Inter Parfums: A Fragrant Investment Opportunity With Global Appeal (NASDAQ:IPAR)

Inter Parfums, Inc. (NASDAQ:IPAR), famous for partnering with luxury brands to provide perfumes globally, has been a rewarding stock for long and short-term investors with returns of 121.14% over the last five years. The company’s returns have beaten those of its larger competitors in the luxury perfume market. It also provides a quarterly dividend with an FWD yield of 1.64% at a conservative payout rate.

Inter Parfums benefits from the growing fragrance market thanks to its effective distribution strategies. Their product pipeline is strong, with new additions like Lacoste and Roberto Cavalli, and they have a fully operational Italian affiliate, which will further strengthen their position in the US and European markets. The company is confident in a strong 2024, and its consistent history of beating quarterly expectations, along with its upward-trending Q4 and FY 2024 revenue results, make it an attractive investment. Long-term investors may want to take a bullish stance on this sturdy business.

What makes the company compelling?

Inter Parfums was founded in 1982 and is famous for its strategic partnerships with luxury brands that generate revenue across Europe and the United States. It manages the entire fragrance lifecycle and has achieved upward-trending top-line and bottom-line results. The company continues positioning itself in a growing fragrance industry through successful collaborations and innovative products. Not only does it have a successful business model, but it also has a long-term track record of consistent performance on the stock market. Inter Parfums boasts a diverse brand portfolio that targets various consumer segments and a significant global presence, capturing both European elegance and American vibrancy. The company aims to evoke memories and experiences that create strong connections with its customers.

Strong market performance versus peers

If we compare Inter Parfum to some of the larger competitors within the luxury fragrance market, namely LVMH Moët Hennessy (OTCPK:LVMHF), Estée Lauder (EL), L’Oréal (OTCPK:LRLCF) and Coty (COTY) the company has seen short and long-term successes. With a ten-year price performance of 385.15%, it outperformed its peers over the year, three-year, five-year, and ten-year periods.

Strategic and long term partnerships with leading brands in the US and Europe

One of the company’s key strengths is its long-standing partnerships with prestigious brands. They have proven their ability to provide better results than companies that keep fragrance production in-house. The company’s portfolio includes iconic names such as Lacoste, JIMMY CHOO, Bebe, Paul Smith, Abercrombie & Fitch, and COACH. These partnerships allow the company to create captivating fragrances that resonate with global consumers.

Its product pipeline is robust, with recent additions such as a fifteen-year partnership contract with Lacoste, which ended its partnership with competitor Coty. This demonstrates the confidence luxury brands have in their business model and processes. Roberto Cavalli has also demonstrated its commitment to staying ahead in the fragrance industry through its fully operational Italian affiliate. The company has diverse brand operations spanning Europe and the United States, capturing both European elegance and American vibrancy to strengthen its position.

Strong top line Q4 and Full-year sales

Inter Parfums reported an increase in net sales of 6% to $329 million for the three months ended December 31, 2023, and an increase of 21% to $1.32 billion for the full year ended December 31, 2023, as compared to the same periods in 2022. This growth was primarily due to the strong overall fragrance market and the company’s successful distribution execution. In addition, the company’s sales showed a remarkable increase of 85% for both Q4 and full year 2023 as compared to 2019.

In Q4 2023, European sales grew by 2%, primarily driven by a 17% rise in Coach brand sales. Overall, European operations achieved a 16% sales increase for the FY2024, with Coach, Jimmy Choo, and Montblanc brands leading the way with growth rates of 25%, 19%, and 15%.

In Q4 2023, U.S.-based operations experienced a 13% sales growth. This growth was primarily driven by Donna Karan/DKNY, which saw comparable quarter sales grow by 21%. GUESS and Ferragamo also achieved mid-single-digit sales growth during the quarter despite the challenge of a very high base from the prior year. The Phase 1 roll-out of the iconic Abercrombie & Fitch Fierce fragrance in select markets contributed to boosting fourth-quarter sales. Further gains are expected as Phase 2 of the fragrance launch occurs in the spring. For the full year, U.S.-based operations achieved impressive sales growth of 33%. Donna Karan/DKNY, GUESS, and Ferragamo led the way with gains of 205%, 23%, and 21%, respectively. Notably, Donna Karan/DKNY became part of the portfolio in July 2022, which explains the exceptional year-over-year performance.

Growing fragrance industry

The fragrance industry is expected to continue its upward trajectory and make a significant impact in the coming years. By 2024, it is projected to generate an impressive $59.87 billion in revenues, marking the fourth consecutive year of revenue growth with a consistent annual increase of 2.75%. Fragrances are set to be the third-fastest growing category in the beauty industry in 2024, with 9.3% of the total revenue. This indicates that nearly $1 out of every $10 spent on beauty products will be allocated toward fragrances. The fragrance market thrives on several factors including rising disposable incomes, evolving consumer lifestyles, the demand for luxury perfumes, unisex fragrances that transcend traditional gender boundaries, natural and unique scents favored by health-conscious consumers, and millennials’ preference for lighter-scented products.

Earnings and upcoming earnings

We can observe that the company has exceeded its EPS expectations for the past five quarters. Moreover, if we analyse the company’s performance since 2018, we can see that it has a robust history of surpassing quarterly expectations. Although this does not guarantee future performance, it is a strong indication of a long-standing company’s ability to perform well over the long term. Additionally, the business has recovered from its COVID-19 lows and is on track to deliver a record year. It also has a positive outlook for 2024.

Dividend

Inter Parfums distinguishes itself in the fragrance industry through its shareholder-friendly dividend policies. The company offers a competitive forward dividend yield of 1.64%. Over the past 5 years, IPAR has demonstrated an impressive 24.37% growth rate in dividends, signalling management’s confidence in the company’s future prospects. The most recent dividend announcement was $0.63 per share, with an ex-dividend date of December 14, 2023, and a payout date of December 31, 2023. Importantly, IPAR maintains a healthy payout ratio of 46.18%, striking a balance between distributing profits and retaining capital for growth. Investors seeking stability can find comfort in Inter Parfums’ prudent approach, which includes a quarterly dividend and a focus on sustainable reinvestment strategies.

Cash flow and balance sheet

The company’s unlevered and levered free cash flow has been negative for the last three years, but it’s showing signs of improvement with TTM levered free cash flow at negative 6.3 million. The company has plans to return to its pre-COVID-19 level of delivering positive cash flow, which it can use to reinvest in the business, pay off debts, and reward investors.

If we look at the balance sheet, we can see that there has been cash burn over the last three years and has continued if we look at the last report, which indicated total cash and short-term investments of $183.5 million. However, as the company starts to improve its cash flow, we can expect the cash burn to reduce. Furthermore, the company has improved its debt situation and has strong liquidity if we see its current ratio of 2.41 and quick ratio of 1.34, indicating that it can cover its short-term liabilities.

Valuation

Inter Parfum has been performing impressively when compared to its larger peers in the luxury perfume market. If we compare the company with some of its larger peers in the luxury perfume market, we can see that it is still attractively valued with a TTM price-to-earnings ratio of 30.79, which is lower than all of its peers except LVMHF. Additionally, it has an attractive PEG TTM of 0.58, which is lower than all of its peers except Coty. However, Coty does not offer a dividend program to investors, which is another reason to invest in Inter Parfum.

Risks

The fragrance industry is sensitive to economic cycles and consumer spending patterns. During economic downturns, luxury goods like perfumes may experience reduced demand. Additionally, shifts in consumer preferences or global events can impact sales. Inter Parfums relies heavily on licensing agreements with luxury brands such as Montblanc, Jimmy Choo, and Coach. Any adverse changes in these partnerships, expiration of licenses, or brand underperformance could significantly affect revenue. Fragrance production involves sourcing raw materials from different regions. Supply chain disruptions due to geopolitical tensions, natural disasters, or logistical challenges can disrupt manufacturing and impact profitability. The fragrance market is competitive, with established players and new entrants vying for market share. Inter Parfums must continually innovate, maintain product quality, and adapt to changing consumer preferences.

Final thoughts

Inter Parfums has been a rewarding stock for both long and short-term investors. The company’s performance has outpaced that of its larger competitors in the luxury perfume market. Additionally, Inter Parfums provides a quarterly dividend with an FWD yield of 1.64% at a sustainable payout rate. With a strong product pipeline, strategic collaborations, and consistent revenue growth, it remains an attractive investment choice for long-term investors. Inter Parfums benefits from the growing fragrance market thanks to its effective distribution strategies. Their product pipeline is strong, with new additions like Lacoste and Roberto Cavalli. The company is confident in a strong 2024, and its consistent history of beating quarterly expectations, along with its upward-trending Q4 and FY 2024 results, make it an attractive investment. Long-term investors may want to take a bullish stance on this sturdy business.