The second segment is US-based operations, where fragrance products are sold primarily under licence and other agreements with famous brand owners such as Abercrombie & Fitch, Donna Karan/DKNY, Ferragamo and Guess.
The investment case for Interparfums is that it is cheap at current valuations, though the share price decline does not reflect the business’s true value. In other words, the company is undervalued. The onus is on the investor to prove that the company is not terrible, has decent prospects, and that its stock was oversold.
Year to date, Interparfums’ share price has fallen more than 20% after missing analyst estimates and weaker management guidance. Also, the macroeconomic environment is forecast to be less favourable for the company, with headwinds such as a cyclical downturn and retailer destocking expected to affect sales negatively.
Selling prestige
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Interparfums’ niche is prestige fragrances, where all its brands are licensed from unaffiliated third parties; hence, its business is dependent on the renewal and continuation of these licences. The company does not own any manufacturing facilities and hence is not capital-intensive. Also, Interparfums is a general contractor and sources its materials and components from suppliers, which are stored directly at its third-party filler centres or received at its own distribution centres. Essentially, the company controls its inventory, as it can manufacture finished products to meet production needs.
Revenue-wise, the top five brands are Coach, Jimmy Choo, Montblanc, Guess and Lacoste. The earliest licence expiration date for these five brands is end-2030, implying that Interparfums has earnings visibility over the short to medium-term. It is important to note that, due to the nature of Interparfums’ industry, seasonality is a key factor that periodically affects the company’s results. Generally, the company tends to do better during the third- and fourth-quarter holiday season, as it sells directly to retailers in specific markets such as France, the US, and Italy. Chart 1 illustrates this, and, based on historical trends, the upcoming financial semi-annual period is expected to be positive.
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Interparfums’ business strategy addresses the key to success in the industry. Firstly, it focuses on prestige beauty brands, which usually have higher margins and are more inelastic. Secondly, the company leverages established names to introduce new, seasonal, and limited-edition fragrances, which positively contribute to profitability. The company has been around for more than 40 years and has acquired and partnered with an extensive portfolio of brands. This enables the company to gather valuable data to gauge market trends and launch products that cater to consumer preferences.
Manufacturing moat
Interparfums also differentiates itself from competitors through its manufacturing expertise, with specialised supplier partners for each component of fragrance, such as glass, packaging boxes, and labelling. Further, the company utilises AI, which enables it to perform detailed analysis of the potential of new products under each brand. Some trends that Interparfums has identified and plans to capitalise on include consumers upgrading to more exclusive and luxury fragrances, especially in the European and North American markets.
Moving forward, the company has multiple plans to continue its growth and expand its global footprint. The first initiative is their wholly owned, original fragrance brand, Solférino, launched online last month and expected to be rolled out to a broader audience by late 2026. This is an excellent move by the company to become less reliant on short-term licenses with other brands, though the challenge is making a name for itself.
Recent developments include signing a licence agreement with Longchamp, covering over 400 stores in 80 countries, which runs until the end of 2036. Other brands set for commercialisation starting next year include Goutal and Off-White.
Interparfums’ financial performance has been consistently strong over the past 10 years, as illustrated in Chart 2. This indicates that the business can adapt to seasonal headwinds over the medium- to longer-term. Specifically, Interparfums’ focus on prestige and luxury fragrances is strategic, as luxury beauty products have historically withstood economic downturns by serving as an “affordable indulgence” for their target market, as reflected in the company’s consistent profitability.
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Financially robust
The company’s financial health is strong, with both short-term liquidity and longer-term solvency. Regarding Interparfum’s liquidity, the company has quick and current ratios of 1.6 times and 3.1 times, respectively, well above the benchmark of one time, indicating that short-term financial obligations are not an issue. A net debt-to-equity ratio of 12.7% and an interest coverage ratio of over 30 times suggest that the company is unlikely to be in financial distress. Further, the company’s Altman Z-score is 8.8 times, significantly above the benchmark of three times, and, along with its investment-grade-rated debt, reflects that the company is financially healthy with a very low probability of default.
In terms of relative valuation, Interparfums trades cheaply compared to global peers, with discounts of 34%, 15%, and 2% to its forward P/E, forward EV/Ebitda, and forward EV/Revenue ratios, respectively. Regionally, the company trades at 32%, 30%, and 34% discounts for the same metrics, respectively. This indicates that Interparfums is an attractive pick-up relative to peers in the industry, based on forward or estimated price multiples, suggesting it is undervalued.
The company also pays dividends quarterly, with a current yield of 3.3%.
Sentiment-wise, there are seven “buy” calls, three “hold” calls, and one “sell” call for Interparfums from analysts over the next 12 months, with an average target price that is over 60% above its current trading price of US$95.91 ($124.19). Based on a methodology that includes multiple valuation methods (see Charts 3a & 3b), the company’s intrinsic value is US$122.33, which is almost 30% above its current trading price.
Interparfums SA, a 72% owned subsidiary, is publicly traded on Euronext Paris. Since this is a mid-cap US stock listed on the Nasdaq, Singapore investors can purchase it through their international trading account with most investment brokers, or the Paris-listed shares if they wish to be exposed to the euro rather than US dollars.
Simply Good Foods falls after missing earnings estimates
In the previous write-up on Simply Good Foods, it was noted that the company’s results would be announced when the article is published (see Issue 1211: Is Simply Good Foods too good to be true?). Post-results, the company’s share price fell almost 20% due to missing earnings estimates and poor guidance from management. The updated intrinsic valuation for Simply Good Foods is US$23.36 ($30.22), down from US$31.34 previously, suggesting that there is still some upside from its current share price.
Disclaimer: This article is strictly for information purposes only and does not constitute a recommendation or solicitation, or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. Any personal investments should be made at the investor’s own discretion and/or after consulting licensed investment professionals, at their own risk. The author of this article does NOT hold or own any stock(s) featured in this article or have a vested interest in it at the time of writing
