# INTERPARFUMS INC (IPAR) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from INTERPARFUMS INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/822663/000175392623000213/g083417_10k.htm
Accession: 0001753926-23-000213
Filing date: 2023-02-28
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/IPAR/
All MD&A years: /company/IPAR/mda/
Previous year: /company/IPAR/mda/fy2021/ (FY 2021)
Next year: /company/IPAR/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations

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 72% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as
28% 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 68%, 75% and 78% of net sales for 2022, 2021 and 2020, respectively. We have built a portfolio of prestige brands,
which include Boucheron, Coach, Jimmy Choo, Karl Lagerfeld, Kate Spade, Lanvin, Moncler, Montblanc, Rochas, S.T. Dupont 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 32%, 25% and 22% of net sales in 2022,
2021 and 2020, respectively. These fragrance products are sold primarily pursuant to license or other agreements with the owners
of the Abercrombie & Fitch, Anna Sui, Donna Karan, DKNY, Ferragamo, Graff, GUESS, Hollister, MCM, Oscar de la Renta and
Ungaro 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, Coach and GUESS brand names.

As a percentage of net sales, product sales
for the Company’s largest brands were as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["Montblanc","","","18","%","","","19","%","","","21","%"],["Jimmy Choo","","","18","%","","","18","%","","","16","%"],["Coach","","","15","%","","","16","%","","","17","%"],["GUESS","","","12","%","","","12","%","","","11","%"]]
[[/GREPCENT_TABLE]]

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 primarily sell directly to retailers in France and the United States.

We grow our business and expand our shares
in two distinct ways. First, 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 by 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. The 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 either received and stored directly at our third-party fillers or 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.

41

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.

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 50% 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. We address certain financial exposures through a controlled program of risk management
that includes the use of derivative financial instruments, and primarily enter into foreign currency forward exchange contracts
to reduce the effects of fluctuating foreign currency exchange rates.

Impact of COVID-19 Pandemic

A novel strain of coronavirus (“COVID-19”)
surfaced in late 2019 and in March 2020, the World Health Organization declared COVID-19 a pandemic. In response, various national,
state, and local governments issued decrees prohibiting certain businesses from operating and certain classes of workers from reporting
to work. Retail store closings, event cancellations and a shutdown of international air travel brought our sales to a virtual standstill
and caused a significant unfavorable impact on our results of operations in 2020.

Business significantly improved in the second
half of 2020 and continued to improve throughout 2021 and 2022, as retail stores reopened, and consumers increased online purchasing.
While we expect this trend to continue, the introduction of variants of COVID-19 in various parts of the world has caused the temporary
re-implementation of governmental restrictions to prevent further spread of the virus. In addition, international air travel remains
curtailed in several jurisdictions due to both governmental restrictions and consumer health concerns. While COVID-19 had significantly
restricted international travel, the travel retail business has picked up. We remain confident that travel retail will once again
be a source of growth over the long-term. Lastly, the improved economy has put significant strains on our supply chain causing
disruptions affecting the procurement of components, the ability to transport goods, and related cost increases. These disruptions
have come at a time when demand for our product lines has never been stronger or more sustained. We have been addressing this issue
since the beginning of 2021, by ordering well in advance of need and in larger quantities. Since 2021, we have strived to carry
more inventory overall, source the same components from multiple suppliers and when possible, manufacture products closer to where
they are sold. We do not expect the supply chain bottlenecks to begin lifting until the second half of 2023. Therefore, despite
recent business improvement, the impact of the COVID-19 pandemic might continue to have adverse effects on our results of our operations,
financial position and cash flows through at least the first half of 2023.

Recent Important Events

Lacoste

In December 2022, we
closed a transaction agreement with Lacoste, whereby an exclusive and worldwide license was granted for the production and distribution
of Lacoste brand perfumes and cosmetics. Our rights under this license are subject to certain minimum advertising expenditures
and royalty payments as are customary in our industry. The license becomes effective in January 2024 and will last for 15 years.

Dunhill

In April 2022, we announced
that the Dunhill fragrance license will expire on September 30, 2023 and will not be renewed. The Company will continue to produce
and sell Dunhill fragrances until the license expires and will maintain the right to sell-off remaining Dunhill fragrance inventory
for a limited time as is customary in the fragrance industry.

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Salvatore Ferragamo

In October 2021, we
closed on a transaction agreement with Salvatore Ferragamo S.p.A., whereby an exclusive and worldwide license was granted for the
production and distribution of Ferragamo brand perfumes. Our rights under this license are subject to certain minimum advertising
expenditures and royalty payments as are customary in our industry. The license became effective in October 2021 and will last
for 10 years with a 5-year optional term, subject to certain conditions.

With respect to the
management and coordination of activities related to the license agreement, the Company operates through a wholly-owned Italian
subsidiary based in Florence, that was acquired from Salvatore Ferragamo on October 1, 2021. The acquisition together with the
license agreement was accounted for as an asset acquisition.

Emanuel Ungaro

In October 2021, we
also entered into a 10-year exclusive global licensing agreement a with a 5-year optional term subject to certain conditions, with
Emanuel Ungaro Italia S.r.l, for the creation, development and distribution of fragrances and fragrance-related products, under
the Emanuel Ungaro brand. Our rights under this license are subject to certain minimum advertising expenditures and royalty payments
as are customary in our industry.

Donna Karan and DKNY

In September 2021,
we entered into a long-term global licensing agreement for the creation, development and distribution of fragrances and fragrance-related
products under the Donna Karan and DKNY brands. Our rights under this license are subject to certain minimum advertising expenditures
and royalty payments as are customary in our industry. With this agreement, we are gaining several well-established and valuable
fragrance franchises, most notably Donna Karan Cashmere Mist and DKNY Be Delicious, as well as a significant loyal
consumer base around the world. In connection with the grant of license, we issued 65,342 shares of Inter Parfums, Inc. common
stock valued at $5.0 million to the licensor. The exclusive license became effective on July 1, 2022, and we are planning to launch
new fragrances under these brands in 2024.

Rochas Fashion

Effective January
1, 2021, we entered into a new license agreement modifying our Rochas fashion business model. The new agreement calls for a reduction
in royalties to be received. As a result, in the first quarter of 2021, we took a $2.4 million impairment charge on our Rochas
fashion trademark. In the fourth quarter of 2022, we again took a $6.8 million impairment charge on the Rochas fashion trademark
after an independent expert concluded that the valuation of the trademark was $11.3 million. The new license also contains an
option for the licensee to buy-out the Rochas fashion trademarks in June 2025 at its then fair market value.

Land
and Building Acquisition - Future Headquarters in Paris

In
April 2021, Interparfums SA, our 73% owned French subsidiary, completed the acquisition of its future headquarters at 10 rue de
Solférino in the 7th arrondissement of Paris from the property developer. This is an office complex combining three buildings
connected by two inner courtyards, and consists of approximately 40,000 total sq. ft.

The
purchase price includes the complete renovation of the site. As of December 31, 2022, $148.1 million of the purchase price, including
approximately $4.4 million of acquisition costs, is included in property, equipment and leasehold improvements on the accompanying
balance sheet as of December 31, 2022. The purchase price has been allocated approximately $61.1 million to land and $87.0 million
to the building. The building, which was delivered on February 28, 2022, includes the building structure, development of
the property, façade waterproofing, general and technical installations and interior fittings that will be depreciated
over a range of 7 to 50 years. The Company has elected to depreciate the building cost based on the useful lives of its components.
Approximately $3.4 million of cash held in escrow is also included in property, equipment and leasehold improvements on the accompanying
balance sheet as of December 31, 2022.

The acquisition was
financed by a 10-year €120 million (approximately $128.0 million) bank loan which bears interest at one-month Euribor plus
0.75%. Approximately €80 million of the variable rate debt was swapped for variable interest rate debt with a maximum rate
of 2% per annum.

Discussion of Critical Accounting Policies

We make estimates and assumptions in the
preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America.
Actual results could differ significantly from those estimates under different assumptions and conditions. We believe the following
discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial
condition and results of operations. These accounting policies generally require our management’s most difficult and subjective
judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management
of the Company has discussed the selection of significant accounting policies and the effect of estimates with the Audit Committee
of the Board of Directors.

Long-Lived Assets

We evaluate indefinite-lived intangible
assets for impairment at least annually during the fourth quarter, or more frequently when events occur or circumstances change,
such as an unexpected decline in sales, that would more likely than not indicate that the carrying value of an indefinite-lived
intangible asset may not be recoverable. When testing indefinite-lived intangible assets for impairment, the evaluation requires
a comparison of the estimated fair value of the asset to the carrying value of the asset. The fair values used in our evaluations
are estimated based upon discounted future cash flow projections using a weighted average cost of capital of 9.80%. The cash flow
projections are based upon a number of assumptions, including, future sales levels and future cost of goods and operating expense
levels, as well as economic conditions, changes to our business model or changes in consumer acceptance of our products which are
more subjective in nature. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, an impairment
charge is recorded.

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We believe that the assumptions we have
made in projecting future cash flows for the evaluations described above are reasonable. However, if future actual results do not
meet our expectations, we may be required to record an impairment charge, the amount of which could be material to our results
of operations.

At December 31, 2022 indefinite-lived intangible
assets aggregated $105.0 million. The following table presents the impact a change in the following significant assumptions would
have had on the calculated fair value in 2022 assuming all other assumptions remained constant:

[[GREPCENT_TABLE]]
[["$ in millions","","","Change","","","","Increase (decrease) to fair value"],["Weighted average cost of capital","","","+10%","","","$","(7.2",")"],["Weighted average cost of capital","","","-10%","","","$","8.1"],["Future sales levels","","","+10%","","","$","9.7"],["Future sales levels","","","-10%","","","$","(9.7",")"]]
[[/GREPCENT_TABLE]]

Intangible assets subject to amortization
are evaluated for impairment testing whenever events or changes in circumstances indicate that the carrying amount of an amortizable
intangible asset may not be recoverable. If impairment indicators exist for an amortizable intangible asset, the undiscounted future
cash flows associated with the expected service potential of the asset are compared to the carrying value of the asset. If our
projection of undiscounted future cash flows is in excess of the carrying value of the intangible asset, no impairment charge is
recorded. If our projection of undiscounted future cash flows is less than the carrying value of the intangible asset, an impairment
charge would be recorded to reduce the intangible asset to its fair value. The cash flow projections are based upon a number of
assumptions, including future sales levels and future cost of goods and operating expense levels, as well as economic conditions,
changes to our business model or changes in consumer acceptance of our products which are more subjective in nature. In those cases
where we determine that the useful life of long-lived assets should be shortened, we would amortize the net book value in excess
of the salvage value (after testing for impairment as described above), over the revised remaining useful life of such asset thereby
increasing amortization expense. We believe that the assumptions we have made in projecting future cash flows for the evaluations
described above are reasonable.

In determining the useful life of our Lanvin
brand names and trademarks, we applied the provisions of ASC topic 350-30-35-3. The only factor that prevented us from determining
that the Lanvin brand names and trademarks were indefinite life intangible assets was Item c. “Any legal, regulatory, or
contractual provisions that may limit the useful life.” The existence of a repurchase option originally in 2025 and amended
to 2027, may limit the useful life of the Lanvin brand names and trademarks to the Company. However, this limitation would only
take effect if the repurchase option were to be exercised and the repurchase price was paid. If the repurchase option is not exercised,
then the Lanvin brand names and trademarks are expected to continue to contribute directly to the future cash flows of our Company
and their useful life would be considered to be indefinite.

With respect to the application of ASC topic
350-30-35-8, the Lanvin brand names and trademarks would only have a finite life to our Company if the repurchase option were exercised,
and in applying ASC topic 350-30-35-8, we assumed that the repurchase option is exercised. When exercised, Lanvin has an obligation
to pay the exercise price and the Company would be required to convey the Lanvin brand names and trademarks back to Lanvin. The
exercise price to be received (residual value) is well in excess of the carrying value of the Lanvin brand names and trademarks,
therefore no amortization is required.

44

Quantitative Analysis

During the three-year period ended December
31, 2022, we have not made any material changes in our assumptions underlying these critical accounting policies or to the related
significant estimates. The results of our business underlying these assumptions have not differed significantly from our expectations.

While
we believe the estimates we have made are proper and the related results of operations for the period are presented fairly in
all material respects, other assumptions could reasonably be justified that would change the amount of reported net sales, cost
of sales, and selling, general and administrative expenses as they relate to the provisions for anticipated sales returns, allowance
for doubtful accounts and inventory obsolescence reserves. For 2022, had these estimates been changed simultaneously by 5% in
either direction, our reported gross profit would have increased or decreased by approximately $0.8 million and selling, general
and administrative expenses would have changed by approximately $0.1 million. The collective impact of these changes on 2022 operating
income, net income attributable to Inter Parfums, Inc., and net income attributable to Inter Parfums, Inc. per diluted share would
be an increase or decrease of approximately $0.8 million, $0.5 million and $0.02, respectively.

Results of Operations

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Net sales rebounded significantly in 2021,
as compared to 2020 for both European and United States based operations and continued to increase in 2022. At comparable foreign
currency exchange rates, net sales increased 30% in 2022, as compared to 2021. Net sales in 2020 reflected the negative impacts
of the COVID-19 pandemic on the beauty industry. Retail store closings, event cancellations and a shutdown of international air
travel brought our sales to a virtual standstill in early 2020. In the second half of 2020, business began rebounding thanks to
retail stores reopening and a robust e-commerce business conducted by our retail customers.

For European based operations, our largest
brands, Montblanc, Jimmy Choo and Coach grew 2022 sales by 15%, 23% and 18%, respectively, as compared to 2021. There were also
significant gains made by our mid-sized brands, including Van Cleef & Arpels and Karl Lagerfeld. The year-over-year gains,
in both euro and dollars, are all the more impressive considering our new product pipeline was dominated by flankers and extensions.
However, we did bring to market several entirely new lines, including our first ever Moncler duo, Kate Spade Sparkle, Singulier
by Boucheron and Open Road and Wild Rose by Coach.

In 2021, GUESS became our fourth brand
with sales exceeding $100 million. Strong momentum on GUESS continued in 2022 with brand sales increasing another 24% as compared
to 2021. There were also significant gains made by our mid-sized brands, especially Abercrombie & Fitch, Hollister and Oscar
de la Renta. Additionally, 2022 saw the first full year of sales of Ferragamo products and in the second half of 2022, we also
welcomed first time sales of our newest brands, Donna Karan/DKNY. Together, these new brands contributed to 38% growth of our
US operations.

45

We are confident in our future as 2023
has many exciting developments for the Company. We have transitioned to a new modern enterprise resource planning system (ERP)
for our US operations which will enable us to operate more efficiently and offer more scale to absorb our newer brands We have
a solid line-up of new product launches in the pipeline for many of our brands. This includes the roll out of the Moncler Collection
in the first quarter and a Duo flanker in the third quarter, a launch of GUESS Uomo Acqua in the second quarter,
as well as Bella Vita Paradiso in the fourth quarter. Extensions of the Montblanc Legend, Jimmy Choo Man
and Jimmy Choo’s I Want Choo, debut in the first, second and third quarters, respectively. Also, in the third quarter,
we will unveil new men’s lines for Coach and Boucheron. Brand extensions and flankers are in the works for MCM, Abercrombie
& Fitch, Hollister, Anna Sui, and Oscar de la Renta. In sum, 2023 has all the earmarks of another superb year as the growth
catalysts currently far outweigh the headwinds, most notably inflation and supply chain disruptions. Lastly, we have recently
announced the license agreement with Lacoste which will offer us another sizable building block of growth in 2024. 

As in the past, we hope to benefit from
our strong financial position to potentially acquire one or more brands, either on a proprietary basis or as a licensee. However,
we have no certainty that any new license or acquisition agreements will be consummated.

Net Sales to
Customers by Region

[[GREPCENT_TABLE]]
[["","","Years ended December 31,"],["","","2022","","","2021","","","2020"],["","","(in millions)"],["North America","","$","431.9","","","$","354.1","","","$","193.5"],["Western Europe","","","259.2","","","","202.0","","","","147.1"],["Asia","","","152.7","","","","128.0","","","","79.7"],["Middle East","","","87.8","","","","61.0","","","","46.8"],["Eastern Europe","","","74.2","","","","69.7","","","","33.1"],["Central and South America","","","69.9","","","","56.4","","","","32.5"],["Other","","","11.0","","","","8.4","","","","6.3"],["","","$","1,086.7","","","$","879.6","","","$","539.0"]]
[[/GREPCENT_TABLE]]

Our largest market, North America achieved
sales growth of 22% in 2022 compared to 2021, while Western Europe and Asia grew sales by 28% and 19% in 2022, respectively, compared
to 2021. Latin America and the Middle East also achieved top line growth of 24% and 44% in 2022, respectively compared to 2021.
Eastern Europe saw only moderate top line growth of 6% as compared to 2021 largely related to the war in Ukraine.

Gross Margins

[[GREPCENT_TABLE]]
[["","","Years ended December 31,"],["","","2022","","","2021","","","2020"],["","","(in millions)"],["European operations:"],["Net sales","","$","744.0","","","$","663.2","","","$","422.9"],["Cost of sales","","","236.9","","","","221.2","","","","152.3"],["Gross margin","","$","507.1","","","$","442.0","","","$","270.6"],["Gross margin, as a percent of net sales","","","68.2","%","","","66.6","%","","","64.0","%"],["United States operations:"],["Net sales","","$","342.7","","","$","216.4","","","$","116.1"],["Cost of sales","","","155.4","","","","101.5","","","","56.0"],["Gross margin","","$","187.3","","","$","114.9","","","$","60.1"],["Gross margin, as a percent of net sales","","","54.7","%","","","53.1","%","","","51.8","%"]]
[[/GREPCENT_TABLE]]

46

For European based operations, gross profit
margin as a percentage of net sales was 68.2%, 66.6% and 64.0% in 2022, 2021 and 2020, respectively. Distribution in the United
States for European based operations is handled by a 100% owned subsidiary of Interparfums SA based in the United States. Therefore,
sales are made at a wholesale price rather than at an ex-factory price, resulting in higher gross margins. Net sales of our U.S.
based distribution subsidiary increased 16% in 2022, as compared to 2021, leading to favorable mix and giving rise to the increase
in gross margin in 2022 over both 2021 and 2020. We carefully monitor movements in foreign currency exchange rates as over 50%
of our European based operations net sales is 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 margin while a weak U.S. dollar has a negative effect.
The average dollar/euro exchange rate was 1.05 in 2022, 1.18 in 2021, and 1.15 in 2020. Pricing action also enabled us to offset
inflationary pressures.

For United States operations, gross profit
margin was 54.7%, 53.1% and 51.8% in 2022, 2021 and 2020, respectively. With a decline in sales in 2020, certain expenses such
as depreciation of tools and molds together with the distribution of point-of-sale materials exaggerated the decline in gross margin
for the year as a percentage of sales. The scale benefits coming from our significant growth in 2021 and 2022, combined with pricing
actions and favorable channel/brand mix, have enabled us to more than offset the impacts of inflation and thus expand gross margin
by 130 bps in 2021 and another 160 bps in 2022.

Costs relating to purchase with purchase
and gift with purchase promotions are reflected in cost of sales, and aggregated $43.1 million, $36.9 million and $26.4 million
in 2022, 2021 and 2020, respectively, and represented 4.0%, 4.2% and 4.9% of net sales, respectively.

Generally, we do not bill customers for
shipping and handling costs and such costs, which aggregated $15.8 million, $10.0 million and $5.0 million in 2022, 2021 and 2020,
respectively, are included in selling, general and administrative expenses in the consolidated statements of income. As such, our
Company’s gross margins may not be comparable to other companies, which may include these expenses as a component of cost
of goods sold.

Selling, General & Administrative
Expenses

[[GREPCENT_TABLE]]
[["","","Years ended December 31,"],["","","2022","","","2021","","","2020"],["","","(in millions)"],["European Operations"],["Selling, general & administrative expenses","","$","358.3","","","$","327.5","","","$","210.6"],["Selling, general & administrative expenses as a percent of net sales","","","48.2","%","","","49.4","%","","","49.8","%"],["United States Operations"],["Selling, general & administrative expenses","","$","134.0","","","$","79.0","","","$","50.1"],["Selling, general & administrative expenses as a percent of net sales","","","39.1","%","","","36.5","%","","","43.1","%"]]
[[/GREPCENT_TABLE]]

For European operations, selling, general
and administrative expenses increased 9% and 55% in 2022 and 2021, respectively, as compared to the corresponding prior year period,
and represented 48.2%, 49.4% and 49.8% of sales in 2022, 2021 and 2020, respectively as we were able to leverage our scale. As
discussed in more detail below, these fluctuations, which are in line with the fluctuations in sales for European operations, are
primarily from variations in promotion and advertising expenditures. For United States operations, selling, general and administrative
expenses increased 70% and 58% in 2022 and 2021, respectively, as compared to the corresponding prior year period and represented
39.1%, 36.5% and 43.1% of sales in 2022, 2021 and 2020, respectively. As discussed in more detail below, the increased selling,
general and administrative expenses as a percentage of net sales are primarily the result of increases in promotion and advertising
expenditures. Additionally, the US based operations increased expenses related to salaries and benefits as we build the organization
and infrastructure to support our new brands and future growth.

47

Promotion and advertising included in selling,
general and administrative expenses aggregated $212.4 million, $171.1 million and $91.7 million in 2022, 2021 and 2020, respectively.
Promotion and advertising as a percentage of sales represented 19.5%, 19.5% and 17.0% of net sales in 2022, 2021 and 2020, respectively.
Promotion and advertising programs were cut significantly in 2020 in response to market conditions. Promotion and advertising are
integral parts of our industry, and we continue to invest heavily in promotional spending to support new product launches and to
build brand awareness. We believe that our promotion and advertising efforts have had a beneficial effect on online net sales,
causing then to continue to grow strongly on a global basis. All of our brands have benefitted from newly launched and enhanced
e-commerce sites in existing markets in collaboration with our retail customers on their e-commerce sites. We also continue to
develop and implement omnichannel concepts, the way brick-and-mortar stores and a business’ online operations work in tandem,
and compelling content to deliver an integrated consumer experience. We anticipated that on a full year basis, future promotion
and advertising expenditures will aggregate approximately 21% of net sales, which is in line with pre-COVID historical averages.

Royalty expense included in selling, general
and administrative expenses aggregated $87.0 million, $68.9 million and $41.1 million in 2022, 2021 and 2020, respectively. Royalty
expense as a percentage of sales represented 8.0%, 7.8% and 7.6% of net sales in 2022, 2021 and 2020, respectively. The increases
in 2022 and 2021, as a percentage of sales, are directly related to new licenses and increased royalty-based product sales. As
a result of the COVID-19 pandemic, we reached agreements with most of our licensors to waive or significantly reduce minimum guaranteed
royalties for 2020.

Service fees, which are fees paid within
our European operations to third parties relating to the activities of our distribution subsidiaries, aggregated $7.9 million,
$9.4 million and $6.8 million in 2022, 2021 and 2020, respectively. The 2022 and 2021 amounts are in line with and directly related
to fluctuations in sales within our U.S. distribution subsidiary.

Income from Operations

As a result of the above analysis regarding
net sales, gross profit margins and selling, general and administrative expenses, our operating margins aggregated 17.9%, 16.8%
and 13.1% for the years ended December 31, 2022, 2021 and 2020, respectively.

Other Income and Expenses

In December 2022, to
finance the acquisition of the Lacoste trademark, the Company entered into a $53.3 million (€50 million) four-year loan agreement.
The loan agreement bears interest at EURIBOR-1 month rates plus a margin of 0.825%. This variable rate debt was swapped for variable
interest rate debt with a maximum rate of 2% per annum. Additionally, in April 2021, we completed the acquisition of the future
headquarters of Interparfums SA. The acquisition was financed by a 10-year €120 million (approximately $128 million) bank
loan which bears interest at one-month Euribor plus 0.75%. Also in 2021, approximately €80 million of the variable rate debt
was swapped for fixed interest rate debt. Long-term debt including current maturities aggregated $186.8 million, $148.8 million
and $24.7 million as of December 31, 2022, 2021 and 2020, respectively.

We 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. Due to the sizable swings in currency
rates during 2022, we went from recognizing a gain of $2.3 million in 2021 to a loss of $1.9 million in 2022. This accounts for
most of our fluctuation within Other income and expenses.

Interest and investment income represents
interest earned on cash and cash equivalents and short-term investments. In 2022, short-term investments include approximately
$19.9 million of marketable equity securities of other companies in the luxury goods sector. Interest and investment income includes
approximately $3.1 million of unrealized gains on marketable equity securities. Given our strong balance sheet and cash position,
the increase in interest rates had a favorable impact on interest and investment income.

Income Taxes

Our effective income tax rate was 22.2%,
27.1% and 27.9% in 2022, 2021 and 2020, respectively.

48

Income tax expense represents U.S. federal,
foreign, state and local income taxes. The effective rate differs from the federal statutory rate primarily due to the effect of
state and local income taxes, the tax impact of share-based compensation and the taxation of foreign income including tax settlements.
Our effective tax rate will change from year-to-year based on recurring and non-recurring factors including the geographical mix
of earnings, enacted tax legislation, state and local income taxes, the tax impact of share-based compensation, the interaction
of various global tax strategies and the impact from certain acquisitions.

Our effective income tax rate for European
operations was 25.2%, 30.6% and 29.7% in 2022, 2021 and 2020, respectively, as the French Prime Minister reduced the French corporate
income tax rate from approximately 33% to 25% over a three-year period.

Our effective income tax rate for U.S. operations
was 13.8%, 15.6% and 16.7% in 2022, 2021 and 2020, respectively.

Our effective tax rate differs from the
21% statutory rate due to state, local and foreign taxes, offset by benefits received from the exercise of stock options as well
as deductions we are allowed for a portion of our foreign derived intangible income. Additionally, in the third quarter of 2022,
our U.S. operations recognized a one-time tax benefit of $2.5 million associated with the 2021 Salvatore Ferragamo acquisition.
At the time of the acquisition, we had not recognized deferred tax benefits as there were uncertainties concerning its potential
recoverability; however, as of September 30, 2022, the recoverability was deemed likely.

The Company has determined that it has no
tax liability related global intangible low-taxed income (“GILTI”) as of December 31, 2022, 2021 and 2020. The Company
also estimated the effect of its foreign derived intangible income (“FDII”) and recorded a tax benefit of $1.5 million,
$0.6 million and $0.3 million as of December 31, 2022, 2021 and 2020, respectively. Share-based compensation resulted in a discrete
tax benefit of $0.8 million, $1.3 million and $0.4 million in 2022, 2021 and 2020, respectively.

Net Income

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Net income attributable to European operations
was $107.3 million, $80.7 million and $42.0 million in 2022, 2021 and 2020, respectively, while net income attributable to United
States operations was $43.7 million, $29.4 million and $8.0 million in 2022, 2021 and 2020, respectively. The fluctuations in net
income for both European operations and United States operations are directly related to the previous discussions concerning changes
in sales, gross profit margins, selling, general and administrative expenses, most of which were caused by the effects of the COVID-19
pandemic beginning in 2020 and the recovery in 2021 and 2022.

The noncontrolling interest arises primarily
from our 72% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 28% of Interparfums SA shares
trade on the Euronext. Net income attributable to the noncontrolling interest is directly related to the profitability of our European
operations and aggregated 27.9%, 28.0% and 28.1% of European operations net income in 2022, 2021 and 2020, respectively. Net margins
attributable to Inter Parfums, Inc. aggregated 11.1%, 9.9% and 7.1% in 2022, 2022 and 2020, respectively.

Liquidity and Capital Resources

Our conservative financial tradition has
enabled us to amass significant cash balances. As of December 31, 2022, we had $256 million in cash, cash equivalents and short-term
investments, most of which are held in euro by our European operations and are readily convertible into U.S. dollars. We have not
had any liquidity issues to date, and do not expect any liquidity issues relating to such cash and cash equivalents and short-term
investments. As of December 31, 2022, short-term investments include approximately $19.9 million of marketable equity securities.

49

As of December 31, 2022, working capital
aggregated $443 million, and we had a working capital ratio of 2.3 to 1. Approximately 80% of the Company’s total assets
are held by European operations including approximately $249 million of trademarks, licenses and other intangible assets.

The Company is party to a number of license
and other agreements for the use of trademarks and rights in connection with the manufacture and sale of its products expiring
at various dates through 2039. In connection with certain of these license agreements, the Company is subject to minimum annual
advertising commitments, minimum annual royalties and other commitments. See Item 8. Financial Statements and Supplementary
Data – Note 12 – Commitments in this annual report on Form 10-K. Future advertising commitments are estimated based
on planned future sales for the license terms that were in effect at December 31, 2022, without consideration for potential renewal
periods and do not reflect the fact that our distributors share our advertising obligations.

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. In
December 2022, we entered into a long-term global licensing agreement for the creation, development and distribution of fragrances
and fragrance-related products under the Lacoste brand. This new license takes effect January 2024.

In September 2021, we entered into a long-term
global licensing agreement for the creation, development and distribution of fragrances and fragrance-related products under the
Donna Karan and DKNY brands. Our rights under this license are subject to certain minimum advertising expenditures and royalty
payments as are customary in our industry. With this agreement, we are gaining several well-established and valuable fragrance
franchises, most notably Donna Karan Cashmere Mist and DKNY Be Delicious, as well as a significant loyal consumer
base around the world. The exclusive license became effective on July 1, 2022, and we are planning to launch new fragrances under
these brands in 2024.

In October 2021, we closed on a transaction
agreement with Salvatore Ferragamo S.p.A., whereby an exclusive and worldwide license was granted for the production and distribution
of Ferragamo brand perfumes. The license became effective in October 2021 and will last for 10 years with a 5-year optional term,
subject to certain conditions. With respect to the management and coordination of activities related to the license agreement,
the Company is operating through a wholly-owned Italian subsidiary based in Florence, that was acquired from Salvatore Ferragamo
on October 1, 2021. The acquisition together with the license agreement was accounted for as an asset acquisition. The total cost
of the assets acquired net of liabilities assumed aggregated approximately $35.8 million. In connection with this acquisition,
we agreed to pay $17.0 million in equal annual installments of $1.7 million including interest imputed at 2.0%.

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 $115.2 million, $119.6 million, and $65.0 million in 2022, 2021 and 2020, respectively. In 2022, working capital items
used $65.6 million in cash from operating activities, as compared to $13.7 million in 2021 and $7.3 million in 2020. Although,
from a cash flow perspective, accounts receivable is up approximately 37% from year-end 2021, the balance is reasonable based
upon fourth quarter 2022 record sales levels and reflects strong collection activity as day’s sales outstanding increased
slightly to 64 days in 2022, as compared to 61 days in 2022 and decreased significantly as compared to 86 days in 2020. From a
cash flow perspective, inventory levels are up 49% from year-end 2021. Inventory days on hand increased to 231 days in 2022, as
compared to 208 days in 2021, and 277 days in 2020 as we chose to protect service level in light of the COVID driven supply chain
disruptions.

Cash flows used in investing activities
reflect the purchase and sales of short-term investments. These investments consist of certificates of deposit with maturities
greater than three months marketable equity securities and other contracts. At December 31, 2022, approximately $39 million of
certificates of deposit contain penalties where we would forfeit a portion of the interest earned in the event of early withdrawal.

50

Our business is not capital intensive as
we do not own any manufacturing facilities. On a full year basis, we generally spend less than $5.0 million on capital expenditures
including tools and molds needed to support our new product development calendar. Capital expenditures also include amounts for
office fixtures, computer equipment and industrial equipment needed at our distribution centers.

In December 2022, to finance Interparfums
SA’s acquisition of the Lacoste trademark, the Company entered into a $53.3 million (€50 million) four-year loan agreement.
The loan agreement bears interest at EURIBOR-1 month rates plus a margin of 0.825%. This variable rate debt was swapped for variable
interest rate debt with a maximum rate of 2% per annum.

In April 2021, Interparfums SA completed
the acquisition of its future headquarters at 10 rue de Solférino in the 7th arrondissement of Paris from the property developer.
This is an office complex combining three buildings connected by two inner courtyards, and consists of approximately 40,000 total
sq. ft.

The $142 million purchase price is in line
with market value and includes the complete renovation of the site. As of December 31, 2021, $136.1 million of the purchase price,
including approximately $3.1 million of acquisition costs, is included in building, equipment and leasehold improvements on the
accompanying balance sheet as of December 31, 2021. Approximately $8.8 million of cash held in escrow is included in other assets
on the accompanying balance sheet as of December 31, 2021. In 2022 this cash was released from escrow and there is no longer any
balance of cash outside of cash and cash equivalents on the accompanying balance sheet as of December 31, 2022. In addition, the
Company borrowed $17.0 million pursuant to a short-term loan equal to the VAT credit, and in July 2021, the $17.0 million VAT credit
was reimbursed by the French Tax Authorities and the loan was repaid.

The acquisition was
financed by a 10-year €120 million (approximately $136 million) bank loan which bears interest at one-month Euribor plus 0.75%.
Approximately €80 million of the variable rate debt was swapped for variable interest rate debt with a maximum rate of 2%
per annum.

In June 2020, the Company and Divabox, owner
of the Origines-parfums e-commerce platform for beauty products, signed a strategic agreement and equity investment pursuant to
which we acquired 25% of Divabox capital for $14 million through a capital increase. In connection with the acquisition, the Company
entered into a $13.4 million term loan, which was repaid in full in February 2021.

Our short-term financing requirements are
expected to be met by available cash on hand at December 31, 2022, cash generated by operations and short-term credit lines provided
by domestic and foreign banks. The principal credit facilities for 2022 consist of a $20.0 million unsecured revolving line of
credit provided by a domestic commercial bank and approximately $20 million in credit lines provided by a consortium of international
financial institutions. There were no balances due from short-term borrowings as of December 31, 2022 and 2021.

In April 2020, as a result of the uncertainties
raised by the COVID-19 pandemic, the Board of Directors authorized a temporary suspension of the quarterly cash dividend. In February
2021, our Board of Directors authorized a reinstatement of an annual dividend of $1.00, payable quarterly and in February 2022,
our Board authorized a 100% increase in the annual dividend to $2.00 per share. In February 2023 the Board of Directors further
increased the annual dividend to $2.50 per share. The next quarterly cash dividend of $0.625 per share is payable on March 31,
2023, to shareholders of record on March 15, 2023. Dividends paid, including dividends paid once per year to noncontrolling stockholders
of Interparfums SA, aggregated $79.8 million, $41.5 million and $21.1 million for the years ended December 31, 2022, 2021 and 2020,
respectively. The cash dividends to be paid in 2023 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.

51

Inflation rates in the U.S. and foreign
countries in which we operate did not have a significant impact on operating results for the year ended December 31, 2022 as they
were either offset by price increases we passed onto our respective customers or operating efficiencies.