Synopsis
Inter Parfums, Inc. (NASDAQ:IPAR) is a global marketer and distributor of a variety of high-end perfumes and other related products in the United States and Europe. It has demonstrated robust growth across major markets, achieving record sales and margin improvements in 2Q24, driven by strong performance in both European and U.S.-based operations. In addition, the firm has effectively leveraged price increases to offset inflationary pressures, benefiting from the resilience of the prestige beauty market and the ongoing premiumization trend, often referred to as the “Lipstick Effect.” Given its strong track record of profitability and promising growth forecast, I would rate IPAR a buy.
Business Overview
IPAR focuses on prestige and well-known brands, launching new ones every few years and releasing seasonal and limited-edition products. Approximately 65% of FY23 net sales come from its European-based operations, with the majority of fragrances produced and distributed under licensing agreements with brand owners. Prestige brands that are made and marketed through United States-based operations account for the remaining 35%. They do not own any manufacturing facilities. However, they function as a general contractor, coordinating and managing production by sourcing materials from various third-party suppliers. They rely on third-party fillers to produce their fragrances, which they then send directly to distribution centers for further processing and delivery. This allows IPAR to be less capital intensive and focus on marketing and brand management while outsourcing the manufacturing process. If we were to look at sales to customers by region, North America has the largest market, accounting for ~39% of FY23 net sales, followed by Western Europe and Asia.
Historical Financial Analysis
IPAR has been seeing strong revenue growth throughout the past few years. FY23 net sales have grown by 21% year-over-year. This growth is primarily due to a 33% increase in U.S.-based product sales year-over-year and a 16% increase in sales of European-based products. Its European-based operations are considered impressive given its new product pipeline, which consists of flankers and extensions rather than entirely new products. This indicates that they have been successful in introducing variations on existing fragrances, driving significant revenue without entirely new products. The U.S.-based operations of the company performed exceptionally well, primarily due to the continued popularity of GUESS fragrances across all geographies. This substantial growth is also largely due to Donna Karan and DKNY’s addition and extension to their fragrance portfolio. FY21 net sales have rebounded significantly by 63%, recovering from the adverse impact of the pandemic on the beauty industry, such as the closure of stores, events, and air travel shutdown. Following store reopening and rapid e-commerce growth, business rebounded immediately. This rebound continues to extend into FY22 with a 24% increase in net sales.
Moving onto profitability margins, IPAR has seen gradual expansions in its gross profit margin and operating income margins. Gross profit margins for FY22 and FY23 are nearly identical due to higher selling prices, a product mix that counters inflationary pressures, and an unfavorable segment mix. SG&A as % of net sales has fallen from 45.3% to 44.6% as a result of favorable geographic/product mix and stronger sales growth in FY23, allowing to spread fixed operating costs over a larger revenue base, leading to better absorption. The better-than-expected sales resulted in lower advertising and promotion spending, coming in at 19.7%, compared to their target of 21%. As a result, IPAR’s FY23 operating income grew by 29%, while its margin expanded from 17.90% to 19.10%.
Second Quarter Earnings Analysis
IPAR has achieved record 2Q24 net sales, up 11% year-over-year from $309 million to $342 million, despite having a high base in the prior year. Gross margins improved by 360 bps in 2Q24 and 50 bps in the first half of 2024. The European-based operations segment drove the margin expansion in this quarter, expanding by 570 bps due to a favorable product and geographic mix, as well as a one-time inventory reserve that had previously reduced the margin. IPAR has been growing in major markets, with 5%, 11%, and 6% growth in North America, Western Europe, and Asia Pacific, respectively. Central and South America grew significantly, reaching 26%. Eastern Europe faces declines in sales due to sourcing constraints arising from the ongoing conflict.
Management has expressed confidence that the fragrance market will remain robust, with positive trends driving demand for IPAR’s products. However, while sell-ins and sell-outs are growing, sell-ins are slower, indicating that retailers are cautious about stocking inventory or drawing down on existing inventory. Operations in Eastern Europe will continue to deal with ongoing geopolitical or economic challenges, affecting demand and logistic matters in the region. Despite the strong performance, management is maintaining its guidance for 2024 to achieve $1.45 billion in net sales and diluted EPS of $5.15.
Robust Growth in Prestige Brands
IPAR has been showing record sales through the first half of FY24, despite having a relatively high start in FY23. There is double-digit sales growth in IPAR’s major markets, especially in Central and South America, reporting 26% sales growth. According to a report from Circana, the prestige beauty market in the United States has grown by 8% to $15.3 billion, outperforming sales in the mass beauty market. Prestige fragrance in particular is the fastest-growing category, with sales up by 12%. Both the upper and lower ends of the price spectrum for prestige fragrances are growing. Higher-end products, such as eau de parfums and parfums, continue to have the most influence on growth. Lower-priced products, such as body sprays, contribute to this growth.
As customers are willing to spoil themselves with little luxuries, more are moving towards exclusive and expensive luxury brands; this will continue to drive the premiumization trend, resulting in a high-growth prestige beauty industry. The “lipstick effect” highlights the resilience of the industry, particularly during economic downturns. Fragrances, much like lipstick, can be seen as little luxuries that consumers indulge in even during challenging economic times.
Successful Brands Expansions and Launches
IPAR has been expanding its prestige portfolio through strategic partnerships and licensing agreements that have proven to perform above expectations. IPAR’s 15-year license with Lacoste became effective in January 2024 and has driven IPAR’s 2Q24 double-digit sales growth in Central and South America. Its newest brands, Roberto Cavalli and Lacoste, have outperformed expectations and are expected to scale further into 2025. IPAR has made several brand expansions, including Karl Lagerfeld, a Moncler brand extension, and two new fragrances from Van Cleef & Arpels. IPAR has a proven track record of building prestige fragrance brands. Brands such as Montblanc fragrance and Jimmy Choo have experienced a 13% and 14% CAGR, respectively.
Relative Valuation Model
In my relative valuation model, I will be comparing IPAR against its peers in the highly competitive fragrance industry in terms of growth outlook and profitability margin trailing twelve months [TTM]. Looking at its growth outlook, IPAR’s forward revenue growth stands at 13.19%, the highest amongst its peers. With a favorable backdrop in the perfume industry, it outperforms its peers’ median of 0.48%.
Moving on to the profitability margin, IPAR continues to outperform its peers’ median. Starting with operating income margin TTM, IPAR reported 17.53%, higher than peers’ median of 11.06%. For net income margin TTM, IPAR reported 10.38%, which is also higher than peers’ median of 10.21%. Currently, IPAR non-GAAP forward P/E is at 24.80x, which is slightly higher than the peers’ median of 24.51x. Given IPAR’s outperformance against its peers, I argue that it is fair for IPAR to be trading at a higher P/E. Therefore, I will be setting my 2025 target P/E ratio for IPAR at 24.80x.
IPAR’s 2024 market revenue estimate is at $1.45 billion, while EPS is at $5.15. For 2025, the market revenue estimate is at $1.58 billion, while EPS is at $5.99. Given the factors discussed in my analysis and full-year management guidance, they align with the market’s estimates. Applying my 2025 target P/E for IPAR brings me to a target price of $148.55.
Risks & Conclusion
The firm has seen significant growth across major markets this quarter, achieving record sales and margin improvements. Over the last few years, IPAR has effectively raised prices to mitigate inflationary pressures, benefiting from the overall strength of the prestige beauty market and the ongoing premiumization trend in the fragrance sector, supported by the “Lipstick Effect.” However, relying on continuous price increases may not be sustainable in the long run, as it could eventually have a material adverse impact on IPAR’s operations.
Despite this, the firm has also seen strong growth from expanding its prestige brand portfolio through strategic partnerships and licensing agreements, leading to better-than-expected performance from brands like Roberto Cavalli and Lacoste. Given its strong track record of profitability and promising growth forecast, I would rate IPAR a buy.