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Greetings, and welcome to Inter Parfums 2018 First Quarter Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I will now turn the call over to Russell Greenberg, Executive Vice President and Chief Financial Officer of Inter Parfums. Mr. Greenberg, you may now begin.
Thank you. Good morning and welcome to our 2018 first quarter conference call. Once again, I will start the call with the financial overview, and then Jean Madar, our Chairman and CEO, will discuss our current business, recent developments and some of our upcoming plans. After that, we will take your questions.
Before proceeding further, I just want to remind listeners that this conference call may contain forward-looking statements, which involve known and unknown risks, uncertainties, and other factors that may cause actual results to be materially different from projected results. These factors include, but are not limited to the risks and uncertainties discussed under the headings Forward-Looking Statements and Risk Factors in our Annual Report on Form 10-K and the reports we file from time-to-time with the Securities and Exchange Commission. We do not intend to, and undertake no duty, to update the information discussed.
When we refer to our European based operations, we are primarily talking about sales of Prestige Fragrance products conducted through our 73%-owned French subsidiary, InterParfums SA. When we discuss our United States based operations, we are primarily referring to sales of Prestige Fragrance products, conducted through our wholly-owned domestic subsidiaries.
Before discussing specific fluctuations and comparable first quarter results, let me remind listeners that for the 2018 first quarter, the average U.S. dollar to euro exchange rate was $1.23 as compared to $1.06 in the first quarter of 2017. Our reported net sales and gross margin are impacted by changes in foreign currency exchange rates.
A weak U.S. dollar has a favorable impact on our net sales, while gross margins are negatively affected because over 45% of net sales of our European operations are denominated in U.S. dollars, while almost all of those costs of our European operations are incurred in euro.
Now, for the first quarter results. Net sales were $171.8 million, up 20.1% from $143.1 million. At comparable foreign currency exchange rates, net sales increased 13.1%. Sales by European operations rose 24.9% to $149.5 million from $119.7 million. Sales by U.S. product-based operations declined 4.6% to $22.3 million from $23.4 million.
Gross margin was 61.5% of net sales compared to 63% in last year's first quarter. SG&A expense as a percentage of net sales was 43.8% compared to 44.7%. Operating income increased 16.2% to $30.4 million as compared to $26.2 million. Operating margin was 17.7% compared to 18.3%, and our effective income tax rate was 30.5% compared to 32.8% in last year's first quarter.
Net income attributable to Inter Parfums, Inc. increased to $15.9 million, up 19% from $13.4 million. And net income attributable to Inter Parfums, Inc. per diluted share rose 18.6% to $0.51 from $0.43. Gross profit margin for European operations was 63% of sales as compared to 65.5% in last year's first quarter, reflecting the impact of the weaker dollar on gross margin for our European operations.
For U.S. operations, gross profit margin was 51.4% compared to 50.1% in last year's first quarter. That improvement was due to increased sales of higher-margin Prestige Fragrance products and the corresponding decline of lower margin products. As we previously announced, certain mass market products will be discontinued over the next few years.
Promotion and advertising included in SG&A expense aggregated approximately $26.9 million or 15.6% of net sales as compared to $22.9 million or 16% of net sales in last year's first quarter. Once again, we have significant promotion and advertising programs in the works. And like last year, we expect promotion and advertising expenditures to approximate 21% of full year 2018 net sales, peaking in the fourth quarter in support of the holiday season activities.
We closed the first quarter with working capital of over $400 million including approximately $250 million in cash, cash equivalents and short-term investments, a working capital ratio of almost 3.4 to 1, and only $56 million of long-term debt including current maturities which was incurred in connection with the 2015 Rochas brand acquisition.
With respect to 2018 guidance, as we stated in our April 25, 2018 release and once again in our May 8 release yesterday, factoring in this strong first quarter performance and initial estimates of GUESS brand fragrance sales, we are looking for 2018 net sales to approximate $665 million. Net income per diluted share attributable to Inter Parfums, Inc. is expected to come in at $1.59 and as always, guidance assumes that the dollar remains at current levels. Jean, please continue.
Thank you, Russ, and good morning, everyone. On our last conference call, the big news was the GUESS fragrance license. The agreement became effective on April 1, a little bit more than a month ago, and things are moving along. Components and finished goods are rising from the former licensee, and we hope to begin shipping finished goods to customer as early as this month. Our main immediate focus is to get in stock for more than 50 SKUs and introduce new products for established fragrance until our major new launch between that happened before 2020 for GUESS.
Over the next year, we will curate the portfolio and develop more selective upscale distribution, and especially in international markets where GUESS is respected as an important American brand. We should be able to enjoy the tailwind rising from GUESS store expansion initiatives in Europe and in Asia. As I mentioned in our last conference call, GUESS is opening a lot of stores in Russia and we expect doing considerable business in Russia. If you have more questions on that, I will answer later.
With respect to other new licensing activities, a month ago on April 1, we announced an exclusive worldwide license agreement with Graff. The eight-year agreement has a three-year automatic renewal options potentially extending the license until the end of 2035. For nearly 60 years, London-based Graff has been dedicated to sourcing gemstones of extraordinary beauty to create the most-exquisite, expensive, fabulous jewels ever produced.
Graff is still a family business overseen by Francois Graff, Chief Executive Officer, who said at the time of the signing of our agreement, Inter Parfums are experts at capturing the essence of a brand in fragrance form, and we will enjoy working closely together to create something truly unique. We agree with Francois 100%, and we have started last week to work on the new Graff fragrance.
With this agreement, Graff has become one of the most exclusive and aspirational brands in our fragrance portfolio. For our initial collection and others to follow, we will search for nature's most-inspiring and rarefied ingredient, and give you most-experienced and gifted perfumers, and develop magnificent packaging to offer Graff customer a truly unique experience. As you might expect, these fragrances will be among our most-expensive brands, but sufficiently accessible for brand experience to enter the world of Graff.
As we reported, we expect to have a multi-scent collection launching towards the end of next year with distribution targeted for Graff stores and high-end department stores, and also upscale travel retail worldwide. There is still room on our plate for additional licensing agreements, and our acquisitions that fits and are - acquisitions that fit our business model. We are approached regularly by brand owners, and we explore opportunities on our own.
The favorable sales trends across geographic markets of 2017 have continued in 2018. North America, which emerged as our largest market in 2017 still holds the lead. North America grew first quarter sales by 19%, Western Europe also by 10% and Asia is growing at an astonishing rate of 34%. Similarly, our smaller markets are vibrant with sales growth of 33% for the Middle East, 15% for South America and 18% for Eastern Europe.
For our European operations, 2018 growth is primarily coming from sales of existing products, brand extension and broader distribution rather than major new product launches. These brand extensions include: Coach Floral for women and Coach Platinum for men, so two new products for Coach; one new product for Lanvin called Lanvin Modern Princess Eau Sensuelle and Eclat d'Arpege; and two products for Jimmy Choo, one called Jimmy Choo Man Blue and Jimmy Choo Fever.
For Rochas, we have added Eau de Toilette to the Mademoiselle Rochas Eau De Parfum fragrance family, but the big push for the brand is in distribution. After adding 15 more countries in 2017, our goal is to further expand the Rochas brand by opening distribution in Asia and in South America.
With regard to U.S. operations, we have new product launches in the works for several of our brands, but of course, the growth catalyst is expected to be the inclusion of GUESS. We have continued confidence in the future of our company. We have a diverse and growing brand portfolio along with the distribution network encompassing 100 countries, including company-owned or controlled distribution in several of our largest markets.
With our ability to turn around stagnant fragrance brands and build new enterprise from the ground up, we have earned an industry wide reputation for growing fragrance franchises that enhance each brand and enrich brand owners, and of course, we have a very strong balance sheet, as Russ told us before. And we have a great pool of talent throughout our organization. So, operator, I would like you to open the floor for our questions.
Yes, thank you. [Operator Instructions] Our first question is from Linda Bolton Weiser with D.A. Davidson. Please proceed.
Hi.
Hi, Linda.
Hi. So can you just give a timing of the shipments of the two new Jimmy Choo launches that are coming later in the year? Which quarter are those shipping in?
For the Jimmy Choo Man Blue and Jimmy Choo Fever, you will see the sales in third and fourth quarter.
Okay. And then, can you just comment on Lanvin? That's been one of your brands that's gotten a little smaller relative to some of the other bigger ones, but it's still one of your main ones. And I think it's changed ownership perhaps. Do you see kind of a more clear path to more consistent growth for Lanvin? Or can you just comment on that franchise?
I can. I can, of course. Yeah, as you know, Lanvin has changed ownership, the fashion Lanvin have changed ownership. I will remind everybody that we own the trademark for Lanvin. This is not a license. We own the trademark, we do not pay royalty. But it's still very important to have the fashion operation in good health. So the new owners are from China, the Fosun Group.
We expect them to invest in opening stores worldwide and reinvesting in the company. So for us, it was a very positive news to see new owners to strengthen the label.
Okay. And then, in terms of the GUESS, are you ramping up so that you can have - it sounds like pretty - almost negligible sales in the second quarter. But it sounds like in third and fourth quarter you're really ramping up to have fairly substantial sales for the holidays for the GUESS products?
Yeah, while during - as I said during my presentation, the process went quite fast. We signed - the deal was effective on April 1. And I think that we're going to have some sales in the second quarter. But we're gearing up for the Christmas season. We'll start shipping a little bit in the next two months, more importantly in September and October.
We have contacted all our distribution. People are quite positive. The former licensee didn't - how should I say, didn't invest a lot of time and energy on GUESS. And maybe it was too small for them. For us GUESS represents a great opportunity. It's an American brand. It has a huge recognition outside of the U.S. We are going to concentrate our energy on markets outside of the U.S., especially Europe, Eastern and Western Europe.
We were in Russia for a big convention with GUESS people, and we witnessed the strength of the brand in Russia. We're going to open a lot of stores. We're going to - our goal is to become quickly in the next 24 months, top 10 fragrance sold in Russian. And we'll invest heavily in advertising, TV and magazine.
We are also - the other point of growth will be Asia. The brand also has good recognition in Asia. Strong sales in China, so which is also a market that we will invest heavily for GUESS. So you could expect some little sales in the second quarter, but mostly in the third and fourth quarter for GUESS. Russ, you want to add something?
Yeah, the only thing I would add is the sales volumes for the remainder of 2018 are really a function of, initially, there's not a tremendous amount of inventory that was acquired from the former licensee. We are already producing components so that we can get back up to speed. And we're concentrating more, as Jean said, on that holiday season for the shipment requirements in September and October.
So it's moving very, very quickly. Our product is moving around, and it's looking very, very positive for the balance of the year.
Okay. Thank you very much.
Okay. Thank you, Linda.
[Operator Instructions] Our next question is from Joe Altobello with Raymond James. Please proceed.
Thanks. Hey, guys. Good morning.
Hello, Joe.
So first question I actually wanted to go back to the gross margin this quarter. Pretty straight forward, given the currency impact, and it looks like the year-over-year compare for the dollar/euro exchange rate probably gets a little bit more favorable for you guys. So I would assume that we shouldn't expect the same sort of headwind on gross margin that we saw in the first quarter going forward.
Yeah, I don't think the impact of the first quarter was not really all that significant, especially considering the breadth of the change from 1.23 to - from 1.23 versus 1.06. You're correct. As we move on through the quarter, we already see that the dollar is actually getting a little bit stronger. So our expectations for the full year is that we really shouldn't see all that much of an impact in the remaining quarters, again if the dollar remains at the levels that they are currently.
Okay. That's helpful. And then secondly, on Coach. This was the second quarter in a row, I think, where it outperformed Jimmy Choo in terms of overall sales. Has this brand established itself as your second largest brand? And could it approach Montblanc over time?
Yes. I think, Coach has definitely the potential to be in the same range of Montblanc. And a big advantage with Coach is that we have a strong business on women and also a very strong business on men. So it's quite surprising, but the numbers are quite strong. Definitely, Coach could be - could have the same volume as Montblanc in the very near future.
Okay. And just one last one, if I could. You mentioned earlier, Russ, that you guys are going to be discontinuing some mass products over the next, I guess, couple of years, it sounds like, how big is that component to your overall sales?
Well, it's around $10 million. I don't know if we can - well, it's not very important.
It's immaterial. As Jean said, it's somewhere around $10 million. It really is insignificant.
Okay, great. Thank you, guys.
Thank you.
[Operator Instructions] Our next question is from Hamed Khorsand with BWS Financial. Please proceed.
Hi. So first question, I have is could you just talk a little bit more about the distributions you're opening up in Asia and South America for Rochas? And are you using new distribution points or is this using what you have in those regions?
Yeah. When we say we are opening distribution, we are entering this market for Rochas. We know the distribution. We have local distributors in Central and South America and in Asia. And for now, we have not really introduced Rochas, because of name recognition. But starting now we will - we are spending money in stores and in advertising in Brazil, in Argentina for South America. And in Asia, it's going to be Japan and Southeast Asia. So it's not that we are opening stores or opening distribution. We are going to start working with our existing network of distributors.
So this brand has been pretty much Europe only. So do you know what kind of reception you will get from different cultures with the fragrance? Or are you changing the fragrance?
Rochas is a very classic fashion and fragrance company. And that's true that it has been only launched in - only known in Europe, Western Europe and Eastern Europe. We think that it's time now to go in certain markets, and we are quite positive on the potential of Rochas. The new fragrance that we are introducing fit quite well in this market, so we are optimistic.
Okay. Thank you.
Thank you.
Thank you, Hamed.
Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.
Okay. Just a quick note. I will be presenting at the Citi Small & Mid Cap Conference in New York on June 6 as well as the Jefferies Consumer Conference in Nantucket on June 20. Thank you for turning into our conference call. And if you have further questions, as usual, you can contact me in the office. And thank you all for being on the call today. Have a great day.
Thank you. This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.