INDEPENDENT RESEARCH Interparfums 8th June 2017 The scent of success Luxury & Consumer Goods Fair Value EUR41 (price EUR37.00) BUY Coverage initiated
Bloomberg ITP FP We initiate coverage of Interparfums, an independent company Reuters IPAR.PA involved on the Perfumes segment sold in selective retail, with a BUY 12-month High / Low (EUR) 37.4 / 20.2 rating and a fair value of EUR41. Market capitalisation (EURm) 1,314 Enterprise Value (BG estimates EURm) 1,138 Avg. 6m daily volume ('000 shares) 13.30 Interparfums is a leading player in the global market for high-end Free Float 27.0% perfumes that are distributed selectively. The group is still controlled by its 3y EPS CAGR 13.0% Gearing (12/16) NM founders, Philippe Benacin and Jean Madar (73%). It operates in this Dividend yields (12/17e) 1.62% segment thanks to licencing agreements with luxury-goods groups (80% of revenues), but also via its own brands. YE December 12/16 12/17e 12/18e 12/19e Revenue (EURm) 365.60 416.00 458.00 500.00 EBIT(EURm) 49.90 57.00 63.00 69.00 Interparfums’ business model is very light. Production and packaging are Basic EPS (EUR) 0.90 1.04 1.15 1.30 Diluted EPS (EUR) 0.90 1.04 1.15 1.30 subcontracted. Moreover, licence agreements are valid for at least 10 years. EV/Sales 3.16x 2.74x 2.44x 2.19x The main licence is Montblanc (30% of sales), followed by Jimmy Choo EV/EBITDA 18.1x 15.8x 14.0x 12.6x EV/EBIT 23.1x 20.0x 17.7x 15.8x (22%). Lanvin (one of Interparfums’ own brands) accounts for 15% of P/E 41.2x 35.5x 32.0x 28.6x group revenues. ROCE 12.7 13.7 14.8 16.0
Over the past five years, pro-forma sales growth has averaged 16% per
36.1 annum, reflecting the group’s dynamic business model. However, management. The group attaches considerably importance to sales growth, 31.1 which we expect to average +11% per annum in 2016-19, nevertheless
26.1 with the operating margin almost stable at 13.5-14%, as management’s priority does not appear to be regular growth of operating profit. 21.1
16.1 With net cash holdings of EUR160m at end 2016, Interparfums says it is 04/12/15 04/03/16 04/06/16 04/09/16 04/12/16 04/03/17 04/06/17 INTERPARFUMS SXX EUROPE 600 ready to participate in a reshuffle of the global perfumes business, which looks likely since Coty acquired P&G’s cosmetics activities in 2016 and, more recently, signed a licence agreement with Burberry.
To value the group, we have relied on the DCF method, as we do not consider the other perfume groups true comparables. Our DCF model suggests a Fair Value de EUR41 and we initiate coverage with a BUY rating. Analyst: Sector Analyst Team: Loïc Morvan Nikolaas Faes 33(0) 1 70 36 57 24 Antoine Parison [email protected] Virginie Roumage Cedric Rossi
r r Interparfums
Simplified Profit & Loss Account (EURm) 2014 2015 2016 2017e 2018e 2019e Revenues 297 327 366 416 458 500 Change (%) -15.2% 10.2% 11.7% 13.8% 10.1% 9.2% Adjusted EBITDA 41.8 58.1 63.9 72.0 80.0 87.0 EBIT 31.3 45.8 49.9 57.0 63.0 69.0 Change (%) -40.2% 46.3% 9.0% 14.2% 10.5% 9.5% Financial results 2.8 (0.70) 0.0 1.0 1.0 1.0 Pre-Tax profits 34.1 45.1 49.9 58.0 64.0 70.0 Tax (11.1) (16.0) (18.0) (21.0) (23.0) (24.0) Profits from associates 0.0 0.0 0.0 0.0 0.0 1.0 Minority interests 0.0 0.0 0.0 0.0 0.0 1.0 Net profit 23.0 29.1 31.9 37.0 41.0 46.0 Restated net profit 23.0 29.1 31.9 37.0 41.0 46.0 Change (%) -34.1% 26.5% 9.6% 16.0% 10.8% 12.2% Cash Flow Statement (EURm) Operating cash flows 33.0 43.0 43.0 51.0 55.0 60.0 Change in working capital 17.0 9.8 (3.0) 14.7 10.9 11.6 Capex, net 2.0 3.0 2.0 3.0 3.0 3.0 Financial investments, net 24.0 108 3.0 0.0 0.0 0.0 Dividends 12.0 13.2 16.0 17.6 19.4 21.3 Other (24.0) 0.0 0.0 0.0 0.0 0.0 Net debt (225) (135) (160) (175) (197) (221) Free Cash flow 14.0 30.2 44.0 33.3 41.1 45.4 Balance Sheet (EURm) Tangible fixed assets 5.2 5.9 7.0 7.0 7.0 7.0 Intangibles assets 69.4 173 163 163 163 163 Cash & equivalents 225 226 230 246 268 292 current assets 129 150 159 169 180 192 Other assets 12.8 13.4 15.0 14.8 14.8 14.8 Company description Total assets 441 568 574 600 632 668 Interparfums Group, indirectly L & ST Debt 0.0 90.5 70.0 70.3 70.3 70.3 controled by Philippe Benacin and Others liabilities 72.5 89.8 99.7 94.9 94.9 94.9 Shareholders' funds 369 388 404 435 467 503 Jean Madar (73%) operates on the Total Liabilities 441 568 574 600 632 668 prestige Perfumes market sold on the Capital employed 151 265 251 266 277 288 selective retail (perfumeries, Ratios Department stores, or specialized Operating margin 10.54 13.99 13.65 13.70 13.76 13.80 stores as Sephora or Marionnaud), Tax rate 32.55 35.48 36.07 36.21 35.94 34.29 Net margin 7.74 8.89 8.73 8.89 8.95 9.20 through own brands as Rochas and ROE (after tax) NM NM NM NM NM NM lanvin (20%of sales) and exclusive and ROCE (after tax) 13.96 11.15 12.71 13.69 14.83 15.96 long term licence contracts as for Gearing NM NM NM NM NM NM Montblanc (30% of sales), Jimmy Pay out ratio 57.29 55.33 61.21 57.57 56.28 57.88 Choo (22% of sales) and very recently Number of shares, diluted 29.20 32.20 35.50 35.50 35.50 35.50 Coach. Moreover, its activity is mainly Data per Share (EUR) EPS 0.65 0.81 0.90 1.04 1.15 1.30 achieved in US (27% of sales), Restated EPS 0.65 0.81 0.90 1.04 1.15 1.30 Western Europe (32%) and Asia (15% % change -35.1% 25.9% 10.5% 16.0% 10.8% 12.2% of sales. EPS bef. GDW 0.65 0.81 0.90 1.04 1.15 1.30 BVPS NM NM NM NM NM NM Operating cash flows 1.13 1.34 1.21 1.44 1.55 1.69 FCF NM NM NM NM NM NM Net dividend 0.37 0.45 0.55 0.60 0.65 0.75
Source: Company Data; Bryan, Garnier & Co ests.
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Table of contents
1. Investment Case ...... 4 2. A competitive perfumes market ...... 5 2.1. Global cosmetics market is growing steadily ...... 5 2.2. Selective perfumes segment: highly competitive ...... 5 2.3. Growth is driven by the very high-end segment ...... 6 2.4. Interparfums is still a small player in this market ...... 7 3. Interparfums’ business model ...... 8 3.1. A light, efficient organisation… ...... 8 3.2. …allows dynamic sales ...... 8 3.3. A strong presence in Europe and the US ...... 10 4. Business model of perfume licences ...... 12 4.1. Differences between eyewear and perfumes ...... 12 4.2. Licences offer good visibility ...... 13 4.3. A reshuffle of the portfolio of brands ...... 14 4.4. The main brands ...... 15 4.4.1. Montblanc ...... 15 4.4.2. Jimmy Choo ...... 16 4.5. Interparfums’ own brands ...... 17 4.5.1. Lanvin ...... 17 4.5.2. Rochas ...... 17 4.6. Coach’s potential ...... 18 5. Encouraging prospects ...... 21 5.1. Momentum remains very strong ...... 21 5.2. 11% sales CAGR in 2016-19e ...... 23 5.3. Higher profitability is not an objective ...... 25 5.4. A very healthy financial situation ...... 27 5.4.1. Net cash of EUR160m ...... 28 5.4.2. Ambitious pay-out ...... 28 6. Valuation ...... 30 6.1. A very good stock-market performance… ...... 30 6.2. … but still some upside to Fair Value of EUR41 ...... 30 Bryan Garnier stock rating system...... 35
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1. Investment Case
The reason for writing now We initiate coverage of Interparfums with a BUY rating and a Fair Value of EUR41. The group operates exclusively in the market for high-end perfumes, and the business model is largely based on exclusive and global exploitation of perfume licences. In addition, Interparfums owns two prestigious brandnames: Rochas (fashion and perfumes) and Lanvin (perfumes).
Valuation Despite a 31% rise in the share price in 2016 and 12% on one month, we still see upside potential. Our DCF model yields a Fair Value of EUR41. We have not used the peer comparisons method, because we see no group that is sufficiently similar. The stock currently trades at a 1.7x EV/EBIT to growth.
Catalysts Interparfums business model takes a long-term view, prioritising steady sales growth and relations of confidence with partner brands. Chasing sales and moreover profit growth is not the group’s objective (and more the consequence of group strategy, although that has not prevented regular increases in market share each year.
Difference from consensus We are considerably more confident than the consensus about the group’s prospects in 2017, and our estimates for sales and earnings are 4% above those of the Street. An excellent first-quarter performance (sales up 34%) has reinforced our optimism.
Risks to our investment case The risks to the stock’s performance are the same as the risks to the luxury goods sector. In addition, in view of the importance of the Montblanc licence (30% of sales), the risk of non-renewal (even though expiry dates are far in the future) may worry investors, especially in view of what happened in the eyewear sector.
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2. A competitive perfumes market Interparfums is an independent global player in the market for prestigious perfumes distributed selectively (independent perfume stores, chains such as Sephora and Marionnaud, department stores etc). It operates in this market thanks to licence agreements with international luxury brands (more than 80% of revenues), but also via its own luxury brands: Lanvin (perfumes) and Rochas (perfumes and fashion).
2.1. Global cosmetics market is growing steadily Although the global cosmetics market, which currently weighs EUR200bn, managed to grow 4% per annum on average from 2006 to 2015 (and again in 2016), the selective distribution segment in which Interparfums operates is less buoyant, having grown just 1-2% in 2016 and been nearly flat in France since 2014 (down in 2016).
The global market for cosmetics is thus dynamic and enjoying steady growth. It grew 3.5% in 2015 and 4% in 2016, and may even accelerate in 2017 (despite a somewhat lacklustre start to the year in the mass market, offset by a very robust selective distribution segment). Growth may be slightly higher than 4% this year, partly thanks to the resumption of Travel Retail, especially in APAC and in Europe.
Over the past 20 years, the only period when growth in the global market slowed sharply was during the financial crisis of 2008-09. Growth in this normally very resilient market was exceptionally low at 1% in 2009, partly due to massive destocking by distributors – especially in the selective distribution channel. But the slowdown was very short-lived. Sales at L’Oréal’s luxury goods division were flat in 2008 and fell 9% in 2009, but grew 7% in 2010. Interparfums’ sales contracted 3% in 2009, but soared 32% in 2010. This sector offers excellent security, in our view. Moreover, between now and 2020, average annual growth of global cosmetics is expected to be 3.7% (see table below), spurred by dynamic emerging markets and innovation (make-up is benefiting from 20% p.a. growth in e-commerce) and by new perfume introductions.
Fig. 1: Growth (%) and size (€ bn) of global cosmetics market
Worldwide Cosmetics market growth (in %) Worldwide Cosmetics market size in EURbn 5 300 4,5 4,6 4,6 4,5 4,2 243,4 4,0 250 CAGR +3.7% 4 3,8 3,8 3,5 3,5 203 3,5 189 196 200 180 2,9 173 3 159 164 166 145 152 2,5 150
2 100 1,5 1,0 1 50 0,5
0 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2020e 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e 2017e
Source: Company Data; Bryan, Garnier & Co ests. 2.2. Selective perfumes segment: highly competitive In the cosmetics market, the perfumes segment (sales of EUR25bn, or 12% of the global market, of which 2/3 from selective distribution) is by far the most competitive and requires regular introduction of new fragrances (especially for women), which often have a very short lifespan. The market for
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selectively-distributed perfumes in which Interparfums operates is considerably less dynamic than the overall market and we estimate its growth at around 1-2% per annum (equal to the 2016 performance), roughly in line with the trend in the global luxury-goods market. It is also highly fragmented. For example, L’Oréal’s market share does not exceed 10%, even though it is now one of the leaders alongside Coty. The Interparfums group accounts for only 2% of the market for selective perfumes, but growth is considerably higher.
In the global cosmetics markets, e-commerce is still quite marginal (6-7% of sales), but it is very dynamic and the segment grew nearly 20% in 2016.
Fig. 2: Breakdown of global cosmetics market by main segments
Skin care 36%
Others Worldwide: EUR203bn Hair care 12% 23%
Fragrances 12% Makeup 17%
Source: Company Data; Bryan, Garnier & Co ests. 2.3. Growth is driven by the very high-end segment The global perfumes market (and of course the French market) is mainly driven by the very upmarket niche in which fragrances are very expensive and often use more natural ingredients. Brands include Serge Lutens (Shiseido group), Frédéric Malle (Estée Lauder group since 2014), Annick Goutal (acquired in 2011 by the Korean group Amore Pacific) and Atelier Cologne (acquired by L’Oréal in 2016). Growth is also driven by well-known brandnames such as Louis Vuitton (which entered the segment in autumn 2016), or by high-end collections from Christian Dior, Chanel, Giorgio Armani with Armani Privé launched in 2003 or even Hermès (Hermessence, which costs EUR200 for 100ml compared to EUR85 for the same quantity of l’Eau d’Orange Verte). These fragrances are available in a limited number of outlets and are developed internally (with an in-house perfume makers like Jean-Claude Ellena or Christine Nagel at Hermès or Olivier Polge at Chanel). L’Oréal estimates that this niche perfumes market weighs about EUR1bn and that is grew over 10% in 2016. The Interparfums group operates in this segment with Boucheron (Collection of six fragrances available in only 50 outlets in the world) and, more recently, Van Cleef & Arpels (Collection Extraordinaire) in addition to the emblematic First (8% of group sales).
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This exclusive offering is an attractive alternative to the nearly 1,000 new fragrances (often quite low- end) introduced each year, versus only about 40 in the 1970s. This perfumes market is highly competitive (and fragmented), in any case much more than in the 1980s and 1990s.
2.4. Interparfums is still a small player in this market The Interparfums group is therefore a niche player compared to competitors such as Coty, which generated sales of EUR2bn in perfumes in 2016 (notably from licences with Calvin Klein, Gucci etc). Coty recently obtained the Burberry licence, having acquired assets from P&G, BPI (Dolce Gabbana, Issey Miyake, Serge Lutens…) in 2016 and L’Oréal (which manages other well-known brandnames under licence from Ralph Lauren, Giorgio Armani, Yves Saint Laurent and Diesel for example, and generated sales of nearly EUR2.5bn from perfumes in 2016). However, Interparfums is present in over 100 countries in the world and its brands are available in over 20,000 sales outlets, which makes it an alternative to the mammoths like Coty and L’Oréal for the middlesize luxury groups.
We estimate Calvin Klein’s global perfume sales at nearly EUR450m, which we believe is similar to Armani and Ralph Lauren’s. For comparison, we estimate Chanel’s cosmetics sales (managed internally) at around EUR700-800m.
Spanish group Puig is probably the player that is most similar to Interparfums, with licences from Prada, Valentino, Benetton and Massimo Dutti, but the Spanish group has more own brands because its portfolio includes Nina Ricci, Paco Rabanne and Jean Paul Gaultier. Lastly, Italian group EuroItalia manages the Versace, Missoni and Moschino labels. Being devoted exclusively to Italian brands, we believe that its international positioning is limited. EuroItalia was founded in 1978 by Giovanni Sgariboldi, and is still controlled by the founder’s family. In terms of size, it is similar to Interparfums having sold nearly 25 million units in 2016. The following table lists the main perfume licences held by the leading cosmetics groups.
Fig. 3: Main perfume licences
Coty L’Oréal Puig BPI EuroItalia Interparfums
Calvin Klein Ralph Lauren Prada Dolce Gabbana Versace Montblanc
Hugo Boss Armani Valentino Zadig & Voltaire Moschino Jimmy Choo
Gucci Yves Saint Laurent Massimo Dutti Issey Miyake Missoni Coach
Burberry Diesel Benetton Narcisco Rodriguez
Bottega Veneta Viktor & Rolf Comme des garçons Elie Saab
Marc Jacobs
Source: Company Data; Bryan, Garnier & Co ests.
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3. Interparfums’ business model Interparfums SA (listed in the Paris secondary market since 1995), was founded in 1982 by Philippe Benacin and Jean Madar, and is still controlled by the founders via Interparfums Inc (73% of the capital). The two founders own 45% of IP Inc. It is still a modest player in the global cosmetics market. As we have already seen, it operates in the relatively narrow market for selectively-distributed perfumes. What’s more, Interparfums’ market share is very limited (2%), relative to much larger players like Coty, P&G, L’Oréal who manage their own brands as well as others under licence, to say nothing of groups that only manage their own labels (LVMH, Estée Lauder, Chanel, Clarins). However, size is not the main objective of the strategy implemented by Interparfums’ management.
3.1. A light, efficient organisation… Interparfums has opted for a very light organisation with only 250 employees, two large subsidiaries (USA and Singapore), five smaller ones (Spain, Italy, Germany…) and agents who market the group’s products worldwide. Moreover, packaging is subcontracted to partners, all of whom are in France. The group has a depot and logistics centre of 30,000m² near Rouen (for comparison, Clarins opened 27,000m² logistics centre in Amiens in 2001) with storage capacity for 40,000 pallets (but only 32 employees), although it currently uses just 60% of this capacity. This leaves scope for growth by acquiring licences, for example, without the need for additional major investment, and thus a positive impact on operating profitability. In 2016, Interparfums sold 25 million units (including three million packs) from this logistics centre.
When a new line of fragrances is to be developed, the concept must first be defined with precise specifications (age and positioning of the target clientele and priority region) by the teams of both the brand and Interparfums, especially the marketing and sales teams, and the project must be approved by brands management (which usually takes about three months). The objective is complete harmonisation of the brand’s image with that projected by the new product, its packaging, fragrance and marketing. The manufacturing phase (bottle, packaging, fragrance) lasts 3-6 months. For the glassware, Interparfums has partnerships with Pochet and Verescence (ex Saint-Gobain and world leader in glass bottle manufacturing). One of the most important partners for packaging is the Qualipac group.
The fragrances are developed and produced by well-known external partners such as IFF, Firmenich, Givaudan or Robertet, like most of the sector’s big names including Parfums Christian Dior and Lancôme. Only a few players have an internal “nose” (e.g. Jacques and Olivier Polge for Chanel, Jacques Cavalier for Louis Vuitton, Jean-Claude Ellena and Christine Nagel for Hermès).
Lastly, packaging and quality control take about two months. The packaging too is done by partners like Jacomo Productions in Deauville and CCI Productions in the Eure department. This solution gives the group some flexibility and allows it to adapt to a very dynamic market (e.g. 2010-2011), or to a very slack market (e.g. 2009).
From the signing of the licence contract to the launch of the first line of products, there is generally an 18-24 month delay.
3.2. …allows dynamic sales In spite of – or perhaps because of – its moderate size, Interparfums has enjoyed very dynamic growth for several years, as illustrated in the table below. CAGR (at constant exchange rates) from 2010 to 2016
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Interparfums reached nearly 15%, far higher than that of the market in which the group operates (+1-2%). This reflects its efficient business model and especially its capacity to acquire major new licences: Jimmy Choo, Montblanc (acquired from P&G in 2010) and Coach (in 2015, at the expense of Estée Lauder). This strong growth also reflects Interparfums’ expertise in launching new luxury perfume lines, or adapting and supporting existing ones.
This very positive trend was confirmed by a 34% increase in revenues (+32.7% at constant forex) in first-quarter 2017, largely thanks to the introduction of new lines for Coach, Rochas and Jimmy Choo. However, existing lines performed very well too.
Fig. 4: Organic sales growth 2010-2017e
2010 2011 2012 2013 2014 2015 2016 2017e organic sales growth (%) 18 33 7 19 19 2 13 13
Source: Company Data; Bryan, Garnier & Co est. In addition, compared to the early years of the present decade, the group has managed to improve the balance of its portfolio of brands. One of Interparfums’ strengths is a relatively good breakdown of sales by brand. Three of them, Montblanc, Jimmy Choo and Lanvin, generate 15-30% of group sales each (respectively 30%, 22% and 15%). Interparfums would not, therefore, be thrown off balance by the loss of a licence, as happened to Safilo when it lost the Gucci licence (22% of sales in 2014, and even 30% for all Kering brands) in September 2014, as its second largest licence, Christian Dior, only accounted for 12% of sales at the time.
Fig. 5: Breakdown of 2016 sales by main licences (%)
Source: Company Data; Bryan, Garnier & Co ests. We are not therefore fully in the same situation as in 2012 when Interparfums was hard hit (2014 sales and EBIT fell 40% and 15% respectively, having already fallen 20% and 10% in 2013) by the end of the Burberry perfumes licence, which at the time represented 53% of group sales, or EUR235m. This event served as a lesson, in our opinion, and the group has since avoided becoming overly dependent on any one brand. Note too that the end of that agreement was not imposed on the group, as management decided not to give in to the financial and operational demands of the British group, especially as the compensation due in case of a rupture of the licence was considerable (EUR181m).
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This also explains Interparfums desire to have as many of its own brands as possible, as is the case for Lanvin (in perfumes and cosmetics) and Rochas (perfumes and fashion).
Moreover, the difficulties that Burberry has encountered with internal management of its cosmetics activity (notably a plan to reduce the number of outlets in some important markets like the UK), and the group’s recent, logical decision to sell this activity to Coty, shows that the work done by Interparfums was useful, as demonstrated by average annual sales growth of 9% for the licence from 2008 to 2012. Even more important, in our view, this trend also shows that internal integration of this activity is not without risks despite the Burberry brand’s considerable size (sales of GBP2.8bn in 2016/17 and licence revenues of GBP203m in 2015/16). So even critical mass does not guarantee success in this area.
In our opinion, this should reassure investors who have been worried about the business model of licences since 2014, when Kering opted for internal integration of its eyewear activities (Gucci notably) at the expense Safilo and, more recently, the JV between LVMH and Marcolin which reflects LVMH’s desire to control this activity better, again to the detriment of Safilo (see §5.1).
3.3. A strong presence in Europe and the US Although western Europe accounts for 32% of Interparfums’ sales (including France 10% and the UK 6%), North America is also a key region as the group generates 23% of its revenues there. And thanks to the Coach licence, this share will likely rise from 2017. Asia-Pacific is the group’s third most important region, with 15% of revenues of which two-thirds from Greater China (Mainland China and Hong Kong combined).
In 2016, Interparfums’ sales increased by 13% in Europe (partly thanks to Montblanc which introduced a new line called Legend Spirit, and to the integration of Rochas), and by 29% in North America (Coach’s first fragrance for women). Eastern European revenues fell by 13% due to the situation in Russia, while Asian revenues grew by 10%.
The US dollar thus accounts for nearly 40% of group sales, which allows Interparfums to benefit from a stronger dollar, as was the case in 2015 and may be the case again in 2017, although to a lesser extent given the dollar’s current level, and despite some weakness in recent weeks.
This is particularly true as the budget and management’s initial estimates for sales (EUR390m) and operating profitability (margin in the region of 13.5%) in 2017 were based on a EUR/UDS rate of 1.15 versus an average of 1.09 since the beginning of the year (and 1.11 in 2016), leaving scope for a slight upward revision to the group’s estimates.
The table below highlights Interparfums’ capacity to gain a gradual foothold in North America and to increase market share there. Although L’Oréal is the market leader for selective Retail perfumes on market share of 18.2% in 2016, Interparfums made the Top 10 (ranking 9th) on market share of 3.2%, versus 2.7% in 2015 (ranking 11th).
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Fig. 6: Market share trends in the US
2016 2016 2015 2015
rank market share (%) rank market share (%)
L'Oréal 1 18.2 L'Oréal 1 17.5
Estée lauder 2 15.7 Estée lauder 2 16.1
Coty 3 13.1 Chanel 3 12.9
Chanel 4 12.9 Coty 4 9.8
LVMH 5 8 P&G 5 9.1
Shiseido 6 7.6 LVMH 6 7.5
PUIG 7 4.4 Shiseido 7 4
EuroItalia 8 3.3 Puig 8 3.7
Interparfums 9 3.2 Elizabeth Arden 9 3.5
Elizabeth Arden 10 2.7 Fragrance Elite 10 3.0
Clarins Group 11 2.0 Interparfums 11 2.7
Source: Company Data; Bryan, Garnier & Co ests. Lastly, we should not overlook the Middle East (9% of group sales), South America (7%) and Eastern Europe (9%).
Fig. 7: Breakdown of 2016 sales by region (%)
LATAM; 7
Middle East; 9
Eastern Europe; 9 Western Europe; 32
Asia; 15
North America; 23
Source: Company Data; Bryan, Garnier & Co ests.
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4. Business model of perfume licences This question may seem incongruous given the group’s strong performances outlined above. However, we believe it is legitimate given recent turbulence in the market for eyewear. Can a similar wave of internal integration (à la Kering, LVMH) occur in perfumes? What are the main differences between the business model of perfume licences and that of spectacles?
4.1. Differences between eyewear and perfumes First, in our opinion, three main reasons account for the wave of concentration in the world of spectacles and the internal integration licences:
i/ Critical mass: This reason is interesting, in our opinion, because it was certainly central to the Kering group’s September-2014 decision to integrate its eyewear activity which had previously been licenced to Safilo. In 2015, the Gucci eyewear licence generated sales of EUR280m for Safilo. Note that the Burberry licence generated sales of EUR235m, which may have led Burberry’s management to believe that critical mass had been reached, and that it was time to manage the activity internally. But a few years later, in 2015/16, the contribution to Burberry was just GBP203m, or EUR233m. Conclusion: the decision destroyed value for the British group, because size is not everything. In our opinion, in addition to size, the main parameter is the stiff competition that prevails in perfumes and cosmetics (much stronger than in glasses), obliging players to be far more aggressive in terms of new products, which have a short lifespan and thus needs replacement rapidly. In our view, therefore, it is a job for professionals who have the expertise (creation of fragrances, manufacturing, communication / marketing and above all distribution) that Interparfums clearly possesses. Moreover, brands like Ralph Lauren, Calvin Klein and Armani, despite their very large size, have opted to entrust this component of their business to cosmetics groups. Over the past 20 years, Burberry is the only luxury goods brands to have repatriated this activity internally.
ii/ Dynamic growth: While the global market for selective perfumes is growing slowly (1-2% a year), the market for glasses – especially the very buoyant sun segment – is growing 5-7% per annum. In 2016, the market grew 5% despite a difficult environment (slack demand for luxury goods, very few tourists etc.). Overall (lenses, frames and sun), the global market for eyewear is thought to weigh EUR15bn. In our view, given the strong growth profile, it is appropriate and strategic for luxury brands to take full advantage of this momentum by integrating this activity internally (via ad hoc subsidiaries like at Kering, or via a JV like LVMH-Marcolin). In our opinion, this is a fundamental difference with the world of selectively-distributed perfumes where growth is slower, and thus less strategic.
iii/ Control of distribution: This third reason for internal management of licences also implies control over the brand image as well as the price policy, but this strategy requires heavy investment for the construction of a distribution network, which explains the importance of critical mass to negotiate the best possible conditions with selective distribution chains like Séphora, as well as department stores. Distribution of eyewear is much more fragmented. Concerning Interparfums, the decision taken this year by Burberry to licence this activity to Coty shows that despite the size of this licence, bargaining power vis-à-vis retailers did not lie with the British group. Under these circumstances, we are confident that neither Montblanc, nor other brands such as Jimmy Choo, can resolve this issue in a satisfactory manner, which suggests that the licence business model is appropriate for perfumes.
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We therefore do not think that it is in the interests of large groups that have licencing agreements with Interparfums to repatriate their cosmetics business. The markets for eyewear and perfumes are sufficiently different to ensure that Interparfums business model is not at risk.
Fig. 8: Optical and Perfumes sectors
Optic Perfumes
1/ Critical size Size is critical Size is not THE issue
2/ Momentum Strong momentum Slow growth, highly competitive
3/ Retail control Distribution is more fragmented Distribution is more concentrated
Source: Company Data; Bryan, Garnier & Co ests. 4.2. Licences offer good visibility Interparfums has a major strength, in our view, especially for the near term: none of its main licences are due to expire in the coming years (see chart below). The two that are most important for the group, Montblanc (30% of sales) and Jimmy Choo (22% of sales), expire respectively in 2025 and 2022, and their performances suggest they will be renewed as sales amount to EUR100m for one and EUR82m for the other after only five years. What’s more, a 62% increase for Jimmy Choo in first-quarter 2017 augurs well for the full year.
In addition, there is no contract for the third most important licence, Lanvin, as Interparfums acquired the brand in 2007. In 2025, however, Lanvin can acquire the brand thanks to a call option but will have to pay a compensation to Interparfums. Note that the Rochas brand belongs to Interparfums, so it is not the object of a contract either.
The next licence to be renewed is for the S.T. Dupont brand (last renewed in 2016, and due to expire in 2019), but it accounts for only 2% of group revenues. Similarly, the Paul Smith licence which expires at end 2017 is highly likely to be renewed. Moreover, the Van Cleef & Arpels licence (5% of sales) expires in 2018 and should, in our opinion, be renewed, probably for at least three years (i.e. to 2021).
We believe that the group has excellent visibility for the next three years, especially for its main licences (Montblanc, Jimmy Choo). This should reassure investors and allow the group to invest with confidence and focus on winning new licences/brands thanks to net cash of EUR160m at end 2016. On the other hand, the group recently announced the end of the licence with Balmain this year in exchange for compensation. Revenues from this marginal licence (1% of group sales) fell 21% in 2016 to EUR3.8m, and deliveries to distributors ceased on 31 March as the group never succeeded in exploiting this licence in a way that produced satisfactory returns for either party.
Fig. 9: Expiry dates of main perfume licences/brands
License 2016 sales Br and Nam e Brand owner 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 start date (EURm ) Montblanc Richemont 2010 110 Jimmy Choo JAB 2010 82 Lanvin Interparfums 2007 56 Rochas Interparfums 2015 29 Coach Coach Group 2016 21 Van Cleef & Arpels Richemont 2007 19 S.T.Dupont Dickson Group 1997 5,4 Paul Smith Private equity 1998 9,2 Boucheron Kering 2011 16 Repetto Jean Marc gaucher 2012 5,0 Karl Lagerfeld Private equity 2012 6,5
Source: Company Data; Bryan, Garnier & Co ests.
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4.3. A reshuffle of the portfolio of brands The decision announced by Burberry in last April to sell the licence for its Beauty business to Coty (for nearly EUR200m, having recovered it from IP in 2013) shows the sceptics of the licence business (especially since 2014, following Kering’s decision to repatriate the Gucci eyewear business) that internal integration of this business is not easy and is very costly. This endorses the IP business model and augurs well for the future.
As we have seen, the most important feature of the perfumes market is, in our opinion, the highly competitive nature of this segment, which is partly due to a relatively modest dynamic that requires regular introductions of new fragrances to spur growth. This situation requires a level of expertise and critical mass that even the British group failed to achieve.
Under these circumstances, we are confident that Interparfums can retain existing licences, especially as mid-sized luxury goods groups prefer to outsource their Beauty activity to a smaller group that will generate a large share of its sales from the contract, rather than be marginalised in a much bigger group.
Even more important and more strategic, in our opinion, Interparfums may be very well placed to recover some licences currently managed by Coty (following their acquisition from P&G), especially as the CEO of Coty has announced a plan to concentrate on the most important licences (Gucci, Hugo Boss, Calvin Klein, Marc Jacobs) which suggests a possible divestment of other brands in the portfolio, including Miu Miu, Roberto Cavalli, Davidoff, Guess and Chloé (a very dynamic fashion and accessories brand that is still small and belongs to the Richemont group, like the Montblanc, licence, which since 2010 has been successfully managed by Interparfums). This has become even more likely since Coty acquired the Burberry licence last April.
We are inclined to think that Bottega Veneta and Balenciaga will not be concerned by this potential reshuffle. They belong to the Kering group, like Gucci which is one of the brands that Coty would like to retain in its portfolio, the logic being that Kering allow its brands to be managed by a single group, even if Balenciaga may have a different fate due to its relatively small size (sales in the region of EUR100m).
The challenge for the French group is clearly to enlarge its portfolio of brands and put its cash holdings (EUR160m at end 2016) to good use. Several possibilities are open to the group’s management: acquire the perfume licence of a brand that is already present in the segment (either during the contract, or on expiry), as was the case with the Coach brand in 2016 when it expired for Estée Lauder; or develop a perfumes activity from scratch, following the example of Jimmy Choo in 2010. Interparfums has the right skill-set, in any case.
Of the luxury-goods brands that are not already present in the perfumes segment and which could be tempted to try to gain a foothold, we note Moncler (although the CEO, Rémo Ruffini, recently denied any interest in the segment), Loro Piana (LVMH group) despite internal expertise, Tod’s, and even Brunello Cucinelli which is already large (2016 sales of EUR456m) may consider the matter.
Note too that Interparfums does not have an Italian brand in its portfolio, which is surprising given Italy’s strong presence in luxury goods. Management may therefore be attracted by brands currently managed by EuroItalia, a competitor of Interparfums founded in 1978 and still owned by an Italian family (the Sgariboldi), like Versace or Missoni or even Bottega Veneta (currently in the Coty portfolio).
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Fig. 10: Main perfume licences
Coty L’Oréal Puig BPI EuroItalia Interparfums
Calvin Klein Ralph Lauren Prada Dolce Gabbana Versace Montblanc
Hugo Boss Armani Valentino Zadig & Voltaire Moschino Jimmy Choo
Gucci Yves Saint Laurent Massimo Dutti Issey Miyake Missoni Coach
Burberry Diesel Benetton Narcisco Rodriguez
Bottega Veneta Viktor & Rolf Comme des Garçons Elie Saab
Marc Jacobs
Source: Company Data; Bryan, Garnier & Co ests. 4.4. The main brands Of the IP brands, we will now take a closer look at the most important (Montblanc, Jimmy Choo) Lanvin), and at Coach’s potential.
4.4.1. Montblanc In 2010, Interparfums obtained the licence for Montblanc (a German writing instruments and leather goods specialist that is owned by Swiss group Richemont, and whose sales we estimate at around EUR1bn). In 2016, it became the group’s most important licence when sales grew 25% to EUR110m, or 27% of Interparfums’ revenues. Since 2013, sales growth has averaged 20% per annum. The positioning is mainly fragrances for men, which is coherent with the brand’s image. But this licence is now capitalising on its success by expanding into fragrances for women (with Lady Embleme) and other initiatives are likely in the medium term. The objective is to have revenues of EUR150m (with EUR20m from feminine fragrances) within three years, versus EUR110m in 2016 and EUR110m again in 2017e. However, growth should take off again in 2018, when we expect revenues to rise 9% to EUR119m.
In 2016, Montblanc’s main new fragrance (which was a resounding success) was Montblanc Legend Spirit (sales above EUR20m), but in 2017, Interparfums expects no major introductions and the comparison base is unfavourable, especially in the early part of the year. This explains our forecast for flat sales in 2017, confirmed by a 6% decrease in the first quarter of this year. However, this licence is not due to expire until 2025, which gives Interparfums the time and the visibility required to launch new products in 2018 and thus make it a true blockbuster thanks to stronger growth in the medium term.
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Fig. 11: Sales generated by Montblanc licence
140 119 120 110 110
100 88 83 80 63 60 46 40 31
20 7 0 2010 2011 2012 2013 2014 2015 2016 2017e 2018e
sales (EURm)
Source: Company Data; Bryan, Garnier & Co ests.
4.4.2. Jimmy Choo Jimmy Choo is Interparfums’ second licence in terms of sales. In 2016, the licence generated revenue of EUR82m. Growth was almost flat last year due to a clear unfavourable comparison base following major introductions in 2015 (Jimmy Choo Man and Jimmy Choo Illicit) which raised sales by 41%. As a result, Jimmy Choo is one of the group’s main assets, helped by a successful range of high-end shoes. The group is 68%-owned by the JAB Holding Company which is controlled by a German family, the Reimann. JAB also owns (since 1992) 37% of US cosmetics group Coty, which acquired last year major assets from Procter & Gamble (see above) and bought recently some important brands in the coffee sector.
Recently, however, Coty has announced its intention to divest this asset (along with the Bally shoe brand) in order to invest in coffee assets. This withdrawal by the Reimann family from Jimmy Choo is, in our opinion, good news for Interparfums, because it eases fears that the licence would go to Coty, which has the same main shareholder as Jimmy Choo.
The British shoe and accessories group, Jimmy Choo, posted sales of GBP364m (EUR430m) in 2016, up 2% at constant exchange rates (+4% in the Retail network alone, but -1% on a same-store basis), in line with last year’s difficult luxury goods market, especially for Wholesale. Asia-Pacific performed very well in 2016 (+19% at constant forex) despite a complicated environment for luxury goods in the region.
The licence contract, signed in 2010, does not expire until 2022, so here too Interparfums has time to develop a coherent strategy that should allow the licence to build on its strong growth. Although no major product was launched in 2016, initiatives have already been taken this year with the Jimmy Choo Signature and Jimmy Choo Man brands whose sales we forecast in the region of EUR105m, up 28% following a 62% upsurge in the first quarter alone.
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Fig. 12: Jimmy Choo’s sales
120 110 105 100 83 82 80 59 60 55 40 40 29
20 0 0 2010 2011 2012 2013 2014 2015 2016 2017e 2018e
sales (EURm)
Source: Company Data; Bryan, Garnier & Co ests. 4.5. Interparfums’ own brands Apart from the main licences discussed above, Interparfums has acquired its own brands in order to shield itself from the risk of non-renewal and to enjoy better visibility, even though the long duration of licences (at least 10 years) and consistently satisfactory results limit the risk of non-renewal or early rupture.
4.5.1. Lanvin Interparfums’ third brand is Lanvin, where sales fell 13% to EUR56m in 2016. In first-quarter 2017, however, they surged 50%. Lanvin’s long-standing lines, notably Eclat d’Arpège, suffered in 2016 and revenues were also hit by an economic slowdown in Russia and China, which are the brand’s two largest markets. In 2017, the Modern Princess line will be expanded internationally (Asia, Middle East) having already been launched in France, Russia and Japan (which explains the strong sales increase in Q1 sales). We thus expect 2017 sales to rise 23% to EUR69m. The expected increase in Asia should also be a major catalyst for growth of this licence in 2017.
4.5.2. Rochas Following a EUR181m payment to Interparfums in 2013 for early rupture of the licence contract with Burberry, the group acquired the Rochas (perfumes and fashion) licence from US group Procter & Gamble for USD108m in March 2015. Interparfums’ objective for Rochas is mainly to develop the perfumes business, which is well-known for its very classic feminine fragrance, L’Eau de Rochas, but also thanks to new labels for women. In addition, Rochas plans to make a cautious entry into fashion.
In fashion, the strategy will be conservative with a relatively small investment. This activity is managed with licences granted to Interparfums (ready-to-wear, watches, glasses etc), that generated systemwide sales of EUR20m in 2016 (EUR2 license sales in 2016 and EUR2.5m anticipated in 2017) and a slightly positive bottom line. In 2017, the brand will introduce its first men’s ready-to-wear lines, but ambitions are modest and distribution will be very selective.
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In 2016, Rochas’ perfume sales amounted to EUR29m, mainly from two lines, Eau de Rochas (nearly 70% of sales) and Rochas Man (30%) and two countries (Spain for about 50% and France for 25%). In 2017, revenues from this activity could rise 20% to around EUR35m thanks to, Mademoiselle Rochas, the first line for ladies developed by Interparfums in a dozen countries, mainly in Europe and the Middle East but also in South America.
This initiative began in the best possible conditions, with a 48% rise in the brand’s sales in Q1 thanks to a favourable response from both distributors and consumers. The objective of this introduction is to reaffirm Rochas as a Paris luxury-goods house and to attract younger customers thanks to a new muse, the actress Noémie Schmidt. A second round of launch is scheduled for this summer.
Fig. 13: Mademoiselle Rochas
Source: Company Data; Bryan, Garnier & Co ests. 4.6. Coach’s potential In April 2015, Interparfums signed a global and exclusive licence with Coach for 11 years. This US group, which belongs to the eponymous Coach Inc, produces accessible luxury goods. In 2015/16 (closed June 2016), sales amounted to USD4.15bn, up 2% and +11% in T4 alone. This brand does particularly well in North America (58% of sales), and in China and Japan where it is the second-largest luxury-goods importer after Louis Vuitton. In 2015/16, the Coach group’s sales amounted to USD4.5bn, up 2% (at constant forex and despite a complicated environment for luxury goods) and yielded an operating margin of 17.3% versus 18.8% in 2014/15. The size of this US group is similar to that of Gucci, but close to half that of Louis Vuitton. Coach, which was created in 1941, is available in 5,500 outlets around the world including 1,000 own stores, of which 300 in the US and 4,500 multi- brand stores in the US and in Travel Retail.
In first-half 2016-17 (to 31 December 2016), the brand’s sales slipped 1% due to restructuring of the wholesale network in North America (which affected other luxury groups) to contain a wave of promotions in US department stores, at a time when sales in these stores increased by 4% reflecting the brand’s good health.
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Moreover, some stores that were considered lacking in quality have been closed. In continental China (15% of the sales), revenues were up double-digits on a same-store basis, but fell 7% in Japan (less Chinese tourist due to the stronger yen). The same trends were recorded in these regions by European groups Louis Vuitton and Gucci.
Fig. 14: Examples of Coach boutiques
One month absolute performance (%)
Source: Company Data; Bryan, Garnier & Co ests.
However, its positioning is not the same as that of most European luxury groups. The Coach brand targets the affordable luxury segment i.e. handbags that sell for USD500 or EUR470 versus an average of EUR1,500 for Louis Vuitton or Gucci. But efforts to reposition or reduce the wholesale segment, especially in the US, are bearing fruit.
The licence contract took effect from autumn 2016 (note that Interparfums did not have to pay to obtain this brand, as the licence contract with Estée Lauder had expired). In the third quarter 2016, Coach’s sales had already reached EUR12m although the group originally anticipated EUR18m for full- year 2016 (but finally posted EUR21m, or EUR9m in Q4 alone) and EUR34m in 2017 (revised upwards to EUR38m by BG), which is the first full-year of revenues. In Q1 2017, Coach’s sales amounted to EUR7.6m partly thanks to a new feminine line Coach introduced in second-half 2016. For 2018, we expect revenues of around EUR46m (up 21% vs 2017) following major fragrance launches in 2016 and 2017.
2016 saw the birth of a new feminine line Coach (in both eau de parfum and eau de toilette), with particularly successful launches in the US and Asia (in September and in October 2016, for example, Coach was the best-selling brand in Sephora stores in Singapore), but also in Russia. On the other hand, management has stated that the launch was more difficult than expected in the UK. The roll-out of this feminine line will continue in 2017, notably in the Chinese and European markets. The current year will also be shaped by the introduction of the first line for men in the autumn.
The objective of Interparfums’ management is to achieve sales of EUR100m with this licence in 4-5 years (it took five years to reach this level with the Montblanc brand launched in 2010). Eventually (in 5-8 years), we think Coach could become the group’s main licence, overtaking Montblanc whose sales amounted to EUR110m in 2016 (+25%) and we expect them to be unchanged in 2017 (given the high comparison base) before rising 8% to EUR119m in 2018e.
The chart below illustrates our expectations for the US brand’s sales, which should rise to nearly EUR68m in 2020e – a level that is below the group’s objective.
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Fig. 15: Coach revenues (EURm)
80 68 70
60 56
50 46 38 40
30 21 20
10
0 2016 2017e 2018e 2019e 2020e
Source: Company Data; Bryan, Garnier & Co ests
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5. Encouraging prospects We are optimistic about the outlook for Interparfums sales and earnings, even though the main catalyst for earnings growth will be buoyant sales rather than a significant improvement in the operating margin, which should be in the region of 13-14% in the coming years.
5.1. Momentum remains very strong Interparfums’ growth has been strong and regular for a long time, as illustrated by the chart below. The slump in sales in 2013 (-40%) and again 2014 (-20%) was entirely due to the ending of the licencing agreement with Burberry. During 2007-2016, pro forma CAGR (i.e. without the Burberry licence contract which ended in 2013) reached about 15%..
In 2016, sales increased 11.7% (+12.5% at constant exchange rates) to EUR366m and management’s initial expectations for 2017 (announced in November 2016) was for EUR380m. In January 2017 when full-year 2016 sales were published, guidance was raised to EUR385-390m (+5-7%). This estimate looks quite conservative to us given the level of the dollar and especially the very good sales performance of first-quarter 2017 (+34% – and +33% at constant forex – to EUR112m).
Let’s not forget that management’s initial guidance for 2016 sales (issued in November 2015) was EUR340m, 8% below the EUR366m that the group finally posted. The same pattern is visible with respect to 2015 sales, which were initially called at EUR300-310m in November 2014, but finally came in at EUR327m.
We can thus conclude that habitually (or at least for the last three years), final sales have been 6-8% higher than management’s initial guidance.
Fig. 16: Comparison of initial sales estimates with actual performance
EURm 2014- 2015 2016 2017e
Initial guidance 280 300-310 340 380
Final achievement 297 327 366 416
Deviation (%) 6 7 8 10
Source: Company Data; Bryan, Garnier & Co ests.
As a result, we expect sales of EUR416m in 2017, significantly higher than the initial guidance but justified by strong growth in Q1 (+33%). This estimate implies a 14% increase vs 2016 and 10% upside relative to the guidance supplied last November, which is at the high end of the historical range (see above). This sort of growth would confirm ongoing strong dynamism, especially as the early-2017 performance appears to have been good (see Q1 revenues increase), partly due to Europe where conditions have improved considerably with the return of tourists (from all regions), but also to successful new fragrances launches by Coach in the US and Asia last autumn and also very strong Jimmy Choo sales during the period.
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Fig. 17: Interparfums sales in EURm (1995-2019e)
600
500 500 445 455 416 398 400 350 366 327 305 297 300 265259 242 216 194 200 157 125 89 93 100 77 45 53 57 29 31 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017e 2018e 2019e
Source: Company Data; Bryan, Garnier & Co ests. In 2009, the luxury sector’s annus horribilis, Interparfums’ sales fell only 3%. The group was barely affected by the financial crisis and its impact on the luxury goods market (massive destocking by distributors, especially in the US), which contracted 4% at constant forex in 2009. For comparison, L’Oréal’s luxury division saw its sales drop 9%.
Growth should remain strong in 2018. Interparfums’ sales could comfortably exceed EUR450m (EUR455m), far above the group’s initial guidance for EUR400m and 9% higher than our estimate for 2017. Management’s objective is to return as soon as possible to the sales level enjoyed before the end of the Burberry licence agreement, i.e. EUR445m in 2012. This target could be reached next year. In addition, management has an ambitious but not official goal (which we consider reasonable) to post sales of EUR500m in 2019.
Fig. 18: Sales and growth rate (excluding Burberry)
600 50 500 500 455 40 416 400 366 30 327 297 300 250 20 209 200 175 10 119 91 100 0
0 -10 2009 2010 2011 2012 2013 2014 2015 2016 2017e 2018e 2019e
CA (EURm) chge %
Source: Company Data; Bryan, Garnier & Co ests.
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Interparfums
5.2. 11% sales CAGR in 2016-19e Over the past five years, Interparfums’ sales have grown 16% per annum on average, and we expect 11% sales CAGR from 2016 to 2019e. In 2016, sales grew 12% at constant forex.
In 2017, we expect sales growth to be slightly higher at 14% (to EUR416m) in view of the strong performance in Q1 (+34% – and +33% at constant forex). This forecast implies ongoing dynamism in an environment of moderate growth (despite an improvement in Q1, especially in Travel Retail in Europe). At this stage, however, the group has not altered its guidance for 2017 sales which is around EUR390m (+6.5%), even though this forecast looks too low to us in the light of the Q1 performance.
Although our forecast for full-year sales of EUR416m implies a sharp slowdown before the year-end (+8% on average for the next three quarters), the company’s guidance includes an average decrease of 2% in each of the three remaining quarters, which looks unrealistic to us. We think it is highly likely that management will raise its guidance for full-year sales with the publication of first-half sales on the morning of 27 July.
Some of the events that are likely to shape 2017 include i/ the launch of a new feminine perfume, Mademoiselle, by Rochas in the first quarter; ii/ major initiatives by Jimmy Choo (Jimmy Choo L’Eau and Jimmy Choo Man Ice); iii/ pursuit of the international launch of Modern Princess by Lanvin and the introduction by Coach of its first men’s fragrance in the Autumn.
Fig. 19: First-quarter 2017 sales
EURm Q1 16 Q1 17 chge %
Jimmy Choo 19.5 31.6 62
Montblanc 31.8 29.7 -7
Lanvin 11.1 16.7 51
Rochas 5.8 8.6 48
Coach 0 7.6 na
Boucheron 4.0 4.8 19
Others 11.5 13.4 16
Total 83.7 112.4 34
Source: Company Data; Bryan, Garnier & Co ests.
Given these circumstances, our initial forecast (see chart below) calls for Interparfums sales to rise close to 10% to EUR455m in 2018 (thus exceeding the EUR445m of 2012, before the end of the Burberry licence) and to rise another 10% to EUR500m in 2019. Naturally, these forecasts are on a same-structure basis, but it is highly likely that the group will sign new licence agreement or even acquire new brands in the next year or two.
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Fig. 20: Sales trend (2014-2019e)
550 20 500 18 500 455 16 450 416 14 12 400 366 10 350 327 8 297 300 6 4 250 2 200 0 2014 2015 2016 2017e 2018e 2019e
Sales (EURm) chge (%)
Source: Company Data; Bryan, Garnier & Co ests. The table below shows our estimates for sales in 2015-19. In 2016, not surprisingly, Montblanc was again the group’s biggest revenue generator (30% of total sales), followed by Jimmy Choo (22% of sales). In 2018, just two years after its introduction, Coach could already become Interparfums’ fourth brand on sales estimated at EUR45m (9% of total revenues), after Montblanc, Jimmy Choo and Lanvin.
In 2016, the main catalysts for sales growth were i/ the successful launch of the Montblanc Legend Spirit for which revenues exceeded EUR20m last year, ii/ two new products at Jimmy Choo (Jimmy Choo Blossom in the early part of the year and Jimmy Choo Illicit towards the year-end) and iii/ the introduction of Coach’s first feminine line in the autumn. Lastly, Van Cleef & Arpels launch its So First.
Moreover, Interparfums bestsellers, Eau de Rochas, Jimmy Choo Man and Montblanc Legend, continued to perform well, partly thanks to investment in marketing and advertising (see below) which should be the case again in 2017 and 2018.
Looking beyond development of the Coach licence (roll-out of the first feminine eau de parfum et eau de toilette and launch of a men’s line in the autumn), the highlights of the current year should be: i/ the introduction by Rochas of its first feminine line, Mademoiselle, developed by Interparfums in a dozen countries, but mainly in Europe, Latin America and the Middle East, which explains our +14% sales forecast; 2/ major initiatives with Jimmy Choo Signature and Jimmy Choo Man. Similarly, Lanvin’s Modern Princess line should pursue its international development. Lastly, a new fragrance will be added to the Collection Extraordinaire line at Van Cleef & Arpels.
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Fig. 21: Breakdown of sales by brand (2015-2019e)
2015 2016 2017e 2018e 2019e
Montblanc 88.0 110.0 110.0 119.0 133.0
Jimmy Choo 83.3 81.7 102.0 110.0 121.0
Lanvin 64.1 56.0 65.0 68.0 73.0
Boucheron 17.8 16.0 17.5 19.0 20.0
VCA 17.5 19.1 19.0 21.0 23.0
Rochas 12.1 29.2 34.0 37.0 39.0
S.T. Dupont 10.4 5.4 6.0 6.0 6.0
Coach 20.9 32 46 56
Karl Lagerfeld 10.3 6.5 8.0 8.0 8.0
Paul Smith 9.5 9.2 8.0 8.5 8.5
Repetto 8.0 5.0 5.5 6.0 6.0
Balmain 4.8 3.8 2.5 0.0 0.0
Others 0.6 0.7 4.0 4.0 4.0
Fashion Rochas 1.0 2.1 2.5 2.5 2.5
Total sales 327.4 365.6 416.0 455.0 500.0
Source: Company Data; Bryan, Garnier & Co ests. On the other hand, no major launch is scheduled in 2017 (except for the third phase of the Legend line in Q4, called Legend Night) and the group’s objective is to consolidate the Montblanc Legend and Montblanc Legend Spirit lines launched in early 2016, which explains the modest 2017 sales forecast.
5.3. Higher profitability is not an objective While sales growth remained dynamic in 2016 and should do so again in 2017 (see above), we are more cautious about Interparfums’ capacity – and even management’s motivation – to raise the operating margin, which may stay within the 13-14% range in the coming years.
The following chart tracks the progress of operating profits and margins since 2011, a period that was marked by the end of the Burberry licence in 2013 (which explains the 40% fall in EBIT to EUR31.4m and the 430bps drop in the operating margin to 10.6%). In 2015, on the other hand, operating profit and margin rebounded smartly to EUR45.8m and 14% respectively, partly thanks to the stronger dollar which, in our view, accounted for two points of the operating margin upswing. In 2016, the group initially guided to an operating margin of 12-13%, but finally posted 13.6%. For this year, the group announced last November that it expects the operating margin to be around 13%.
In 2016, Interparfums’ operating profitability reached 13.6% or EUR50m, significantly above the guidance range provided in November 2016 (margin: 12.5-13%). For 2017 too, we are more optimistic than management as our operating margin forecast is 13.7% (EUR57m) versus guidance at 13%, but based on a higher sales forecast. In 2018, operating profitability could be almost unchanged at 13.8%, or EUR63m.
Like L’Oréal and other cosmetics groups, Interparfums’ business model is more focused on growing sales and winning market share than on higher profitability. The latter is not management’s objective, but a consequence of rising sales and a positive volume effect. Interparfums prefers to avoid cost cutting which destroys value in this sector in the medium term, whether it be at the level of cost of sales (production, logistics etc) or operating charges (marketing/head office costs etc).
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Fig. 22: Operating profit and margin (2011-2019e)
80 17 69 70 63 15 60 57,3 57 52,2 50,0 13 50 46,3 45,8
40 11 31,4 30 9 20 7 10
0 5 2011 2012 2013 2014 2015 2016 2017e 2018e 2019e
EBIT (EURm) as % of sales
Source: Company Data; Bryan, Garnier & Co ests. In the very competitive global cosmetics business, and especially in the feminine perfumes segment where the lifespan of products is increasingly short, spending on communication is vital to support new products or brands and sustain existing ones (often the most profitable). Interparfums has therefore integrated this fundamental market with regular increases in the budget in both nominal terms and as a percentage of sales. It stood at 22% of sales in 2016 and will probably be 24% in 2017e (according to management) versus only 20% in 2014. Nevertheless, in 2018 and 2019, we expect this item to be nearly flat, at 23% of sales.
Fig. 23: Communication budget (2014-2019e)
140 24,0 115 120 105 23,0 98 100 80 22,0 80 67 60 21,0 60 20,0 40
20 19,0
0 18,0 2014 2015 2016 2017e 2018e 2019e
Communication costs (EURm) as % of sales
Source: Company Data; Bryan, Garnier & Co ests. At the same time, the gross margin could rise from 58.4% in 2014 to 65.4% in 2017e (versus 64.8% or EUR227m in 2016 and 63.6% in 2015) thanks to: i/ a favourable volume effect, as was the case in 2016 on the back of Parfums Rochas; ii/ a positive product mix (increased weight of high-margin lines such as Montblanc Legend Spirit); iii/ price increases in a few selected markets and high-growth licences; and lastly iv/ a positive forex (stronger dollar) effect in 2017 following an impact that was not negligible in 2016. This improvement in the gross margin should allow higher investment in sales drivers such as
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Interparfums communication and marketing. In this respect, Interparfums’ business model is similar to that of L’Oréal, as one might expect.
Fig. 24: Gross profit and margin (2014-2019e)
350 323 67,0 298 300 272 65,0
250 237 208 63,0 200 174 61,0 150 59,0 100
50 57,0
0 55,0 2014 2015 2016 2017e 2018e 2019e
Gross profit (EURm) as % of sales
Source: Company Data; Bryan, Garnier & Co ests. The following table shows our forecasts for sales, gross margin and operating profit for the years 2015- 2019e. We expect the operating margin to be almost flat at around 13.5%-14% over the period (+10bp in 2017 at 13.7%). This is in line with company guidance which looks ultra conservative to us. In 2017, higher profitability than the one that we expect does not look unlikely to us.
Fig. 25: Simplified P&L (2015-2019e)
EURm 2015 2016 2017e 2018e 2019e
Sales 327 366 416 458 500
Gross margin 208 237 272 298 323 as % of sales 63,6 64,8 65,4 65,1 64,6
Opex (162) (187) (215) (235) (254) as % of sales -49,6 -51,1 -51,7 -51,3 -50,8 o/w Communication costs (67) (80) (98) (105) (115) as % of sales 20,5 21,9 23,6 -22,9 -23,0
EBIT 45,8 49,9 57,0 63,0 69,0 as % of sales 14,0 13,6 13,7 13,8 13,8
Source: Company Data; Bryan, Garnier & Co ests.
5.4. A very healthy financial situation A feature of Interparfums is its very healthy financial situation, especially since it received EUR181m from Burberry in 2012 following the early ending of the licence contract signed by the two groups. Moreover, the dividend has been raised regularly for many years. And each year, the group has distributed one free share for 10 existing shares.
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Interparfums
5.4.1. Net cash of EUR160m When the Burberry affair was settled and Interparfums received EUR181m in 2012, the group had a war chest of EUR208m (end 2012). Part of this was used to acquire the Rochas brand in 2015, causing net cash to fall from EUR225m in 2014 to EUR136m in 2015. At end 2016, therefore, Interparfums’ net cash amounted to EUR160m (see chart below). Although management will remain cautious with regard to the use of cash, this very sound financial situation would allow it to participate in a reshuffle of the global perfume licence business, which is probable following the acquisition of P&G by Coty and the likely sale of licences in the medium term.
Fig. 26: Change in net cash holding in EURm (2010-2016)
250 222 225 208 200
160 150 136
100
46 50 14
0 2010 2011 2012 2013 2014 2015 2016
Source: Company Data; Bryan, Garnier & Co ests.
5.4.2. Ambitious pay-out Thanks to its strong balance sheet, the group is able to implement an ambitious pay-out policy and the dividend has increased 14% a year on average since 2009. Simultaneously, the pay-out ratio has risen from 28% to 60%.
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Fig. 27: Dividend and pay-out ratio (2009-2016)
0,6 0,55 65 0,50 60 0,5 55 0,40 0,4 0,37 0,37 50 0,31 45 0,3 0,27 40 0,2 0,2 35 30 0,1 25 0 20 2009 2010 2011 2012 2013 2014 2015 2016
Div (EUR) Pay out Ratio (%)
Source: Company Data; Bryan, Garnier & Co ests. What’s more, each year for more than a decade – in 2016 and also in 2017 – the group has distributed one free share for 10 existing shares.
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6. Valuation The Interparfums stock has performed very well recently (+12% in three months) and is the top performer in our HPC sample. However, our DCF model yields a valuation of EUR41, suggesting an additional 11% of upside potential relative to the latest price. In order to value Interparfums, we have not used the comparables method, because neither the cosmetics groups (L’Oréal, Beiersdorf and Estée Lauder) nor the eyewear groups (Luxottica and Safilo) seem sufficiently comparable to us.
6.1. A very good stock-market performance… As the two charts below show, the Interparfums stock was by far the top performer in our HPC sample over the past three months and the past year. We think this is easily to explained by: i/ regular dynamic growth for many years (allowing the group to exceed its initial guidance), which was the case again last year; and ii/ a very good Q1 performance (sales up 34%).
Fig. 28: Stock-market performance of HPC stocks
Since three months YTD
INTERPA RFUMS INTERPA RFUMS ESTEE LA UDER COS.'A ' UNILEV ER DR UNILEV ER DR ESTEE LA UDER COS.'A ' BEIERSDORF BEIERSDORF RECKITT BENCKISER GROUP RECKITT BENCKISER GROUP L'OREA L HENKEL PREF. HENKEL PREF. L'OREA L PROCTER & GA MBLE PROCTER & GA MBLE A V ON PRODUCTS A V ON PRODUCTS
- 30,0 - 20,0 - 10,0 0,0 10,0 20,0 30,0 40,0 - 40,0 - 30,0 - 20,0 - 10,0 0,0 10,0 20,0 30,0 40,0 Source: Datastream 6.2. … but still some upside to Fair Value of EUR41 In order to value the Interparfums group, we opted to use a DCF model rather than the comparables method due to the lack of true comparables. The cosmetics groups like L’Oréal, Beiersdorf and Estée Lauder generally own their brands, which is not the case for Interparfums, so the valuation is bound to be different. Similarly, we believe that eyewear specialists Luxottica and Safilo are not satisfactory comparables for various reasons (e.g. Luxottica sells Essilor products).
However, we note that Interparfums’ EV/EBIT to growth is 1.7x versus an average of 2.7x for L’Oréal and Beiersdorf, which suggests that Interparfums’ valuation remains attractive despite the higher share price.
For our DCF model, we made the following assumptions: i/ 2% growth to infinity, in line with L’Oréal and Beiersdorf; ii/ a 1.6% risk-free rate and a 7% risk premium. Our Fair Value is thus EUR41, implying 11% upside potential from the most recent share price.
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Fig. 29: DCF model
EURm 2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e
Sales 366 416 458 500 530 557 584 608 632 657 670 chge (%) 11,7% 13,8% 10,1% 9,2% 6% 5% 5% 4% 4% 4% 2%
EBIT 50 57 63 69 73 78 82 85 88 92 94 as of sales (%) 13,6% 13,7% 13,8% 13,8% 13,9% 14,0% 14,0% 14,0% 14,0% 14,0% 14,0% tax -18 -20 -21 -19 -21 -22 -23 -24 -25 -26 -26
EBIT aft tax 32 37 42 50 53 56 59 61 64 66 67
D&A 12 13 14 15 13 14 15 12 9 10 10 working capital -3 15 11 12 6 6 6 7 7 7 7 cap ex 2 3 3 3 4 4 4 4 4 5 5
Free Cash Flow 39 62 64 73 68 72 76 76 76 79 80
NPV of FCF 36 58 56 59 52 51 50 46 43 42 40
Source: Company Data; Bryan, Garnier & Co ests. PV of Future 497
Terminal value 784
Enterprise value 1 281
Financial assets 8
Minorities 1
Net debt (2016) -160
Market value 1 448
Number of shares 35,5
Share price (EUR) 40,8
Source: Company Data; Bryan, Garnier & Co ests. However, if we assume that operating profitability improves in 2017 (instead of almost flat in our model) and rises to 14% in 2018, our model would yields a Fair Value of EUR42 and suggests upside of 13%.
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33
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Bryan Garnier stock rating system For the purposes of this Report, the Bryan Garnier stock rating system is defined as follows: Stock rating Positive opinion for a stock where we expect a favourable performance in absolute terms over a period of 6 months from the publication of a BUY recommendation. This opinion is based not only on the FV (the potential upside based on valuation), but also takes into account a number of elements that could include a SWOT analysis, momentum, technical aspects or the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Opinion recommending not to trade in a stock short-term, neither as a BUYER or a SELLER, due to a specific set of factors. This view is intended to NEUTRAL be temporary. It may reflect different situations, but in particular those where a fair value shows no significant potential or where an upcoming binary event constitutes a high-risk that is difficult to quantify. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Negative opinion for a stock where we expect an unfavourable performance in absolute terms over a period of 6 months from the publication of a SELL recommendation. This opinion is based not only on the FV (the potential downside based on valuation), but also takes into account a number of elements that could include a SWOT analysis, momentum, technical aspects or the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Distribution of stock ratings
BUY ratings 48.1% NEUTRAL ratings 35.8% SELL ratings 16%
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