UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE )

☒ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended September 30, 2019.

OR

☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from ___________to ________.

Commission File No. 0-16469

INTER PARFUMS, INC.

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes  ☒ No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act).

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No  ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

At November 5, 2019, there were 31,464,568 shares of common stock, par value $.001 per share, outstanding.

INDEX

INTER PARFUMS, INC. AND SUBSIDIARIES

Part I. Financial Information

Item 1. Financial Statements

In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position, results of operations and cash flows for the interim periods presented. We have condensed such financial statements in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Therefore, such financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America. In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued by filing with the SEC. These financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2018 included in our annual report filed on Form 10-K.

The results of operations for the nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the entire fiscal year.

INTER PARFUMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands except share and per share data)

(Unaudited)

See notes to consolidated financial statements.

INTER PARFUMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands except per share data)

(Unaudited)

See notes to consolidated financial statements.

INTER PARFUMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands except per share data)

(Unaudited)

See notes to consolidated financial statements.

INTER PARFUMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands)

(Unaudited)

Common stock

Additional paid in-capital

Retained earnings

Accumulate other comprehensive loss

Treasury stock

Noncontrolling interest 

 See notes to consolidated financial statements.

INTER PARFUMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See notes to consolidated financial statements.

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

INTER PARFUMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

INTER PARFUMS, INC. AND SUBSIDIARIES

Forward Looking Information

Statements in this report which are not historical in nature are forward-looking statements. Although we believe that our plans, intentions and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. In some cases you can identify forward-looking statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will" and "would" or similar words. You should not rely on forward-looking statements because actual events or results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors. These factors include, but are not limited to, the risks and uncertainties discussed under the headings "Forward Looking Statements" and "Risk Factors" in Inter Parfums' annual report on Form 10-K for the fiscal year ended December 31, 2018 and the reports Inter Parfums files from time to time with the Securities and Exchange Commission. Inter Parfums does not intend to and undertakes no duty to update the information contained in this report.

Overview

We operate in the fragrance business, and manufacture, market and distribute a wide array of fragrances and fragrance related products. We manage our business in two segments, European based operations and United States based operations. Certain prestige fragrance products are produced and marketed by our European operations through our 73% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 27% of Interparfums SA shares trade on the NYSE Euronext.

We produce and distribute our European based fragrance products primarily under license agreements with brand owners, and European based fragrance product sales represented approximately 77% and 81% of net sales for the nine months ended September 30, 2019 and 2018, respectively. We have built a portfolio of prestige brands, which include Boucheron, Coach, Jimmy Choo, Karl Lagerfeld, Kate Spade New York, Lanvin, Montblanc, Paul Smith, S.T. Dupont, Repetto, Rochas and Van Cleef & Arpels, whose products are distributed in over 120 countries around the world.

Through our United States operations, we also market fragrance and fragrance related products. United States operations represented 23% and 19% of net sales for the nine months ended September 30, 2019 and 2018, respectively. These fragrance products are sold or to be sold primarily pursuant to license or other agreements with the owners of the Abercrombie & Fitch, Agent Provocateur, Anna Sui, bebe, Dunhill, French Connection, Graff, GUESS, Hollister, Lily Aldridge and Oscar de la Renta brands.

INTER PARFUMS, INC. AND SUBSIDIARIES

Substantially all of our prestige fragrance brands are licensed from unaffiliated third parties, and our business is dependent upon the continuation and renewal of such licenses. With respect to the Company's brands exceeding 10% of net sales, we own the Lanvin brand name for our class of trade, and license the Montblanc, Jimmy Choo and Coach brand names. As a percentage of net sales, product sales for these brands were as follows:

Quarterly sales fluctuations are influenced by the timing of new product launches as well as the third and fourth quarter holiday season. In certain markets where we sell directly to retailers, seasonality is more evident. We sell directly to retailers in France as well as through our own distribution subsidiaries in Spain and the United States.

We grow our business in two distinct ways. First, we grow by adding new brands to our portfolio, either through new licenses or other arrangements or out-right acquisitions of brands. Second, we grow through the introduction of new products and by supporting new and established products through advertising, merchandising and sampling as well as phasing out underperforming products so we can devote greater resources to those products with greater potential. The economics of developing, producing, launching and supporting products influence our sales and operating performance each year. Our introduction of new products may have some cannibalizing effect on sales of existing products, which we take into account in our business planning.

Our business is not capital intensive, and it is important to note that we do not own manufacturing facilities. We act as a general contractor and source our needed components from our suppliers. These components are received at one of our distribution centers and then, based upon production needs, the components are sent to one of several third party fillers, which manufacture the finished product for us and then deliver them to one of our distribution centers.

As with any global business, many aspects of our operations are subject to influences outside our control. We believe we have a strong brand portfolio with global reach and potential. As part of our strategy, we plan to continue to make investments behind fast-growing markets and channels to grow market share. 

Our reported net sales are impacted by changes in foreign currency exchange rates. A strong U.S. dollar has a negative impact on our net sales. However, earnings are positively affected by a strong dollar, because over 45% of net sales of our European operations are denominated in U.S. dollars, while almost all costs of our European operations are incurred in euro. Conversely, a weak U.S. dollar has a favorable impact on our net sales while gross margins are negatively affected. Our Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. We primarily enter into foreign currency forward exchange contracts to reduce the effects of fluctuating foreign currency exchange rates. We are also carefully monitoring currency trends in the United Kingdom as a result of the volatility created from the United Kingdom's decision to exit the European Union. We have evaluated our pricing models and we do not expect any significant pricing changes. However, if the devaluation of the British pound worsens, it may affect future gross profit margins from sales in that territory.

INTER PARFUMS, INC. AND SUBSIDIARIES

Recent Important Events

Oscar de la Renta

In September 2019, the Company and Oscar de la Renta entered into an amended license agreement extending their partnership through December 31, 2031, and added an additional five-year extension option through December 31, 2036. The original license agreement, signed in October 2013, would have expired on December 31, 2025.

Kate Spade New York

In June 2019, the Company entered into an exclusive, 11-year worldwide license agreement with Kate Spade New York for the creation, development and distribution of fragrances under the Kate Spade brand. This license takes effect on January 1, 2020, and our rights under such license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry.

Lily Aldridge License

In September 2018, Interstellar Brands LLC, a wholly-owned subsidiary of the Company, announced the development of a new fragrance line in collaboration with supermodel Lily Aldridge. The license agreement with Lily Aldridge runs through December 31, 2023, and is subject to royalty payments as are customary in our industry. This deal marks the beginning of a strategic partnership between Interstellar and IMG Models, which manages Lily Aldridge, to develop direct-to-consumer e-commerce fragrance and beauty businesses for IMG Models' diverse and dynamic client base.

Graff License

In April 2018, the Company entered into an exclusive, 8-year worldwide license agreement with London-based Graff for the creation, development and distribution of fragrances under the Graff brand. Our rights under such license agreement are subject to certain advertising expenditures and royalty payments as are customary in our industry. Initial product development includes a multi-scent collection planned for an early 2020 launch. Additionally, we are exploring opportunities for luxury travel amenities, including five star hotels.

GUESS License

In February 2018, the Company entered into an exclusive, 15-year worldwide license agreement with GUESS?, Inc. for the creation, development and distribution of fragrances under the GUESS brand. This license took effect on April 1, 2018, and our rights under such license are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry. In 2018, our sales efforts were focused on existing fragrances; in 2019, we added several flankers to existing product lines and in 2020, an entirely new fragrance line is scheduled for launch.

INTER PARFUMS, INC. AND SUBSIDIARIES

  Discussion of Critical Accounting Policies

Information regarding our critical accounting policies can be found in our 2018 Annual Report on Form 10-K filed with the SEC.

Results of Operations

Three and Nine Months Ended September 30, 2019 as Compared to the Three and Nine Months Ended September 30, 2018

Net Sales

Net sales for the three months ended September 30, 2019 increased 7.9% to $191.2 million, as compared to $177.2 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales for that same period increased 9.7%. Net sales for the nine months ended September 30, 2019 increased 7.5% to $535.7 million, as compared to $498.3 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales for that same period increased 10.2%.

European based product sales increased 4.2% and 2.5% for the three and nine months ended September 30, 2019, respectively, as compared to the corresponding periods of the prior year. Montblanc, our largest brand, continued to perform exceptionally well, with comparable period sales growth of 32.2% and 22.0% for the three and nine months ended September 30, 2019, respectively, as compared to the corresponding periods of the prior year. These results are attributable to the brand's newest scent, Montblanc Explorer, which launched in January 2019 and is performing exceptionally well in the United States and Western Europe. We also see continued strong performance of the brand's founding line Montblanc Legend. In July 2019, we launched Jimmy Choo Urban Hero, our newest men's scent for the Jimmy Choo brand. Initial reactions were very positive and brand sales are up 10.1% and 4.5% for the three and nine months ended September 30, 2019, respectively, as compared to the corresponding periods of the prior year. Despite the strength of the dollar and the high bar set in 2018 when Coach brand sales rose 104%, the popularity of the Coach fragrance portfolio, enabled us to increase sales just over 1% for the nine months ended September 30, 2019, as compared to the corresponding period of the prior year. The April 2019 launch of A Girl in Capri, boosted Lanvin brand sales and offset much of the decline in sales of the brand's established scents. However, the Lanvin brand continues to face difficult markets in Asia and South America and as a result, Lanvin brand sales are down 15.4% for the nine months ended September 30, 2019, as compared to the corresponding period of the prior year.

INTER PARFUMS, INC. AND SUBSIDIARIES

United States based product sales increased 20.7% and 28.6% for the three and nine months ended September 30, 2019, respectively, as compared to the corresponding periods of the prior year. The increase in net sales is primarily the result of the exceptional strength of GUESS brand scents. The recent debuts of 1981 Los Angeles and Seductive Noir have further enhanced the brand's established fragrance franchise. The Abercrombie & Fitch brand also continues to perform well as a result of the global rollout of their newest duo scent, Authentic. In addition, Hollister fragrances generated gains enhanced by the launch of the Wave limited edition duo, plus our first Festival line extension, Festival Nite. The Anna Sui and Oscar de la Renta brands continue to perform well in 2019, while Dunhill is expected to regain some of its lost momentum with the recent global launch of Century Blue.

Sustained growth in the major markets of North America, Western Europe and Middle East was the result of increased product sales from the Montblanc, Jimmy Choo and Coach brands.

Gross profit margin was 59.8% and 61.8% of net sales for the three and nine months ended September 30, 2019, respectively, as compared to 61.6% and 62.3% for the corresponding periods of the prior year.

INTER PARFUMS, INC. AND SUBSIDIARIES

For European operations, gross profit margin was 62.8% and 64.7% of net sales for the three and nine months ended September 30, 2019, respectively, as compared to 64.9% and 65.1%, for the corresponding periods of the prior year. We carefully monitor movements in foreign currency exchange rates as over 45% of our European based operations net sales are denominated in U.S. dollars, while most of our costs are incurred in euro. From a margin standpoint, a strong U.S. dollar has a positive effect on our gross profit margin while a weak U.S. dollar has a negative effect. The average dollar/euro exchange rates for the three and nine months ended September 30, 2019 was 1.11 and 1.12, respectively, as compared to 1.16 and 1.20 for the corresponding periods of the prior year. The stronger dollar in 2019 resulted in a benefit to our gross margin during the three and nine months ended September 30, 2019. However, our new Montblanc Explorer product line, which was designed by some of the most highly sought after designers, has a greater than typical cost of sales, which offset much of the benefit of the stronger dollar.

For U.S. operations, gross profit margin was 51.0% and 52.3% for the three and nine months ended September 30, 2019, respectively, as compared to 49.9% and 50.4% for the corresponding periods of the prior year. Sales growth for our United States operations is primarily the result of increased sales of higher margin prestige products under licenses. In addition, for the three months ended September 30, 2019, increased tariffs enacted by the United States had a small negative impact on our gross margins, and we do not anticipate any material negative impact in the foreseeable future.

Generally, we do not bill customers for shipping and handling costs, and such costs, which aggregated $2.4 million and $5.9 million for the three and nine month periods ended September 30, 2019, respectively, as compared to $1.8 million and $5.3 million for the corresponding periods of the prior year, are included in selling, general and administrative expenses in the consolidated statements of income. As such, our Company's gross profit may not be comparable to other companies, which may include these expenses as a component of cost of goods sold. 

Selling, general and administrative expenses increased 4.9% and 5.6% for the three and nine months ended September 30, 2019, respectively, as compared to the corresponding periods of the prior year. For European operations net sales increased 4.2% and 2.5% for the three and nine months ended September 30, 2019, respectively, as compared to the corresponding periods of the prior year, while selling, general and administrative expenses of our European operations increased 0.3% and 1.4% for those same corresponding periods. As a result, selling, general and administrative expenses of our European operations represented 42.1% and 46.0% of net sales for the three and nine months ended September 30, 2019, respectively, as compared to 43.8% and 46.5% for the corresponding periods of the prior year.

INTER PARFUMS, INC. AND SUBSIDIARIES

For U.S. operations net sales increased 20.7% and 28.6% for the three and nine months ended September 30, 2019, respectively, as compared to the corresponding periods of the prior year. At the same time, selling, general and administrative expenses of our U.S. operations increased 25.0% and 25.6% for the three and nine months ended September 30, 2019, as compared to the corresponding periods of the prior year and as a result, represented 36.3% and 40.0% of net sales for the three and nine months ended September 30, 2019, respectively, as compared to 35.1% and 40.9% for the corresponding periods of the prior year. The increase in selling, general and administrative expenses as a percentage of sales within our U.S. operations is directly associated with increased sales of licensed products.

Promotion and advertising included in selling, general and administrative expenses aggregated $28.7 million and $92.5 million for the three and nine months ended September 30, 2019, respectively, as compared to $27.9 million and $87.2 million for the corresponding periods of the prior year. Promotion and advertising represented 17.3% and 15.0% of net sales for the three and nine months ended September 30, 2019, respectively, as compared to 17.5% and 15.7% for the corresponding periods of the prior year. We continue to invest heavily in promotional spending to support new product launches and to build brand awareness. We have significant promotion and advertising programs underway for 2019, and anticipate that on a full year basis, promotion and advertising expenditure will aggregate approximately 21% of 2019 net sales, which is in line with that of the past two years.

Royalty expense, which is included in selling, general and administrative expenses aggregated $14.1 million and $39.2 million for the three and nine months ended September 30, 2019, respectively, as compared to $13.0 million and $35.5 million for the corresponding periods of the prior year. Royalty expense represented 7.4% and 7.3% of net sales for the three and nine months ended September 30, 2019, as compared to 7.3% and 7.1% of net sales for the corresponding periods of the prior year. The increase is directly related to new licenses and increased royalty based product sales.

As a result of the above analysis regarding net sales, gross profit margins and selling, general and administrative expenses, income from operations increased 4.8% to $36.6 million for the three months ended September 30, 2019, as compared to $35.0 million for the corresponding period of the prior year. Income from operations increased 9.8% to $92.4 million for the nine months ended September 30, 2019, as compared to $84.1 million for the corresponding period of the prior year. Operating margins were 19.2% and 17.2% of net sales for the three and nine months ended September 30, 2019, respectively, as compared to 19.7% and 16.9% for the corresponding periods of the prior year.

Other Income and Expense

Interest expense aggregated $0.4 million and $1.2 million for the three and nine months ended September 30, 2019, respectively, as compared to $0.5 million and $1.6 million for the corresponding periods of the prior year. Interest expense is primarily related to the financing of brand acquisitions. We also use the credit lines available to us, as needed, to finance our working capital needs as well as our financing needs for acquisitions.

INTER PARFUMS, INC. AND SUBSIDIARIES

Foreign currency gain or (loss) aggregated ($0.1) million and ($0.8) million for the three and nine months ended September 30, 2019, respectively, as compared to ($1.1) million and $0.2 million for the corresponding periods of the prior year. We typically enter into foreign currency forward exchange contracts to manage exposure related to receivables from unaffiliated third parties denominated in a foreign currency and occasionally to manage risks related to future sales expected to be denominated in a foreign currency. Over 45% of net sales of our European operations are denominated in U.S. dollars.

Interest income aggregated $0.6 million and $2.9 million for the three and nine months ended September 30, 2019, respectively, as compared to $0.8 million and $3.3 million for the corresponding periods of the prior year. Cash and cash equivalents and short-term investments are primarily invested in certificates of deposit with varying maturities.

Income Taxes

Our effective tax rate was 27.4% and 27.9% for the three and nine months ended September 30, 2019, respectively, as compared to 28.6% and 29.7% for the corresponding periods of the prior year. Our effective tax rate for European operations was 30.0% for both the three and nine months ended September 30, 2019, respectively, as compared to 31.0% for both the three and nine months ended September 30, 2018. The lower effective tax rate for European operations in 2019 is the result of higher profits from their U.S. subsidiary, which are taxed at a lower corporate tax rate.

Our effective tax rate for U.S. operations was 15.8% and 16.6% for the three and nine months ended September 30, 2019, respectively, as compared to 15.7% and 17.5% for the three and nine months ended September 30, 2018. Our effective tax rate differs from the 21% statutory rate due to benefits received from the exercise of stock options as well as deductions we are allowed for a portion of our foreign derived intangible income slightly offset by state and local taxes.

Other than as discussed above, we did not experience any significant changes in tax rates, and none were expected in jurisdictions where we operate.

Net income and earnings per share

Net income increased 9.1% to $26.7 million for the three months ended September 30, 2019, as compared to $24.4 million for the corresponding period of the prior year. Net income increased 11.0% to $67.2 million for the nine months ended September 30, 2019, as compared to $60.5 million for the corresponding period of the prior year. The primary reasons for significant fluctuations in net income for both European operations and United States operations are directly related to the previous discussions relating to changes in sales, gross margin and selling, general and administrative expenses. As discussed, slightly lower gross profit margins as a percentage of sales within our European operations were offset by lower selling, general and administrative expenses as a percentage of sales. For United States operations, in summary, net sales for the nine months ended September 30, 2019 increased 28.6%, gross margin increased 33.6% and selling, general and administrative expenses increased 25.6%, all as compared to the corresponding period of the prior year.

The noncontrolling interest arises from our 73% owned subsidiary, Interparfums SA, which is also a publicly traded company as 27% of Interparfums SA shares trade on the NYSE Euronext. The noncontrolling interest is also affected by the profitability of Interparfums SA's 51% owned distribution subsidiary in Spain. Net income attributable to the noncontrolling interest aggregated 28% of European operations' net income for all periods presented.