LRLCF - Inter Parfums: Strong Recovery Optimistic Prospects

Summary

• After a pandemic-induced drop in revenues in 2020, Inter Parfums recovered strongly in 2021 and the momentum has so far continued in 2022.
• Near-term prospects are cautiously optimistic with international travel recovery and retail store openings outweighing challenges in Eastern Europe, supply chain disruptions, and weak China sales.
• Long-term strategic initiatives including brand and product portfolio expansion efforts are ongoing.

French prestige fragrance manufacturer and distributor Inter Parfums ( IPAR ) is seeing solid recovery and the momentum is expected to continue in the near term. Longer term the company is working on strategic initiatives to support growth. A P/E of 29, although attractive relative to peers, may be pricey for some.

Strong recovery despite supply chain bottlenecks, falling Eastern Europe sales, depressed China sales, strengthening dollar

Inter Parfums continues to recover as covid lockdowns ease and international travel recovers. For Q3 2022 (quarter ended September 2022), Inter Parfums reported a 6.7% YoY rise in revenues (up 12% at comparable foreign exchange rates), an 8% YoY increase in gross profit, and an 8% YoY increase in net profit. For the nine months of 2022, sales are up 16% YoY and up 21% YoY on a comparable foreign currency basis. The performance is decent considering continued supply chain bottlenecks, falling sales in Eastern Europe (driven by Russia), depressed sales in China (which were impacted by the country's lockdowns as a result of the government's 'zero covid' policy) and a strong dollar.

All regions except Eastern Europe reported net sales growth. Shipping issues in the U.S. negatively impacted net sales in North America, Inter Parfums's largest market, with sales rising just 4% YoY for the first nine months of 2022, compared with 34% YoY and 23% YoY for Western Europe and Asia respectively. Net sales in the Middle East and Central and South America rose 41% YoY and 28% YoY respectively.

Eastern Europe sales continued to decline due to the war in Ukraine, dropping 16% YoY during Q3 2022 (after dropping 14% YoY in Q2 2022), and down 15.5% YoY for the first nine months of 2022, driven by the company's decision to stop shipments from the U.S. to Russia (Ukraine and Russia together accounted for about 4% of net sales in 2021).

Gross margins improved in Q3 2022 largely driven by a strengthening dollar.

A strong dollar helped expand net margins as well, despite an increase in promotion and advertising expenditures (which rose 11% YoY in Q3 2022, and rose 31% YoY for the first nine months of 2022). The company expects promotion and advertising expenditures to account for around 21% of net sales in 2022, in line with pre-pandemic averages.

Positive near term momentum from continued brand additions, product launches, travel retail recovery

Near term, inflation and supply chain bottlenecks (supply chain disruptions are not expected to ease until 2H 2023 ) are expected to challenge net sales growth but this is expected to be outweighed by continued recovery in international travel and retail store re-openings. Although international travel has picked up this year, seat capacity still remains below pre-pandemic levels so there is still more pent-up demand and the recovery has more room to run. Inter Parfums management highlighted in their Q3 2022 earnings call that the company's travel retail business currently accounts for about 8% of net sales, considerably lower than the 10% to 15% pre-pandemic reflecting plenty of room for expansion.

Global prestige fragrance sales are expected to exceed pre-pandemic levels in 2023.

Meanwhile the company continues to expand their brand and product portfolio. Inter Parfums has been busy inking multi-year agreements with a number of brands such as Salvatore Ferragamo (in October 2021), Emanuel Ungaro (in October 2021), Donna Karan and DKNY (in September 2021). New brands accounted for 9% of net sales in Q3 2022 and 8% for the first nine months of 2022 at comparable foreign exchange rates. For the coming year these new brands should add to net sales; Donna Karan and SKNY products for instance would be shipped for the full year in 2023 versus five months in 2022.

New products launched in 2022 include Coach Open Road and Jimmy Choo I Want Choo Forever. 2022 also saw continued rollouts of the Moncler duo and Montblanc Legend Red, Jimmy Choo Man Aqua, Lanvin Mon Éclat, Kate Spade Sparkle and Coach Wild Rose. For the final quarter of 2022, Inter Parfums has a number of new product launches in the pipeline including Cosmic Sky for Anna Sui, Ferragamo AMO Oriental Wood and Signorina Limited Edition for U.S. operations. For European operations, Kate Spade Cherie and a new product under the Collection Extraordinaire by Van Cleef & Arpels will be launched.

With overall demand conditions expected to be favorable along with Inter Parfums's new product launches and brand acquisition efforts, the company is optimistic about their prospects; management raised their 2022 guidance with net sales expected at USD 1.025 billion , up from USD 1 billion previously and EPS of USD 3.40 from USD 3.25.

The company's initial 2023 guidance also came in above estimates with net sales expected at USD 1.11 billion, and EPS of around USD 3.70. The estimates do not factor China's loosening covid restrictions.

Growth centers around continuous brand additions, product launches, as well as extensions for existing products

The prestige fragrance market is a mature one; Inter Parfums's revenues have grown at a CAGR of around 3.3% over the past nine years and market growth forecasts do not suggest any major change to growth prospects; the prestige fragrance market is expected to grow at a mid-single digit growth rate annually over the next few years.

The company's growth prospects would thus rest on strategic initiatives. Inter Parfums expects to continue expanding their business through brand acquisitions (either on a proprietary basis or as a licensee), new product launches, and extensions for existing products in an effort to gain market share (which is currently in the single digits).

Inter Parfums signed a new multi-year licensing agreement with Lacoste (first perfume expected to launch in 2024 ). Meanwhile new fragrances are slated for launch in 2024 for Donna Karan and DKNY .

Inter Parfums is capital-light (the company owns no manufacturing facilities), and enjoys a good financial position, enabling it to make investments in brand acquisition, product development and promotion as required; total debt to equity is just around 20.5% , and the company has historically mostly been cash flow positive (2021 cash flows were affected by a inventory stockpiling in response to supply chain disruptions, as well as an increase in payables which according to the company is manageable ). Their current ratio of 2.8 and quick ratio of 1.63 are solid.

Risks

Although international travel appears to be holding up despite inflation, the Russia-Ukraine conflict, and rising interest rates, a possible sharp global economic contraction could dampen travel spending or at worst negatively impact international travel altogether.

Conclusion

Inter Parfums is seeing solid recovery after a pandemic induced impact to financial performance in 2020. 2021 revenues already exceeded pre-pandemic year 2019, and the company continues to see strong net sales growth in 2022 despite weak China sales, falling sales in Eastern Europe and supply chain bottlenecks crimping North America sales. Near term, demand conditions are expected to remain favorable as a recovery in international travel and easing lockdown restrictions outweigh falling sales in Eastern Europe, inflation and supply chain disruptions.

Longer term, the prestige fragrance market is a mature one, and market growth projections for the coming years are roughly in line with Inter Parfums's historical growth figures. The company's strategic efforts include expanding their brand and product portfolio, extensions for existing products which should support topline and bottom line growth. Inter Parfums is financially on a solid footing enabling it to comfortably make investments as needed to support their strategic objectives.

The company is quite shareholder-friendly with a dividend payout that is above the sector median.

Inter Parfums has a low short interest of just 1.3% (compared to 1.3% for Estee Lauder ( EL ), and 4% for Coty ( COTY )).

Overall, Inter Parfums could be viewed as a small but solid player in the fragrance space. With a P/E of 29 and dividend yield of about 2%, Inter Parfums is attractive compared to rivals such as L'Oreal ( LRLCF ) and Estee Lauder.

However Inter Parfums may lose some of its appeal considering L'Oreal and Estee Lauder are considerably larger than Inter Parfums in terms of market share and they have the advantage of a strong brand name and better financial performance in terms of consistently higher better margins. Some may view Inter Parfums as a buy while others may view it as a hold.

Analyst coverage is relatively be limited, but sentiment appears to be generally bullish on the stock.

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