IPAR - Inter Parfums: Consider Revenue Prospects And Profitability Outlook (Rating Downgrade)

2023-09-22 03:23:15 ET

Summary

• Inter Parfums' revenue growth outlook is positive, taking into account multiple drivers such as new products and a reasonably high level of marketing spend.
• IPAR's profitability is expected to weaken going forward, as a result of an unfavorable sales mix.
• I lower my rating for Inter Parfums to a Hold, after considering how the company could potentially perform in the near term.

Elevator Pitch

My investment rating for Inter Parfums, Inc. (IPAR) stock is a Hold.

In my earlier write-up for Inter Parfums published on May 23, 2023, my focus was on IPAR's duty-free business and the company's recent distribution deal. With the latest update, I analyze Inter Parfums' financial prospects for the short term.

I decide to downgrade my rating for IPAR from a Buy earlier to a Hold now, as Inter Parfums' near-term prospects are mixed. While IPAR is expected to maintain robust revenue expansion going forward, the company's profitability will be affected by an unfavorable sales mix.

Recent Changes To Consensus Q3 Financial Projections For IPAR

There are four Wall Street analysts currently covering Inter Parfums' shares. The sell-side's revisions to the company's quarterly financial numbers in recent months provide valuable insights about expectations regarding IPAR's near-term financial performance.

In the last three months, all four of the sell-side analysts raised their Q3 2023 top line estimates for Inter Parfums. On the flip side, half of the Wall Street analysts with IPAR in their coverage universe lowered their third quarter normalized EPS forecasts for the company during the same time period. Notably, there was only a single analyst who revised his or her Q3 bottom line projection upwards in the past three months.

In specific terms, the market consensus sees Inter Parfums' revenue expanding by +26.3% YoY to $354.3 million in the third quarter of the current year, and this is on par with the +26.4% YoY top line growth for IPAR in Q2 2023. On the other hand, IPAR's normalized EPS is projected to decrease by -5.4% YoY to $1.23 for Q3 2023, in tandem with a -370 basis points (source: S&P Capital IQ ) contraction in normalized net margin.

In the subsequent sections of the article, I touch on the positive top line growth outlook and negative profitability expectations for Inter Parfums.

Inter Parfums' Favorable Revenue Growth Prospects

There are multiple factors that are expected to help IPAR sustain the company's strong top line expansion in Q3 2023.

The first key factor is new products.

In its September 2023 investor presentation slides , Inter Parfums outlined its new product development approach involving "the creation of fragrance family extensions within the existing brands." The company's new products typically includes new creations sold under flanker brands, limited edition offerings, and special items meant for certain seasons. IPAR noted at its Q2 2023 earnings briefing last month that new product launches have allowed it to deliver superior top line growth as compared to "competition" and "the market."

The second key factor relates to investments in marketing.

At its second quarter earnings call, IPAR guided for allocating approximately 21% of its revenue to advertising and promotions or A&P. Inter Parfums' Q2 2023 A&P-to-revenue ratio was already as high as 17.6%, and the company's A&P spending will naturally get higher towards the year-end holiday period. At a time where many companies choose to cut back on A&P spend due to tough economic conditions, Inter Parfums' commitment to A&P investments should enable it to gain market share.

The third key factor is the above-expectations growth for specific customer and market segments.

Inter Parfums highlighted at the company's most recent quarterly results call that it observed "a very strong (growth) trend with our men's fragrance business", due to the fact that men are "willing to try more than one" fragrances nowadays. As an illustration of how fast this segment is growing, total men's perfume sales in the South Korean market jumped by +35% in 2022.

Separately, drivers such as "increasing penetration levels, higher usage, and continued premiumization" have supported the growth of IPAR's US business, as disclosed in its September 2023 investor presentation. At its Q2 earnings briefing, Inter Parfums highlighted that more consumers in the US were using multiple fragrances for different parts of the day.

Margin Pressure For IPAR

IPAR's revenue growth outlook is favorable as mentioned in the previous section, but the company's prospects relating to profitability are less encouraging.

Inter Parfums acknowledged at its Q2 2023 earnings call that it is "projecting some erosion in our gross margin" in 2H 2023. These comments are aligned with the market's consensus expectations of a -370 basis points YoY decline in normalized net margin for Q3 2023 as indicated earlier in this article.

In the preceding section, I mentioned that IPAR's US business has been expanding well, and this is one of the reasons for the company's expectations of margin contraction in the near term. The gross margin for Inter Parfums' US business is inferior to that of its European business as disclosed in its recent quarterly earnings briefing.

Also, IPAR is expecting to have lower-margin gift sets account for a relatively bigger percentage of the company's revenue this year as compared to last year. The sales of gift sets in 2022 were depressed due to supply chain disruptions which are less of a factor for 2023.

In a nutshell, an unfavorable revenue mix with higher sales contribution from the US and gift sets is likely to put pressure on Inter Parfums' profit margins in Q3 2023 and 2H 2023.

Concluding Thoughts

A mixed outlook, considering both the top line and bottom line, for Inter Parfums in the short term means that a Hold (rather than a Buy) rating for the stock is more appropriate.

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