ANF - Inter Parfums: New Distribution Agreement And Duty-Free Growth Potential

2023-05-23 11:49:36 ET

Summary

• Inter Parfums has signed a new three-year deal to distribute Abercrombie & Fitch Co.'s Fierce product line, which I think will boost its reputation as a leading distributor in the fragrances market.
• The duty-free market, particularly in Hainan, China, holds a lot of promise, and Inter Parfums still has room to grow in this segment.
• I continue to stay bullish on Inter Parfums stock, after considering the company's new distribution agreement and the growth potential of the duty-free market.

Elevator Pitch

I continue to assign a Buy rating to Inter Parfums, Inc. ( IPAR ) shares. With my March 10, 2023 initiation article for IPAR, I touched on Inter Parfums' "positive outlook for both the short and long term."

My attention turns to IPAR's new distribution agreement with Abercrombie & Fitch Co. ( ANF ) and the growth potential of its duty-free business (especially in China) in this current write-up.

Inter Parfums' latest distribution deal with ANF will strengthen the company's profile as a leading player in the fragrances space, which gives it a better chance of securing new agreements with other leading brands. Separately, IPAR recognizes that the company should have a bigger presence in the duty-free market, and I expect Inter Parfums to step up its growth plans for its duty-free business.

Taking into account the above-mentioned factors, I remain bullish on Inter Parfums' outlook and this translates into a Buy rating for the stock.

New Distribution Agreement

As part of the company's Q1 2023 earnings announcement in early May, Inter Parfums disclosed that "Abercrombie & Fitch has granted it the right to distribute its number one men's fragrance, Fierce, in selective markets" for a three-year period starting on September 1 this year. Although IPAR didn't provide specific financial numbers or guidance relating to this new distribution agreement, Inter Parfums stressed at its first quarter earnings briefing that the new distribution agreement for the Fierce product will be "accretive to our business."

As indicated in the company's March 2023 investor presentation , Inter Parfums first started distributing some of ANF's products in 2014, which means that Abercrombie & Fitch has been partnering with IPAR for close to 10 years. It is also noteworthy that IPAR has recently received extensions of its existing distribution agreements for ANF's Away duo and Authentic duo product lines in last year and this year, respectively. In the second quarter of 2022 , Inter Parfums also signed a new distribution agreement for Abercrombie & Fitch's Authentic Moment duo product.

Inter Parfums' ability to secure a new distribution agreement for Fierce from Abercrombie & Fitch is particularly significant, taking into account the Fierce family status as one of the leading products for ANF. While Abercrombie & Fitch doesn't usually reveal the sales performance of individual products or brands, ANF did mention in an earlier January 2019 media release that Fierce was among the "top four highest selling men's fragrances in the United States for the past seven years and remains a top performing item."

At the company's Q1 2023 results call , Inter Parfums highlighted that its edge lies with "data driven marketing tactics" and a "focus on storytelling," which are definitely strengths that Abercrombie & Fitch and other brand owners would have recognized. More significantly, IPAR emphasized at its most recent quarterly results briefing that it continues "seeking out new licenses or other types of agreements that expand our fragrance portfolio."

As such, IPAR's new distribution agreement for Fierce could potentially open doors for the company to secure new brand licenses and extend the company's growth runway for the long run.

Duty-Free Market's Growth Potential

Inter Parfums mentioned in the company's first quarter results press release that its "plans (for the new Fierce product distribution agreement) call for growing penetration in existing Fierce markets that includes department, specialty and duty-free stores ( author's emphasis )." This draws investors' attention to IPAR's duty-free business.

According to Allied Market Research's January 2023 research report on the global duty-free market, worldwide duty-free retail sales are projected to expand by a 2022-2031 CAGR of +10.6% to $94.2 billion by the start of the next decade. As a comparison, Inter Parfums estimated that the size of the global fragrances market was $56.0 billion in 2021 as indicated in its March 2023 investor presentation.

Without providing specific financial figures, Inter Parfums highlighted at the company's Q1 2023 earnings briefing that its "business in the duty-free sector is steadily improving" and guided for "continued momentum as the year progresses." However, IPAR also acknowledged at this quarterly investor call that its "business is not big enough in duty free," but the company was optimistic that its duty-free business "could be bigger" in the future.

It is worth thinking about how Inter Parfums' expansion in the duty-free space could boost the company's growth prospects in the long term. As I indicated in my March 10, 2023 initiation piece for IPAR, the Asian region only accounted for 14% of the company's top line for the prior year. This suggests that IPAR hasn't been able to fully capitalize on the growth potential of the Asian and Chinese markets, and this might be attributable to the fact that Inter Parfums' presence in the duty-free market isn't as significant as what one would have hoped for.

A research report published by the China Hainan Institute for Reform and Development last year cited in a July 28, 2022 Yicai Global media article noted that Hainan, China might potentially overtake South Korea to become the largest duty-free market globally in two to three years' time. The conclusion from this research report ties in with Jean Madar's (IPAR's CEO) observations during a recent trip to Hainan. At IPAR's first quarter results call, Jean Madar mentioned that the duty-free market in "Hainan is capturing a lot of travel retail (demand) from Chinese that were traveling before in Korea."

In a nutshell, there are significant growth opportunities associated with the duty-free market, and IPAR's management commentary indicates that this is an area of untapped potential for the company.

Closing Thoughts

My positive opinion of Inter Parfums, Inc. as an attractive investment remains unchanged. The new IPAR distribution agreement with Abercrombie & Fitch Co. and the company's comments on the duty-free market reinforce my bullish view of Inter Parfums, Inc.

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