IPAR - Inter Parfums: 2024 Guidance Supports My Neutral View

2023-12-01 17:52:06 ET

Summary

• Inter Parfums is guiding for a revenue growth rate in the teens for fiscal 2024.
• But guidance points to a slower single-digit percentage increase in the company's earnings for the following year.
• I retain a Hold rating for IPAR after assessing the company's prospects in view of its new 2024 guidance.

Elevator Pitch

I continue to have a Neutral opinion and a Hold rating for Inter Parfums, Inc. ( IPAR ) stock.

I previously downgraded my rating for IPAR from a Buy to a Hold with my September 22, 2023 update on the basis of the company's "mixed outlook, considering both the top line (decent growth) and bottom line (margin contraction)." Inter Parfums stock price decreased by -13.4% (source: Seeking Alpha price data) and underperformed the S&P 500 by -18.6 percentage points since I lowered the rating for the company's shares in late September.

Inter Parfums' new fiscal 2024 guidance provides support for my earlier assessment of Inter Parfums' financial prospects, which means that my Hold rating remains intact. IPAR's double-digit percentage top line growth outlook in FY 2024 is decent, but its high P/E multiple demands a higher earnings growth rate than the company's +8% bottom line expansion guidance for next year.

IPAR Is Expected to Deliver Decent Revenue Expansion Next Year

Seeking Alpha News recently published an article on November 30, 2023 citing research from BofA Securities ( BAC ), which highlighted Inter Parfums as one of the stocks which has "historically outperformed downturns and recession regimes." IPAR's fiscal 2024 financial guidance seems to be consistent with BofA Securities' positive view of the company's defensiveness and resilience.

In late November, Inter Parfums issued a media release revealing the company's FY 2024 outlook. In specific terms, IPAR guided for a +12% growth in its revenue to $1,450 million for the next fiscal year. The analysts think that the company's sales guidance is achievable, given that the current consensus FY 2024 top line forecast for IPAR is just marginally lower at $1,447.5 million (source: S&P Capital IQ ).

The company stressed in its November 21, 2023 press release that 2024 will be a year of "record-level sales" driven by "ongoing momentum in the fragrance market", "enrichment from line extensions, and incremental sales from our newest brands."

I had already mentioned in my previous article that IPAR's new product offerings, and the outperformance of the company's US geographical market and the men's customer segment will boost its top line in the foreseeable future.

Also, Inter Parfums' sales mix limits the downside risks for its future top line performance. At its most recent Q3 2023 results briefing , IPAR noted that its exposure to both the China geographical market and the travel retail sales channel is limited. The company mentioned at its third quarter results call that "China currently represents only a very small portion of our business." IPAR also noted that its sales contribution from travel retail is in the single-digit percentage range and smaller "as opposed to our larger competitors." China's economy remains challenging based on the latest available monthly data ; while travel retail demand tends to be volatile as it is influenced by geopolitical issues and tourist spending.

But it is worthy of note that the market didn't respond very favorably to Inter Parfums' FY 2024 guidance released after the close on November 21. IPAR's share price increased by just +0.02% from $123.62 at the end of the November 21 trading day to $123.65 as of November 22. This might be because IPAR's bottom line outlook was lackluster as detailed in the next section.

But Inter Parfums' FY 2024 Earnings Growth Guidance Is Disappointing

IPAR sees its earnings per share or EPS expanding by +8% to $5.15 for FY 2024, which will be a slower pace of growth as compared to its guided +12% top line increase in the same fiscal year.

Earlier, I outlined my expectations of "margin pressure" for Inter Parfums resulting from "an unfavorable revenue mix with higher sales contribution from the US and gift sets" in my September write-up. This explains why IPAR is anticipating flattish gross margin for FY 2024 versus FY 2023.

Separately, IPAR noted in its November 2023 press release that the "launch investment associated with our two newest brands, Cavalli and Lacoste" and the "non-cash amortization expense of the acquisition cost (for the Lacoste brand)" will weigh on the company's bottom line in the following year.

There is a misalignment between Inter Parfums' current valuations and its expected bottom line growth rate. IPAR is now trading at 26.3 times consensus fiscal 2023 normalized P/E as per S&P Capital IQ consensus data, but the company is guiding for a modest high-single digit percentage earnings expansion rate for FY 2024. This translates into a Price-to-Earnings-Growth or PEG ratio of 3.3 times.

Inter Parfums' PEG metric becomes a slightly more reasonable 2.1 times, if one calculates the PEG ratio based on the company's consensus FY 2025-2026 normalized EPS CAGR of +12.3%.

The company's ROEs at the high-teens percentage level (source: S&P Capital IQ ) do support a higher valuation multiple, but its weak near-term FY 2024 EPS growth guidance of +8% will limit the stock's capital appreciation and valuation re-rating potential for the near term.

Closing Thoughts

I leave my Hold rating unchanged. IPAR's FY 2024 financial guidance doesn't change my earlier expectations of mixed financial prospects (i.e. positive revenue growth, margin pressure) for the company in the short term.

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