For most of last year, I expected that fragrance distributor Inter Parfums (NASDAQ:IPAR) would have a down 2004, go flat in the first quarter of 2005, and then take off for the rest of this year. I was looking for inflection points that would give us an opportunity to buy in, considering that I believe the company is overvalued, or at best fairly valued, at its current $14-$15 trading range.

Last week, the distributor of fragrances such as Burberry Brit for Men, Christian Lacroix, Diane von Furstenberg, and the recently released Fever line from Celine, pre-announced first-quarter earnings, and I'm thinking I may have to extend that recovery somewhat.

As Foolish contributor Dave Marino-Nachison correctly predicted last month, Inter Parfums has come to rely upon high-end fragrance lines to boost its sales at the expense of lower priced "mass market" lines. With higher royalties required for those luxury names -- Burberry is one such name -- Inter Parfums ends up taking a hit in margins. A higher royalty payment went into effect last July, and in January, increased costs associated with a new advertising campaign began. It simply takes more money to support these high-end "prestige" names. While that paid off in a 29% increase in their sales, it was greatly offset by a 16% decline in the mass market lines, which has been feeling the effects of the softness in the dollar store market where they are primarily sold.

It probably also helps explain why Inter Parfums is raising full-year sales guidance to $280 million but is predicting flat earnings for 2005. Margins are going to be taking a further hit, too, as the company expects net margins to drop from 6.7% in 2004 to 5.6% in 2005. The company is not necessarily selling more, just charging more for the lines it is selling, but it's costing it more to make the sales.

Market researcher Euromonitor forecasts fragrance industry growth at only 2.6% over the next two years. Tough competition comes from typical luxury cosmetics companies like Estee Lauder (NYSE:EL), Elizabeth Arden (NASDAQ:RDEN), and Revlon (NYSE:REV), plus Inter Parfums faces the likes of Colgate-Palmolive (NYSE:CL), Alberto-Culver (NYSE:ACV), and Avon (NYSE:AVP) from below.

For the first quarter of this year, the company noted that sales would come in at $71 million, a 22% increase over the first quarter last year. Yet those revenues were up 55% over 2003. With a decline in the growth rate greater than 50%, I still believe there is plenty of room for the stock price to drop. How far? I think a range of $11 to $12 a share is possible, and if it dropped to around $10 or below, I would even consider picking up shares.

The company does have some great brand names, and it also has its men's health spa, Nickel, which it acquired last year, contributing to revenues. As the metrosexual revolution, alas, continues unabated, the spa should contribute even more to Inter Parfums' top and bottom lines. For investors, the 33% increase in the dividend -- its 13th consecutive quarterly payment -- should ease any discomfort they are feeling from the lack of any appreciation in the share price.

With a healthy balance sheet, significant cash, and access to credit lines, Inter Parfums can, and has indicated it would, make additional acquisitions if the right one comes along. It's just not time to acquire any shares in the company.

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Fool contributor Rich Duprey actually bought his first facial moisturizer. Sheesh! He does not own any of the stocks mentioned in the article.