Overview

We operate in the fragrance business, and manufacture, market and distribute a 
wide array of fragrances and fragrance related products. We manage our business 
in two segments, European based operations and United States based operations. 
Certain prestige fragrance products are produced and marketed by our European 
operations through our 73% owned subsidiary in Paris, Interparfums SA, which is 
also a publicly traded company as 27% of Interparfums SA shares trade on the 
NYSE Euronext.

We produce and distribute our European based fragrance products primarily under 
license agreements with brand owners, and European based fragrance product 
sales represented approximately 78% and 83% of net sales for the six months 
ended June 30, 2019 and 2018, respectively. We have built a portfolio of 
prestige brands, which include Boucheron, Coach, Jimmy Choo, Karl Lagerfeld, 
Kate Spade, Lanvin, Montblanc, Paul Smith, S.T. Dupont, Repetto, Rochas and Van 
Cleef & Arpels , whose products are distributed in over 120 countries around 
the world.

Through our United States operations, we also market fragrance and fragrance 
related products. United States operations represented 22% and 17% of net sales 
for the six months ended June 30, 2019 and 2018. These fragrance products are 
sold or to be sold primarily pursuant to license or other agreements with the 
owners of the Abercrombie & Fitch, Agent Provocateur, Anna Sui, bebe, Dunhill, 
French Connection, Graff, GUESS, Hollister, Lily Aldridge and Oscar de la Renta 
brands.

Substantially all of our prestige fragrance brands are licensed from 
unaffiliated third parties, and our business is dependent upon the continuation 
and renewal of such licenses. With respect to the Company’s largest brands, we 
license the Montblanc, Jimmy Choo and Coach brand names and own the Lanvin 
brand name for our class of trade. 11 %

Quarterly sales fluctuations are influenced by the timing of new product 
launches as well as the third and fourth quarter holiday season. In certain 
markets where we sell directly to retailers, seasonality is more evident. We 
sell directly to retailers in France as well as through our own distribution 
subsidiaries in Spain and the United States.

We grow our business in two distinct ways. First, we grow by adding new brands 
to our portfolio, either through new licenses or other arrangements or 
out-right acquisitions of brands. Second, we grow through the introduction of 
new products and by supporting new and established products through 
advertising, merchandising and sampling as well as phasing out underperforming 
products so we can devote greater resources to those products with greater 
potential. The economics of developing, producing, launching and supporting 
products influence our sales and operating performance each year. Our 
introduction of new products may have some cannibalizing effect on sales of 
existing products, which we take into account in our business planning.

Our business is not capital intensive, and it is important to note that we do 
not own manufacturing facilities. We act as a general contractor and source our 
needed components from our suppliers. These components are received at one of 
our distribution centers and then, based upon production needs, the components 
are sent to one of several third party fillers, which manufacture the finished 
product for us and then deliver them to one of our distribution centers.

As with any global business, many aspects of our operations are subject to 
influences outside our control. We believe we have a strong brand portfolio 
with global reach and potential. As part of our strategy, we plan to continue 
to make investments behind fast-growing markets and channels to grow market 
share.

We believe general economic and other uncertainties exist in select markets in 
which we do business, and we monitor these uncertainties and other risks that 
may affect our business.

Our reported net sales are impacted by changes in foreign currency exchange 
rates. A strong U.S. dollar has a negative impact on our net sales. However, 
earnings are positively affected by a strong dollar, because over 45% of net 
sales of our European operations are denominated in U.S. dollars, while almost 
all costs of our European operations are incurred in euro. Conversely, a weak 
U.S. dollar has a favorable impact on our net sales while gross margins are 
negatively affected. Our Company addresses certain financial exposures through 
a controlled program of risk management that includes the use of derivative 
financial instruments. We primarily enter into foreign currency forward 
exchange contracts to reduce the effects of fluctuating foreign currency 
exchange rates. We are also carefully monitoring currency trends in the United 
Kingdom as a result of the volatility created from the United Kingdom’s 
decision to exit the European Union. We have evaluated our pricing models and 
we do not expect any significant pricing changes. However, if the devaluation 
of the British pound worsens, it may affect future gross profit margins from 
sales in that territory.

Recent Important Events

Kate Spade

In June 2019, the Company entered into an exclusive, 11-year worldwide license 
agreement with Kate Spade New York for the creation, development and 
distribution of fragrances under the Kate Spade brand. This license takes 
effect on January 1, 2020, and our rights under such license are subject to 
certain minimum advertising expenditures and royalty payments as are customary 
in our industry.

Lily Aldridge License

In September 2018, Interstellar Brands LLC, a wholly-owned subsidiary of the 
Company, announced the development of a new fragrance line in collaboration 
with supermodel Lily Aldridge. The license agreement with Lily Aldridge runs 
through December 31, 2023, and is subject to royalty payments as are customary 
in our industry. This deal marks the beginning of a strategic partnership 
between Interstellar and IMG Models, which manages Lily Aldridge, to develop 
direct-to-consumer e-commerce fragrance and beauty businesses for IMG Models’ 
diverse and dynamic client base. Our two initial fragrances for the brand are 
planned for the third and fourth quarters of 2019 with two additional scents in 
the first half of 2020.

Graff License

In April 2018, the Company entered into an exclusive, 8-year worldwide license 
agreement with London-based Graff for the creation, development and 
distribution of fragrances under the Graff brand. Our rights under such license 
agreement are subject to certain advertising expenditures and royalty payments 
as are customary in our industry. Initial product development includes a 
multi-scent collection planned for an early 2020 launch. Additionally, we are 
exploring opportunities for luxury travel amenities, including five star 
hotels.

GUESS License

In February 2018, the Company entered into an exclusive, 15-year worldwide 
license agreement with GUESS?, Inc. for the creation, development and 
distribution of fragrances under the GUESS brand. This license took effect on 
April 1, 2018, and our rights under such license are subject to certain minimum 
advertising expenditures and royalty payments as are customary in our industry. 
In 2018, our sales efforts were focused on existing fragrances; in 2019, we 
plan to add several flankers to existing product lines and in 2020, an entirely 
new fragrance line is scheduled for launch.

Results of Operations

Three and Six Months Ended June 30, 2019 as Compared to the Three and Six 
Months Ended June 30, 2018

Net sales for the three months ended June 30, 2019 increased 11.3% to $166.2 
million, as compared to $149.4 million for the corresponding period of the 
prior year. At comparable foreign currency exchange rates, net sales increased 
13.7%. For the three months ended June 30, 2019 and 2018, the average 
dollar/euro exchange rate was 1.12 and 1.19, respectively. Net sales for the 
six months ended June 30, 2019 increased 7.3% to $344.5 million, as compared to 
$321.1 million for the corresponding period of the prior year. At comparable 
foreign currency exchange rates, net sales increased 10.4% for the period. For 
the six months ended June 30, 2019 and 2018, the average U.S. dollar/euro 
exchange rate was 1.13 and 1.21, respectively.

European based product sales increased 8.7% and 1.6% for the three and six 
months ended June 30, 2019, respectively, as compared to the corresponding 
periods of the prior year. Montblanc, our largest brand, continued to perform 
exceptionally well, with comparable period sales growth of 28.3% and 17.2% for 
the three and six months ended June 30, 2019, as compared to the corresponding 
periods of the prior year. These results are attributable to the brand’s newest 
scent, Montblanc Explorer , as well as to the brand’s portfolio of established 
fragrances. With regard to our second largest brand, Jimmy Choo, fragrance 
sales declined nearly 20%, but due to the 25.7% sales increase in the first 
quarter, were up slightly through the first half of 2019. The popularity of our 
entire Coach fragrance portfolio, along with the better than expected 
performance of the new flanker, Coach Floral Blush , spurred the 43.8% increase 
in second quarter sales by our third largest brand, which more than offset the 
22.3% drop in the first quarter. As expected, the recent launch of A Girl in 
Capri , boosted Lanvin brand sales countering much of the decline in the first 
quarter. In addition, two of our smaller brands showed remarkable resiliency; 
Van Cleef & Arpels and Karl Lagerfeld achieved significant second quarter sales 
growth relating to each brand’s expanding multi-scent collections.

United States based product sales increased 20.4% and 34.1% for the three and 
six months ended June 30, 2019, respectively, as compared to the corresponding 
periods of the prior year. Most of the credit for the more than 20% increase in 
second quarter sales goes to the exceptional strength of GUESS brand scents. We 
expect that the recent domestic debut of 1981 Los Angeles and upcoming launch 
of Seductive Noir will further enhance the brand’s fragrance franchise. The 
Abercrombie & Fitch brand also contributed to the increase in sales, helped by 
the exclusive Authentic duo launch in UK Duty Free stores in April followed by 
the global rollout in May. In addition, Hollister fragrances generated gains 
enhanced by the launch of the Wave limited edition duo, plus our first Festival 
brand extension, Festival Nite . In last year’s second quarter, the Anna Sui, 
Dunhill, and Oscar de la Renta brands produced significant comparable quarter 
sales, making this year’s quarterly comparisons especially challenging. While 
Anna Sui and Oscar de la Renta are not far behind last year’s second quarter, 
Dunhill is expected to regain some of its lost momentum with the global launch 
of Century Blue later this year.

Sustained growth in the major markets of North America, Western Europe and 
Middle East was the result of increased product sales from the Montblanc, Jimmy 
Choo and Coach brands. The 2% decrease in Asia is primarily the result of the 
small decline in Lanvin and Anna Sui brand sales.

Gross profit margin was 64% and 63% for the three and six months ended June 30, 
2019, respectively, as well as for the three and six months ended June 30, 
2018, respectively. For European operations, gross profit margin was 68% and 
66% for the three and six months ended June 30, 2019, respectively, as compared 
to 68% and 65% for the corresponding periods of the prior year.

We carefully monitor movements in foreign currency exchange rates as over 45% 
of our European based operations net sales are denominated in U.S. dollars, 
while most of our costs are incurred in euro. From a margin standpoint, a 
strong U.S. dollar has a positive effect on our gross profit margin while a 
weak U.S. dollar has a negative effect. The stronger dollar in 2019 resulted in 
a benefit to our gross margin during the three and six months ended June 30, 
2019. However, our new Montblanc Explorer product line, which was designed by 
some of the most highly sought after designers, has a greater than typical cost 
of sales, which offset much of the benefit of the stronger dollar.

For U.S. operations, gross profit margin was 52% and 53% for the three and six 
months ended June 30, 2019, respectively, as compared to 50% and 51% for the 
corresponding periods of the prior year. Sales growth for our United States 
operations has primarily come from increased sales of higher margin prestige 
products under licenses.

Generally, we do not bill customers for shipping and handling costs, and such 
costs, which aggregated $1.9 million and $3.5 million for the three and six 
month periods ended June 30, 2019, respectively, as compared to $2.0 million 
and $3.6 million for the corresponding periods of the prior year, are included 
in selling, general and administrative expenses in the consolidated statements 
of income. As such, our Company’s gross profit may not be comparable to other 
companies, which may include these expenses as a component of cost of goods 
sold.

Selling, general and administrative expenses increased 10% and 6% for the three 
and six months ended June 30, 2019, respectively, as compared to the 
corresponding periods of the prior year. Selling, general and administrative 
expenses were 51% and 47% of net sales for the three and six months ended June 
30, 2019, respectively, as well as for the three and six months ended June 30, 
2018, respectively. For European operations sales increased 9% and 2% for the 
three and six months ended June 30, 2019, respectively, as compared to the 
corresponding periods of the prior year, while selling, general and 
administrative expenses of our European operations increased 8% and 2% for the 
same periods, respectively. In addition, selling, general and administrative 
expenses of our European operations represented 54% and 48% of net sales for 
the three and six months ended June 30, 2019, respectively, as well as for the 
three and six months ended June 30, 2018, respectively.

For U.S. operations sales increased 20% and 34% for the three and six months 
ended June 30, 2019, respectively, as compared to the corresponding periods of 
the prior year. At the same time, selling, general and administrative expenses 
of our U.S. operations increased 17% and 26% for the three and six months ended 
June 30, 2019, as compared to the corresponding periods of the prior year and 
represented 40% and 42% of net sales for the three and six months ended June 
30, 2019, respectively, as compared to 41% and 45% for the corresponding 
periods of the prior year.

Promotion and advertising included in selling, general and administrative 
expenses aggregated $36.4 million and $63.8 million for the three and six 
months ended June 30, 2019, respectively, as compared to $32.5 million and 
$59.3 million for the corresponding periods of the prior year. Promotion and 
advertising represented 21.9% and 18.5% of net sales for the three and six 
months ended June 30, 2019, respectively, as compared to 21.7% and 18.5% for 
the corresponding periods of the prior year. We continue to invest heavily in 
promotional spending to support new product launches and building brand 
awareness. We have significant promotion and advertising programs underway for 
2019, and anticipate that on a full year basis, promotion and advertising 
expenditure will aggregate approximately 21% of 2019 net sales, which is in 
line with that of the past two years.

Royalty expense included in selling, general and administrative expenses 
aggregated $12.1 million and $25.1 million for the three and six months ended 
June 30, 2019, respectively, as compared to $10.7 million and $22.5 million for 
the corresponding periods of the prior year. Royalty expense represented 7.3% 
of net sales for both the three and six months ended June 30, 2019, as compared 
to 7.2% and 7.0% of net sales for the corresponding periods of the prior year. 
The increase is directly related to new licenses and increased royalty based 
product sales.

As a result of the above analysis regarding net sales, gross profit margins and 
selling, general and administrative expenses, income from operations increased 
20% to $22.5 million for the three months ended June 30, 2019, as compared to 
$18.8 million for the corresponding period of the prior year. Income from 
operations increased 13% to $55.7 million for the six months ended June 30, 
2019, as compared to $49.2 million for the corresponding period of the prior 
year. Operating margins were 13.5% and 16.2% of net sales for the three and six 
months ended June 30, 2019, respectively, as compared to 12.6% and 15.3% for 
the corresponding periods of the prior year.

Other Income and Expense

Interest expense aggregated $0.2 million and $0.8 million for the three and six 
months ended June 30, 2019, respectively, as compared to $0.6 million and $1.0 
million for the corresponding periods of the prior year. Interest expense is 
primarily related to the financing of brand acquisitions. We also use the 
credit lines available to us, as needed, to finance our working capital needs 
as well as our financing needs for acquisitions.

Foreign currency loss aggregated $0.5 million and $0.7 million for the three 
and six months ended June 30, 2019, respectively, as compared to gains of $1.5 
million and $1.3 million for the corresponding periods of the prior year. We 
typically enter into foreign currency forward exchange contracts to manage 
exposure related to receivables from unaffiliated third parties denominated in 
a foreign currency and occasionally to manage risks related to future sales 
expected to be denominated in a foreign currency. Over 45% of net sales of our 
European operations are denominated in U.S. dollars.

Interest income aggregated $0.4 million and $2.3 million for the three and six 
months ended June 30, 2019, respectively, as compared to $0.7 million and $2.5 
million for the corresponding periods of the prior year. Cash and cash 
equivalents and short-term investments are primarily invested in certificates 
of deposit with varying maturities.

Income Taxes

Our effective tax rate was 29.5% and 28.2% for the three and six months ended 
June 30, 2019, respectively, as compared to 30.2% and 30.4% for the 
corresponding periods of the prior year. Pursuant to an action plan released by 
the French Prime Minister, the French corporate income tax rate was to be cut 
from 33% to 25% over a five-year period beginning in 2018. In 2019, such plan 
was postponed and as such our effective tax rate for European operations was 
31.8% and 30.0% for the three and six months ended June 30, 2019, respectively, 
as compared to 31.0% for both three and six months ended June 30, 2018.

In December 2017, the U.S. government passed the Tax Cuts and Jobs Act (the 
“Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, 
including, but not limited to reducing the U.S. federal corporate tax rate from 
35% to 21% beginning in 2018. The Tax Act also established a new provision 
designed to tax global intangible low-taxed income (“GILTI”) as well as a 
provision that allows a domestic corporation an immediate deduction for a 
portion of its foreign derived intangible income (“FDII”).

The decrease in our effective rate for the 2019 period is also related to 
increased profits from our United States subsidiaries for the three and six 
months ended June 30, 2019, as compared to the corresponding periods of the 
prior year.

Other than as discussed above, we did not experience any significant changes in 
tax rates, and none were expected in jurisdictions where we operate.

Net Income and Earnings per Share

Net income was $15.6 million for the three months ended June 30, 2019, as 
compared to $14.3 million for the corresponding period of the prior year. Net 
income was $40.6 million for the six months ended June 30, 2019, as compared to 
$36.1 million for the corresponding period of the prior year. The reasons for 
significant fluctuations in net income for both European operations and United 
States operations are directly related to the previous discussions relating to 
changes in sales, gross profit margins and selling, general and administrative 
expenses. As discussed above, changes in gross profit margins and selling, 
general and administrative expenses for our European operations were in line 
with the change in net sales for European operations. For United States 
operations, in summary, for the six months ended June 30, 2019, sales increased 
34.1%, gross profit margin increased 40.7% and selling, general and 
administrative expenses increased 25.9%, all as compared to the corresponding 
period of the prior year.


The noncontrolling interest arises from our 73% owned subsidiary, Interparfums 
SA, which is also a publicly traded company as 27% of Interparfums SA shares 
trade on the NYSE Euronext. The noncontrolling interest is also affected by the 
profitability of Interparfums SA’s 51% owned distribution subsidiaries in 
Spain. Net income attributable to the noncontrolling interest aggregated 27% of 
European operations’ net income for both three and six months ended June 30, 
2019, respectively, as compared to 28% for the corresponding periods of the 
prior year.

Liquidity and Capital Resources

The Company’s financial position remains strong. At June 30, 2019, working 
capital aggregated $376 million and we had a working capital ratio of over 3.1 
to 1. Cash and cash equivalents and short-term investments aggregated $214 
million, most of which is held in euro by our European operations and is 
readily convertible into U.S. dollars. We have not had any liquidity issues to 
date, and do not expect any liquidity issues relating to cash and cash 
equivalents and short-term investments held by our European operations. 
Approximately 80% of the Company’s total assets are held by European operations 
and approximately $178 million of trademarks, licenses and other intangible 
assets are held by European operations.

The Company hopes to continue to benefit from its strong financial position to 
potentially acquire one or more brands, either on a proprietary basis or as a 
licensee. Opportunities for external growth are regularly examined, with the 
priority of maintaining the quality and homogeneous nature of our portfolio. 
However, we cannot assure you that any new license or acquisition agreements 
will be consummated.

Cash provided by operating activities aggregated $0.6 million for the six 
months ended June 30, 2019, as compared to a use of cash of $6.1 million for 
the corresponding period of the prior year. For the six months ended June 30, 
2019, working capital items used $45.9 million in cash from operating 
activities, as compared to $47.3 million in the 2018 period. Although accounts 
receivable is up 8% from year end, the balance is reasonable based on second 
quarter 2019 sales levels and reflects continued strong collection activity as 
day’s sales outstanding is 80 days, as compared to 84 days for the 
corresponding period of the prior year. We continue to monitor collection 
activities actively and adjust customer credit limits as needed. Inventory 
levels are up approximately 12% from year end and reflect levels needed to 
support second half sales expectations and our new product launches.

Cash flows used in investing activities in 2019 reflect the purchases and sales 
of short-term investments. These investments are primarily certificates of 
deposit with maturities greater than three months. Approximately $77 million of 
such certificates of deposit contain penalties where we would forfeit a portion 
of the interest earned in the event of early withdrawal.

Our business is not capital intensive as we do not own any manufacturing 
facilities. However, on a full year basis, we spend approximately $4.0 million 
on tools and molds, depending on our new product development calendar. Capital 
expenditures also include amounts for office fixtures, computer equipment and 
industrial equipment needed at our distribution centers. Payments for licenses, 
trademarks and other intangible assets primarily represent upfront entry fees 
incurred in connection with new license agreements.

In 2018, in connection with a license agreement, we agreed to pay $15.0 million 
in equal annual installments of $1.1 million including interest imputed at 
4.1%. In 2015, in connection with a brand acquisition, we entered into a 5-year 
term loan payable in equal quarterly installments of €5.0 million 
(approximately $5.7 million) plus interest. In order to reduce exposure to 
rising variable interest rates, we entered into a swap transaction effectively 
exchanging the variable interest rate to a fixed rate of approximately 1.2%.

Our short-term financing requirements are expected to be met by available cash 
on hand at June 30, 2019, cash generated by operations and short-term credit 
lines provided by domestic and foreign banks. The principal credit facilities 
for 2019 consist of a $20.0 million unsecured revolving line of credit provided 
by a domestic commercial bank and approximately $28.4 million in credit lines 
provided by a consortium of international financial institutions. There were no 
short-term borrowings outstanding as of both June 30, 2019 and June 30, 2018.

Purchase of subsidiary shares from noncontrolling interest represents the 
purchase of treasury shares of Interparfums SA, which are expected to be issued 
to Interparfums SA employees pursuant to its Free Share Plans.

In October 2018, the Board of Directors authorized a 31% increase in the annual 
dividend to $1.10 per share. The next quarterly cash dividend of $0.275 per 
share is payable on October 15, 2019 to shareholders of record on September 30, 
2019. Dividends paid also include dividends paid once per year to the 
noncontrolling shareholders of Interparfums SA, which aggregated $9.7 million 
and $8.7 million for the six months ended June 30, 2019 and 2018, respectively. 
The annual cash dividends are not expected to have any significant impact on 
our financial position.

We believe that funds provided by or used in operations can be supplemented by 
our present cash position and available credit facilities, so that they will 
provide us with sufficient resources to meet all present and reasonably 
foreseeable future operating needs.

Inflation rates in the U.S. and foreign countries in which we operate did not 
have a significant impact on operating results for the six months ended June 
30, 2019.



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

General

We address certain financial exposures through a controlled program of risk 
management that primarily consists of the use of derivative financial 
instruments. We primarily enter into foreign currency forward exchange 
contracts in order to reduce the effects of fluctuating foreign currency 
exchange rates. We do not engage in the trading of foreign currency forward 
exchange contracts or interest rate swaps.

Foreign Exchange Risk Management

We periodically enter into foreign currency forward exchange contracts to hedge 
exposure related to receivables denominated in a foreign currency and to manage 
risks related to future sales expected to be denominated in a currency other 
than our functional currency. We enter into these exchange contracts for 
periods consistent with our identified exposures. The purpose of the hedging 
activities is to minimize the effect of foreign exchange rate movements on the 
receivables and cash flows of Interparfums SA, whose functional currency is the 
euro. All foreign currency contracts are denominated in currencies of major 
industrial countries and are with large financial institutions, which are rated 
as strong investment grade.

All derivative instruments are required to be reflected as either assets or 
liabilities in the balance sheet measured at fair value. Generally, increases 
or decreases in fair value of derivative instruments will be recognized as 
gains or losses in earnings in the period of change. If the derivative is 
designated and qualifies as a cash flow hedge, then the changes in fair value 
of the derivative instrument will be recorded in other comprehensive income.

Before entering into a derivative transaction for hedging purposes, we 
determine that the change in the value of the derivative will effectively 
offset the change in the fair value of the hedged item from a movement in 
foreign currency rates. Then, we measure the effectiveness of each hedge 
throughout the hedged period. Any hedge ineffectiveness is recognized in the 
income statement.

At June 30, 2019, we had foreign currency contracts in the form of forward 
exchange contracts in the amount of approximately U.S. $58.7 million, GB £1.7 
million and JPY ¥60 million which all have maturities of less than one year. We 
believe that our risk of loss as the result of nonperformance by any of such 
financial institutions is remote.

Interest Rate Risk Management

We mitigate interest rate risk by monitoring interest rates, and then 
determining whether fixed interest rates should be swapped for floating rate 
debt, or if floating rate debt should be swapped for fixed rate debt. We 
entered into an interest rate swap in June 2015 on €100 million of debt, 
effectively exchanging the variable interest rate to a fixed rate of 
approximately 1.2%. This derivative instrument is recorded at fair value and 
changes in fair value are reflected in the accompanying consolidated statements 
of income.