of $65.8 million and if you took out promo royalty, even freight and service fees, which are the typical variable expenses that we normally disclose, you end up at around 33 point -- $33 million or so. However, Joe, there are additional variable expenses that are also included in those numbers. We went on record indicating that we think that the fixed expenses should run somewhere around that $25 million per quarter. And I think we're still pretty much right on target with that. But keep in mind, compared to the second quarter, our sales are up 200-and-somewhat-percent. With that, is going to come other variable expenses that we don't highlight as part of our normal ongoing quarterly reporting mechanism.
Joseph Altobello -- Raymond James -- Analyst
Okay. Thank you. Appreciate it.
Russell Greenberg -- Chief Financial Officer
No problem, Joe.
Operator
Thank you. Our next question comes from Linda Bolton Weiser with D.A. Davidson. Please proceed with your question.
Linda Bolton Weiser -- D.A. Davidson & Co. -- Analyst
Yes, hi. Actually when...
Jean Madar -- Chairman
Hi, Linda.
Linda Bolton Weiser -- D.A. Davidson & Co. -- Analyst
Hi. When L'Oreal talked about their quarter, they actually talked about the fact that they think they've gained market share because they went ahead with certain launches and I think they highlighted some fragrance areas and Coty has been talking about some success in their fragrance area as well. So, do you think that you've lost some market share by delaying those launches?
Jean Madar -- Chairman
I read through L'Oreal and Coty. I think that the amount of launches that happened were really in the first quarter and what was done in the second quarter was really launches that they couldn't stop. So I don't think that they do -- they did it on purpose.
And to -- I'm glad that we delayed our launches this -- in the second quarter, it would have been a terrible. Third quarter some of the countries were open, but some of the countries were slowly getting back to normal, trying to unload the inventory that they had before. I have absolutely no regret on what we've done. And I do not think that we have lost market share for our products. I think that we will look at this at the end of the Christmas season when -- at the end of the year when we look at our NPD [Phonetic]. I don't -- I'm sure that we will -- none of our products will have lost markets. But market is down in general. I don't think that we are more down than the market.
Linda Bolton Weiser -- D.A. Davidson & Co. -- Analyst
Okay. Thank you very much.
Jean Madar -- Chairman
Thank you, Linda.
Russell Greenberg -- Chief Financial Officer
Thank you, Linda.
Operator
Thank you. Our next question comes from Steph Wissink with Jefferies. Please proceed with your question.
Stephanie Wissink -- Jefferies -- Analyst
Thanks. Good morning, everyone. I want to follow up on Joe's earlier question on SG&A and just against the guidance Russ for the year and it does imply the fourth quarter is down similarly to the third quarter, but your earnings are somewhat lower. And so, I wanted to just understand a little bit about what's happening mechanically in the gross margin and the SG&A balance in Q4 that would imply a sharper degradation in earnings?
Russell Greenberg -- Chief Financial Officer
So typically, we've only really given guidance on the sales and earnings number for Q4. The biggest variable in connection with Q4 is the amount of advertising that we're going to put into place. Part of that is actually being decided as we speak. And that really is going to depend on the visibility that we see within the retail marketplace. There are several different programs that are kind of in a wait and see mode, depending upon how sales continue to trend through the rest of November and then into early December, and therefore, we are really trying to just be as we usually are a little bit conservative in case we see the momentum pick up, and we want to put more advertising dollars into the market. And that's where those variables really come from.
Stephanie Wissink -- Jefferies -- Analyst
Okay. That's really helpful. And then question for both of you, actually two-part question is, just a disclosure you gave on Hainan island, I thought it was really interesting that fragrance under indexes other categories within beauty, but that also customers may be buying up to that government issued level and taking some of that merchandise back and reselling it. If you could just talk a little bit more about observations around what we would call the local market travel retail versus cross-border travel retail?
And then also just a clarification question on dotcom. Can you just remind us how your licenses work with some of your big brands like a Montblanc, Jimmy Choo? Are you selling wholesale to those dotcoms if you're selling those goods through the brand dotcoms? Thank you.
Jean Madar -- Chairman
Well, to go back to Hainan, because everybody is talking about that, I discussed briefly, Hainan was known for their beaches and the shopping, but today, you have hundreds or, I mean, what am I talking, tends of thousands of people who go to Hainan, they buy products, they put it in their suitcase and they bring it back to Mainland China and they resell it. So it's a semi-wholesale. I've seen this -- we all have seen this when Chinese people were traveling to Korea. They were also coming with suitcases and bringing back products. This is really to take advantage of pricing. There is a 25% to 35% price difference between Hainan and Mainland China. So that's why people are doing it. Is it really, what we call, duty free travel retail? Not really. For me, I consider it as, how should I say, local transfer of merchandise.
When the real travel retail is going to get back to normal? This is -- we think it's not for now, it's not for next year. It will maybe take we think three years before we go back to where we were in 2019. So this is my answer on Hainan.
Russ, do you want to answer on how do we sell [Speech Overlap]?
Russell Greenberg -- Chief Financial Officer
Yeah. On the --. Sure. On that -- most of our sales in the dotcom arena are -- and most of our licenses, certainly, always allow us to sell through the dotcom of any brick-and-mortar customer that we sell to. So, whether or not we sell to Sephora or to Macy's or to -- or even in the international markets to Gloss [Phonetic] or Harrods or any of those major retailers around the world. We are always able to sell product to their -- through their dotcom environment.
And in addition, in most of our licenses, it also allows us to go through other dotcom venues, and those are approved on a case-by-case basis. In other words, here in the United States, if we wanted to sell through Amazon, for example, in their beauty segment, we would normally go back to licensors and they typically would give us permission to sell through those different venues. But most of our dotcom sales today are through our brick-and-mortar customers.
Stephanie Wissink -- Jefferies -- Analyst
Thank you.
Operator
Thank you. Our next question comes from the line of Hamed Khorsand with BWS Financial. Please proceed with your question.
Vahid Khorsand -- BWS Financial -- Analyst
Hi. Thank you for taking the question. This is Vahid calling in for Hamed. Could you provide a little bit of background on what the current channel inventory is?
Jean Madar -- Chairman
In this call I did not, but when we talk to our distributors and when we talk to the retailers that we sell directly, we see that the level of inventory is still very, very reasonable. They buy for a month or two. We ship a lot of merchandise by air. It means that people cannot wait too long to receive the inventory. So, the amount of goods in the channel are not very high. But it has been like this for the whole year.
Vahid Khorsand -- BWS Financial -- Analyst
Okay. And I just heard you gave a response where you think the travel sales won't return to 2019 levels for another three years. But as you're looking at this launch calendar, what kind of thinking is going into the production -- level of production and how much inventory you do put in the channel?
Russell Greenberg -- Chief Financial Officer
So, I think -- I'm sorry.
Jean Madar -- Chairman
Yes, Russ.
Russell Greenberg -- Chief Financial Officer
I just wanted to bring up to the attention is that, travel retail still only represents or only represented 15% to 20% of our sales in 2019. Now, some of that, of course, is being made up by brick-and-mortar. And as Jean mentioned in Hainan province in China, you have a different types of, I don't want to call it, of travel retail, maybe not international travel retail, that is taking place. So, that's not going to have a significant or a very, very significant impact in our expectations for new product launches.
Our true travel retail as in the historic norm that we know of, there it's a matter of -- that can only come back once customers and people are back to traveling and really international travel, vacationing and things of that sort. And that very well may take until the end of 2021 or early 2022. But it's going to be a process that will happen in time, but I don't think it's going to have a major -- a significant impact in the distribution of our product from the standpoint of new product launches.
Jean Madar -- Chairman
Yeah. 80% or 90% of our sales are done outside of travel retail. So, when you ask about our launches, for all the brands that we have, we'll have launches in 100 countries where we sell our products and it will be in Macy's or in macys.com, in [Indecipherable], or in Sephora -- and sephora.com. And we can absolutely live with travel retail that will be in trouble for the next, I don't know, two years at least.
Vahid Khorsand -- BWS Financial -- Analyst
I apologize. I meant that as just a broadening topic, not just on travel retail because I know earlier in the call you were discussing even with the vaccine, it's hard to tell when normal is going to return. So, I'm just trying to get a better picture of what your production output may look like given that circumstance of the unknown. Like, is it -- are you anticipating a normal launch? Are you anticipating like what levels are you putting into calculating how much production to put out? And what you anticipate the channel inventory will look like given there are so many variables with what the true reopening is going to look like?
Jean Madar -- Chairman
Yeah. It's a good question, because how much are we going to sell of the new product, it is difficult to us, but again we are not a start-up, we have been doing this for 40 years. So we have a good idea of what can we sell, how much space is allocated in what store, in what country. So all our teams are -- everywhere in the world are working to make sure that we have the space. And also, our supply chain partners is working hard in order to improve delivery of products.
Definitely, we will have a conservative approach, because this is the way we are. We were, for instance, taken a little bit by surprise by the strength of our third quarter and we were, of course, out of stock for [Indecipherable] in the third quarter. We will be back -- we are back in stock in the fourth quarter. But for these new launches, we are -- because they are from -- they are blockbusters from most of our bigger brands we'll take an aggressive approach and we'll make sure that we have enough inventory to supply the accounts.
Vahid Khorsand -- BWS Financial -- Analyst
Okay. Thank you very much.
Operator
Thank you. We have no additional questions at this time. So I'd like to pass the floor back over to Mr. Greenberg for any additional or closing comments.
Russell Greenberg -- Chief Financial Officer
Okay. Okay. Thank you, Jessie. And thank you all for joining us today on the conference call. As usual, if anybody does have any further questions or needs further discussion, please contact me by email. Everybody, please stay well and stay safe. And thank you again for joining us today.
Operator
[Operator Closing Remarks]
Duration: 37 minutes
Call participants:
Russell Greenberg -- Chief Financial Officer
Jean Madar -- Chairman
Joseph Altobello -- Raymond James -- Analyst
Linda Bolton Weiser -- D.A. Davidson & Co. -- Analyst
Stephanie Wissink -- Jefferies -- Analyst
Vahid Khorsand -- BWS Financial -- Analyst
