Inter Parfums hit by rising royalites

The company said that net sales increased 31 per cent for the quarter to June 30, up from $46.7 million the previous year, to $61.3 million this year. This meant that sales for the full six months were up 26 per cent, from $105.1 million, to $132.4 million.

Although the sales figures indicate that for the most recent quarter the trend was up, profits proved to be a disappointment. Net income for the quarter declined by 6 per cent to $3.2 million, reflecting both the continued pressure from increased Burberry royalties and other market expenses that have increased in the space of the last year.

The irony in the results was that much of the company's top line growth was attributed to the Burberry fragrances, which have continued to be category leaders in both the US and internationally. This meant that the increased costs associated with the royalties UK-based Burberry receives for the privilege of using its brand on the fragrances means that the added sales have had the reverse effect on the bottom line.

Indicating the impact this has had on expenses, company-wide royalty expenses came to $7.1 million and $14.8 million for the current quarter and full six months. This compares to $2.6 million and $6.0 million in the same periods for 2004. However, Inter Parfums CEO Jean Madar did point out that increased gross margins had helped to reduce the effect this had had on the bottom line.

But besides the Burberry brand, other fragrance brands had also registered positive growth, including a strong performance from the Lanvin fragrance, as well as the latest Paul Smith and Celine fragrances that were launched in the third quarter of 2004 and the second quarter of 2005 respectively.

Madar also pointed out that prestige product sales accounted for 88 per cent of the total, increasing by 44 per cent over last year's second quarter, while mass market sales slumped 19 per cent.

But fortunes could soon turn around for the company, following the signing of an agreement last month with leading clothes retailer Gap, to provide all its new personal care product lines for its Gap and Banana Republic stores in the US. Industry analysts have already indicated that the move could give a significant boost to the company if the terms are right.

Discussing the agreement, Madar said: We have established a dedicated operating unit and have begun staffing it. Eventually, this unit will employ between 15 to 25 people. We are also engaging a third party design and marketing firm to work with us on concept and formulations. As this is an important new dimension to our business, we intend to devote the resources, human, financial and creative, that may be required to make these programs successful."​

Madar added that the company had already budgeted between $1.5 million and $2.5 million in Gap-related start-up expenses for the second half of 2005. This means that the company could see its bottom line further affected during the second half of 2005, but with the launch of the new Gap personal care lines scheduled to be roll out in the Autumn of 2006, the longer term looks brighter.

The company said that for the full year 2005, it has downgraded sales expectations from $280 million to $274 million on account of currency fluctuations, whereas net profits have been lowered to $14.6 million.