Prepared remarks
Greetings, and welcome to Interparfums 2026 Conference Call and Webcast. I would now like to turn the conference over to your host, Mr. Devin Sullivan. Thank you. You may begin.
Thank you, Rob, and good morning, everyone. Joining us on the call today will be Chairman and Chief Executive Officer, Jean Madar; and Chief Financial Officer, Michel Atwood. As a reminder, 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 may be found in the company's filings with the Securities and Exchange Commission under the headings Forward-Looking Statements and Risk Factors. Forward-looking statements speak only as of the date on which they are made, and Interparfums undertakes no obligation to update the information discussed. Interparfums' consolidated results include 2 business segments, European-based operations through Interparfums SA, the company's 72% owned French subsidiary and United States-based operations. It is now my pleasure to turn the call over to Jean Madar. Jean, please go ahead.
Thank you, Devin, and good morning, everyone, and thank you for joining us on today's call. We are very pleased with our performance at the midpoint of the year, which reflects the appeal of our global brand portfolio and the strength of our underlying business as well as the disciplined execution and continued dedication of our team. Despite the challenges that persist in our business and industry, these results give me confidence in our ability to deliver on our full year objectives and continue on the path towards creating long-term value for our shareholders. We delivered 2% sales growth in both the second quarter and first half of 2026, supported by strong performance from several of our leading brands and a strong rebound in our United States-based operation off an admittedly weak comparison. Excluding the war-related headwinds in the Middle East, organic sales advanced 4% in the quarter and 1% year-to-date. We maintained a robust financial position while continuing to invest in product initiatives that position us well for the balance of the year and beyond. Consolidated sales growth in the first half of the year reflects strong brand execution and solid performance in select regions, partially offset by macro and regional headwinds. North America, our largest market, was up 5%, propelled by a healthy category, a steady cadence of new extensions, most notably from Coach, and marketing investments that are clearly paying off. Asia Pacific was a highlight, up 14% as initiatives supporting Coach and Montblanc took hold. GUESS extended its footprint in Australia and New Zealand and our new Korean affiliate got off to an excellent start after several years of uneven results in the region. We are also encouraged that consumers across Asia Pacific are increasingly embracing the fragrance category, and we are moving quickly to capture that opportunity. In India, for example, we recently teamed up with a new distributor to bring Coach, Montblanc and Jimmy Choo and several of our other brands back to one of the world's fastest-growing beauty markets. Also, South America rose by 15% behind the continued success of Coach for women and Montblanc's Legend line. Partially offsetting growth from these geographies, a few regions declined in the first half. Western Europe was down 3% on softer consumer demand. Eastern Europe was down 7% amid operational difficulties in certain markets, which weighed most heavily on Lanvin and Lacoste. And of course, Middle East and Africa fell 24% as the war in the region continued to weigh on our results. Even with these pressures, our diversified footprint allowed us to grow overall, which speaks to the resilience of our model. Looking at our brands, momentum in the first half was broad and several of our largest properties finished the second quarter with real strength. Coach grew 10% in the first half, driven by strong performance in the U.S., its primary market, driven by continued demand across most existing lines and by the launch of new extensions in the Coach Women and Coach Men franchises earlier in 2026. Montblanc advanced 6% in the first half of 2026 due to favorable exchange rates and the ongoing success of the Montblanc Explorer Extreme line and the strength of the Legend franchise. With sales holding firm in the second quarter and the first franchise arriving in 2027, we see plenty of runway ahead for this brand. Next, Jimmy Choo was up 8% for the half year, capped by an impressive 23% jump in the second quarter. The brand's fragrances are winning over more and more customers, particularly in the U.S., thanks to the enduring popularity of I Want Choo and a very successful debut for Jimmy Choo Man platform. GUESS, our largest U.S.-based brand, rose 11% in the first half, including strong performance in the second quarter. The iconic franchise keeps delivering, now bolstered by Iconic Blue for men and the newest Amore extension, Amore Napoli, which was launched in the second quarter. The brand's reach keeps widening as well. Today, for instance, GUESS stands among the top 15 fragrance brands in Australia. Let's talk about Ferragamo. Ferragamo sales jumped by 41% in the second quarter, bringing first half growth to 17%. Growth was geographically broad with the Signorina and Ferragamo lines performing very well, elevated by their latest launches introduced in late 2025. We rolled out a commercial innovation program across the brand franchise in May, which further enhanced the brand's growth, including our newest extension, Fiamma Assoluta, which has seen very positive feedback so far. During the second quarter, Chinese singer and actor Karry Wang joined the Ferragamo family as the brand's global fragrance ambassador. As mentioned earlier, Asia Pacific is increasingly embracing fragrance. We are hopeful that Karry's affiliation with Ferragamo will further elevate the brand in this burgeoning market. Donna Karan/DKNY climbed 12% in the first half, punctuated by a 28% increase in the second quarter with healthy demand across categories and franchises and e-commerce becoming an increasing engine for the brand's growth. The DKNY brand remains a fixture on TikTok Shop and Amazon. Roberto Cavalli grew 8% in the first half, fueled by this year's introduction across several franchises, among them the unisex scent Marbleous Cypress and several other fragrances launched earlier this year. Serpentine continues to be a massive success for the brand globally. The war in the Middle East is certainly impacting this brand, and Cavalli is our largest brand in the region. Notwithstanding the world impact, our conviction and excitement on the trajectory of the brand remains strong. A few brands faced steeper comparison. Lacoste came in 16% below last year when a string of heat launches lifted first half sales by 44% and conditions in Eastern Europe added pressure. We introduced L.12.12 Bleu for men during the second quarter and with major initiatives lined up for 2027 and 2028, we believe the brand's best performance lies ahead. Recognition keeps coming for our fragrances as well. Bella Blanca from Oscar de la Renta took home the Best Eau de Parfum at the Marie Claire Fragrance Awards 2026 and Ferragamo Signorina Romantica was honored as the best true gourmand fragrance at the Who What Wear Fragrance Awards 2026. Honors like this celebrate the artistry of our team and partners and add to the desirability of our portfolio. Even as consumers remain increasingly selective about how they allocate their products, in the United States, fragrance was once again the fastest-growing beauty category in the first half, owing to its status as an affordable indulgence and daily form of self-expression. The market has normalized after several years of exceptional growth, but the opportunity remains attractive. For us, it is very clear: win share with brands that have personality, quality and global reach. Across our portfolio, we have many ways to speak to consumers and that diversity is one of our greatest strengths. Beyond the success and innovation from our core brands so far this year, we also made significant strides in developing and expanding our newest portfolio of brands. We are rebuilding momentum in high-end fragrance with existing outlets having resumed distribution and reopening of Paris boutiques. We are also preparing the launch of new fragrances in 2027. Lastly, newly created wholly-owned brand Solferino extended to 100 total points of sale at the end of the first half this year, and we plan to launch an 11th fragrance to the initial collection in the second half of this year. We are also preparing for the first launches of new fragrances for Longchamp and Off-White in 2027. Longchamp has the potential to become our next $100 million brand and Off-White represents another step for us into the high-end category. The layer on top of that is the extraordinary rise of digital commerce, which remains a growth driver for us in the second quarter, highlighting Amazon and TikTok Shop. Amazon now sells more beauty online than anyone else in both the U.S. and Europe. While TikTok Shop has become the fourth largest beauty e-commerce platform in the U.S. and is quickly expanding across Europe. We will stay ahead of the curve to identify evolving behaviors and continuously adapt how, where and when we engage so we meet consumers not just where they are but where they are leading. Consumers are also making personal layering sense, assembling fragrance wardrobes and turning to AI-powered recommendations for discovery. However they choose to find us—on social media, on the major marketplaces or in stores—we are meeting them with storytelling that carries across every channel and delivers an immersive consistent brand experience. Ultimately, this business is about inspiring desire, offering consumers an entry point into the world of an iconic fashion house or celebrity, and we work every day to keep the desire running across each of our brands. Travel retail remained a steady contributor, once again accounting for roughly 7% of total net sales, in line with prior periods. New York is where the channel is strongest today with conditions softer elsewhere, including, of course, the Middle East, and we see steady growth ahead for this business. I will briefly touch on tariffs given the newest round implemented under Section 301. As a reminder, our manufacturing is based primarily in Europe and the rates we faced under this latest wave are largely in line with what we were already operating under. So we don't expect to see meaningful changes to our cost structure going forward. That said, we are not standing still. We are increasingly working to position our distributors closer to the point of sale, which shortens supply lines and helps mitigate tariff impacts while keeping our brands close to the consumer. We are also working on cost saving initiatives to
Okay. Please remain on the line. Okay. Our speaker is back with us. You can continue.
I'm so sorry. I don't know how you lost me. But anyway, I'm at the end of my comments. So we are saying that while the environment remains anything but certain, we are demonstrating that we can do more than manage through turbulence. We can grow through it. The fragrance category remains resilient. Our brands are performing and we're on track to deliver on our goals this year. We remain cautiously optimistic about the balance of 2026, mindful of disruption in the Middle East, but energized by improving trends we see elsewhere and confident in our ability to keep operating efficiently and profitably while driving disciplined, sustainable long-term growth for our customers, brand partners and consumers. With that, I will now turn it over to Michel for a review of our finance. Michel?
Yes. Thank you, Jean, and good morning, everyone. I will begin by discussing the consolidated results before breaking them down into our two operating units, European and United States-based operations. Overall, the diversity of our portfolio continued to support global growth with strength in select brands and geographies, offsetting softness elsewhere and driving our overall results. This year's U.S.-based results benefited from a favorable comparison against last year's second quarter, which was weighed down by weaker innovation and tariff-related supply chain disruptions, whereas our European results are cycling a prior year period of strong growth and therefore faced a much tougher year-over-year comparison in the current quarter. Echoing Jean's comments, we maintain a strong financial position, operate with efficiency and continue to invest in our brand portfolio. Net sales grew modestly in the 2026 second quarter and first half with reported sales of 2% in each period. These were helped by foreign exchange. Organic growth in 2026 periods was impacted by lingering headwinds associated with the war in the Middle East. Excluding these factors, organic growth improved by 4% in the second quarter and 1% in the first half, respectively. Our seven largest brands, which represented 81% of our first half sales, grew 6% and our expanding direct-to-retail channel, which represented 42% of first half sales, grew 9%. Furthermore, our top 20 brand-region combinations, which represent 84% of our sales, grew a healthy 7%, showcasing the overall strength of our core business. While the stronger euro has continued to favor our top line, it also increases our cost base across the P&L and our balance sheet. We are continuing to implement a variety of actions to mitigate that impact and have been pleased with the results. While gross margin declined slightly in the 2026 second quarter, first half gross margin expanded by 30 basis points to 65.3% from 65%, and this was primarily driven by a favorable segment, brand and channel mix as well as lower destruction costs, which reflect our continued focus on inventory and supply chain management. These gains were partially offset by tariffs, which represented a net additional expense of $8.2 million in the first half of 2026 compared to last year. As of June 30, 2026, the company also received $8.7 million in IEEPA tariff refunds, of which $6.9 million was recognized as a nonrecurring reduction in cost of sales in the second quarter. In July 2026, we received the remaining balance of the $17.6 million in IEEPA tariff refunds owed. These funds will benefit quarters three and four of this year. For the total year, we expect gross margins to improve by roughly 150 basis points with 110 basis points of improvement coming from the tariff refunds and the balance coming from favorable brand and channel mix as well as cost efficiency programs. Higher SG&A expenses for the 2026 period resulted from higher brand marketing investments, royalty costs growing ahead of sales due to unfavorable brand mix as well as higher logistics costs related to supply chain transitions and channel mix. Our A&P spending for the first half of 2026 rose to $129 million or 18.8% of sales. This reflects our ongoing commitment to investing in our existing brands and upcoming launches. We are reinvesting the tariff refunds to protect our top line growth and position the company for a successful 2027. As such, we anticipate that on a full year basis, A&P expenditures will approach our long-term target of approximately 21% of net sales. For the first half of 2026, consolidated operating profit declined to $123 million with an operating margin of 17.9% compared to an operating margin of 20% in the prior year period. Below the operating line, other income and expenses swung to a gain of $0.4 million in the first half from a loss of $6.7 million in the prior year period, a positive impact of $7 million. The improvement was driven by higher interest and investment income, reflecting a stronger ROI on our excess cash and gains on marketable equity securities as well as lower foreign exchange losses. Our consolidated effective tax rate for the first half was a stable 24.2% compared to 24.3% in the prior year period. For the first half, net income held stable at $74 million, or $2.31 per diluted share compared to $2.32 in the prior year period. Now moving to our two business segments. I will start with European-based operations. Net sales declined modestly 4% in the second quarter and 1% in the first half with 5% organic declines in each period, partially offset by favorable foreign exchange. I will again note that our European-based operations competed against a very high growth comparison in the prior year periods. Gross margin was at 67.4% in both the second quarter and the first half versus 68.3% and 66.9% in the prior year periods. The quarterly decline was driven by unfavorable brand and channel mix, along with higher tariff costs that were partially offset by one-time tariff refunds. The year-to-date improvement was supported by mix, lower destruction costs and $2.7 million of IEEPA tariff refunds, partially offset by tariffs, which represented an initial expense of $4.5 million. SG&A increased 8% in the second quarter and first half, rising to $125 million and $229 million or 53.9% of net sales and 47.4% in the second quarter. The driver of higher marketing is tied to product launches and brand investments. Royalty costs also grew ahead of sales, driven by unfavorable brand mix. Employee-related costs expanded as we continued building up our Korean subsidiary, and we saw higher logistic costs related to increased warehousing fees and supply chain transitions. Overall, net income attributable to European-based operations declined to $23 million for the quarter, representing 10% of net sales compared to 13.6% in the prior year period. For the first half, net income attributable to European-based operations was $73 million, representing a very healthy 15% of net sales compared to 16.6% in the prior year period. Now turning to our United States-based operations. Unlike our European-based operations, these results benefited from a favorable comparison base as second quarter 2025 results were negatively impacted by the factors we discussed earlier. With that context, net sales rose 18% in the second quarter, reflecting organic growth of 17% and a 1% positive foreign exchange impact. This performance lifted first half sales growth to 10%, comprising 8% organic growth and a 2% foreign exchange tailwind. Gross margin expanded 90 basis points to 61.6% from 60.7% in the second quarter and 60 basis points to 60.3% from 59.7% for the first half. Tariff refunds representing $4.2 million as well as lower levels of destruction costs helped offset unfavorable channel and product mix and higher ongoing tariff costs. SG&A grew 9% in the quarter and 6% in the first half, each below our sales growth. As a result, SG&A declined as a percentage of net sales to 44.2% and 46%, respectively, compared to 48% and 47.8% in the prior year periods, reflecting productivity gains from accelerated sales growth and partially offset by unfavorable brand mix on royalties. Overall, net income attributable to U.S.-based operations grew to $15 million for the quarter representing 13.7% of net sales compared to 10% in the prior year period and to $24 million in the first half, representing 11.4% of net sales compared to 9.6% last year. Moving to cash. At June 30, our balance sheet remains strong with $211 million in cash, cash equivalents and short-term investments and working capital of $664 million. From a cash flow perspective, accounts receivable declined 3% from year-end 2025 and days sales outstanding decreased slightly to 73 days from 74 days in the prior year period. These were driven by changes in our channel mix. We continue to see strong collecting activity and do not anticipate any issues with collections of accounts receivable. Despite foreign exchange headwinds on our costs, inventories declined 12% to $376 million compared to the prior year period, representing a 34-day reduction in inventory days on hand to 269 days as we continue to drive inventory efficiencies and work to increase the conversion of raw materials into finished goods. By effectively managing working capital relative to our sales growth, we again significantly improved our operating cash flow. Cash flow generated from operating activities reached $46 million in the first half or 49% of net income, up from $5 million or 5% of net income in the prior year period. Obviously, operating cash flow also benefited from the receipt of the $8.7 million in IEEPA tariff refunds, but we continue to expect strong free cash flow productivity in 2026 and beyond. Now, as noted in our Form 10-Q, our Board has authorized a share repurchase program as an additional capital allocation tool. This gives us flexibility to evaluate potential repurchases of shares of Interparfums, Inc. or shares of Interparfums SA or both, depending on market conditions, liquidity, relative valuation and other business priorities. The Board has also authorized the company to enter into a line of credit of up to $250 million to support the program, enhancing our financial flexibility and optionality without obligating us to draw the full amount or complete any specific level of repurchase. We intend to approach the program in a measured and disciplined way while continuing to prioritize the needs of the business, strategic investment opportunities and long-term value creation for our shareholders. Now turning to our 2026 guidance and outlook. As outlined in our earnings release issued last evening, we are maintaining our full year outlook. We continue to expect sales of approximately $1.48 billion and diluted earnings per share of $4.85. Our EPS guidance includes the expected benefits of the $17.6 million of tariff refunds we have received this year, which is enabling us to reinvest in A&P and offset higher-than-expected tariff and logistic costs. With refunds received, we will reinvest in our brands to drive growth. We continue to anticipate a return to improved growth in 2027, driven by enhanced innovation, including a series of blockbuster launches planned for 2027 and 2028 as well as the development and distribution of our newest brands that Jean talked about. Overall, we remain mindful of external pressures, including the war in the Middle East, moderating demand in several international markets, overall economic concerns and pressures that may arise from recently enacted tariffs on our cost structures, but we are continuing to closely monitor potential inflationary impacts as suppliers adjust pricing. Nevertheless, we remain well positioned with a strong innovation pipeline, enduring global partnerships and a resilient consumer base that collectively reinforce our confidence in our long-term growth and value creation. With that, Rob, please open the line for questions.
Questions and answers
Our first question comes from Sydney Wagner with Jefferies.
So first one, maybe just to ask about the consumer. You mentioned some consumer selectivity. Can you just talk about how that's manifesting itself in fragrance? I understand that the category overall has been strong, but maybe are you seeing fewer add-ons, buying smaller sizes? Or has this driven kind of a shift toward promotional occasions? I guess within that, maybe also just comment on the promotional environment. And then on China, we've heard some reports of international players now doing better in China versus domestic brands. Are you seeing any change in consumer demand or sell-through trends there that have improved versus maybe what you've seen 6 to 12 months ago?
Yes. Sure, Sydney. Look, overall, we continue to see healthy demand. We're not seeing any significant increases in promotional activity. I mean, there was certainly over the holiday season last year a little bit more gift sets than we typically see in the holiday period. But overall, I would say it's been quite normalized and a lot of the price increases that have been taken have stuck. I know that there have been some conversations around the entry price points and smaller sizes. We're not really seeing anything in that space. It's pretty much normalizing. In terms of China, the market is actually doing quite well, and we're seeing some significant growth there. But again, the China fragrance market is generally quite small for us, but it's been growing and it's been actually quite healthy. Jean?
Yes. There is no particular increase of small sizes, and we do not see any more promotional activity. So we will not have anything special to report on that. Regarding China, what we can see is that when we are able to find and sign celebrity ambassadors that have hundreds of millions of followers, of course, this accelerates the sale. That's what we are doing for Ferragamo and for Coach. Going forward, we will definitely continue to hire these very large celebrity ambassadors to speak about the brand, which is what works in China.
Our next question comes from Susan Anderson with Canaccord Genuity.
I was wondering if maybe you could just expand on some of the blockbuster launches you see coming next year. Maybe if there's any color you can provide on timing of them flowing through in 2027? And then also, I guess, the same with the new licenses, Longchamp and Off-White, how are you thinking about those flowing through for the year? And then just in terms of the investment around those new launches and licenses, how should we think about that flowing through the income statement?
I can try to answer the first part of the question. I will let Michel talk about the investment. 2027 is going to be impressive because all our big brands—the ones that are $100 million and above—will have a blockbuster. For people who are not familiar, 'blockbuster' means a whole new launch, a whole new pillar. Montblanc, Coach, GUESS, Jimmy Choo all will have a blockbuster. It's quite unusual for us; usually, it doesn't happen all in the same year. So the cadence will be across all the quarters. We are not going to launch everything on January 1; it will be paced during the year. It's difficult to give you the precise impact when we have a blockbuster in one of our brands, as it has a halo effect on the whole brand. That's why we can expect when we have a blockbuster to have growth of high single digits, sometimes low double digits. So it will be very exciting, and it will continue into 2028 also. Michel, do you want to talk about investments? Or maybe investment. Longchamp, Off-White. Longchamp is very exciting. It's a beautiful brand known for their bags. We had great success with Coach, so we think that Longchamp will be also very successful. We showed the products to all our distributors and retailers, and the response is very positive. That's why I said earlier that Longchamp has the potential to become quickly a $100 million brand. Off-White is going to be also interesting because this is not a license; this is a trademark that we bought 1.5 years ago, and we will be launching men's and women's fragrance at the end of the first quarter next year.
Yes, sure. Thanks, Jean. On the investment side, obviously, when you have significant launches, you will have to invest more. But our thinking is that we'll be able to cover this within the rest of the P&L. If we get significant sales acceleration, we should see some scale benefits on the rest of the P&L. So really, our goal is to fund this within the P&L. But again, until we actually put together the plan and sequencing, we won't have clear visibility to that. Our number one priority remains profitable top line growth, and that's really where we're going to continue to head over the next couple of years.
Our next question comes from Jonna Kim with TD Cowen.
The first one is, how are you measuring your efficiency of marketing spend as you continue to invest in that? Any key channels and priorities that you could talk about would be helpful. And then second question, what would take you to raise guide at this point? What are key factors you're currently monitoring for the guide?
We measure the ROI of our spending. Most of our spending today is really done on digital as well as on social media, and using influencers. We have tools to measure what is working and what's not working. Generally, that's where we're allocating most of our dollars. We're also allocating a lot of our dollars towards fast-growing channels, which as Jean pointed out include Amazon, TikTok and other online channels. In terms of increasing our guidance, there are a number of things in the second half that we're watching. We have done a little better on the top line than we were originally planning and have been helped by FX. We're starting to see FX move in the opposite direction. There's also the consideration of the Middle East and Eastern Europe, which have been weighing down on growth. If things improve there, that may help us, but it depends on when that happens during the year. On the rest of the P&L, we expect a similar profile to last year with the exception of A&P, which we're expecting to continue to increase to fuel investments and shore up growth.
No, I think you covered it. I totally agree. Our guidance is always difficult to exercise because there are so many parameters that we have to take into account. But right now, we are comfortable with the current guidance.
Our next question comes from Aron Adamski with Goldman Sachs.
I have three. Firstly, on inventory levels. As we enter the peak fragrance trading period, how would you assess retailer and distributor inventories at this stage across the U.S. and Europe? Are there any pockets of elevated stocks that could lead to destocking? Second, just to actually follow-up on the 2027 launch cycle. I believe the juices for these products are now ready. So I was wondering how complementary from an olfactory standpoint do you expect these new products to be? Or would you expect to see some cannibalization within the portfolio as you launch these? And then lastly, on the outlook for the remainder of the year, how should we think about the growth cadence between Q3 and Q4? Are there any specific phasing factors to consider? And similarly, on profitability, how do you expect gross margin and operating margin progression to develop across the two remaining quarters? And if there are any phasing factors to consider?
Thank you, Aron. I'll let Michel start and I will comment. I didn't really understand your second question about the 2027 launches.
Yes. So just to clarify, the scent profile of these new products—do you expect them to be complementary to your current offering? Or is there some risk of cannibalization?
Okay. Okay. All right. Let's start. Michel, do you want to start with inventory, please?
Let me start with inventory. Overall, we're finding that the destocking is really starting to normalize. We're not really seeing any significant areas where there's very high inventory levels or very low inventory levels. Overall, we're feeling pretty comfortable. Structurally, inventory will probably continue to go down for the reasons we have explained in the past, which is as people become more efficient and more people buy online, there will naturally be less inventory in the system. But overall, we're not seeing the concerns we had over the last 12 months; it seems to be normalizing.
This is, of course, something that we look at very carefully, and we monitor inventory at the level of our distributors and when we have information at the level of our retailers. Inventory at both levels is quite well managed by our distributors and by the retailers. They are ordering on a weekly or every-other-week basis. I don't see heavy inventory in stores, maybe a little light for certain partners like Amazon and TikTok, but their business is growing at a fast pace, and sometimes we have difficulty anticipating their needs, which is a good problem to have, but we need to be vigilant to make sure that we don't miss any business there. I don't see destocking.
Maybe I'll touch on the outlook for the rest of the year and then we can go back to the second question on the launch cycle. As you know, Aron, we don't really like to guide by quarter. It's difficult enough to guide for the year in the current environment. What I can say is that if you look at our guidance, it implies a 3% decline in the second half versus last year. There's going to be about 1 point of that that's going to come from FX. As you know, higher FX helped us in the first half, but we expect it to hurt us in the second half if trends persist. There's also a big question mark around the Middle East and Eastern Europe. If things improve there, that may help us. If you look at Q3 versus Q4, last year Q4 was stronger, so I would expect the balance to look a little bit better in Q3 and a little bit worse in Q4 versus last year. On the cost of goods side, it will depend on how we account for the tariff refunds; there could be some significant benefits in Q3 from the way those are recognized, but we haven't fully modeled that yet. On SG&A, most of the A&P increase that you're seeing will be mostly in Q3 as we invest ahead of the key consumption period in Q4. We generally always have a very strong Q4, so you'll see investments primarily more in Q3 to strengthen the third quarter in preparation for the fourth quarter.
The scent profile question is very interesting. We're going to launch a lot of new blockbusters next year. When we start to think about what we are going to launch—and this takes 18 to 24 months—we do a mapping to make sure that what we are going to launch doesn't cannibalize or overlap the territory of other franchises. With a new blockbuster, we're aiming to get new customers, maybe a different age, different preferences or a different geography. So while cannibalization could happen, we're designing launches to reach additional consumers and cover unmet needs.
Maybe just to build on Jean: when we design a blockbuster, the key is to identify an unmet need from a consumer standpoint. We look at existing consumers and at why certain consumers are not buying. If those consumers are interested in the brand but not purchasing, we try to develop a consumer proposition that covers those unmet needs. It's not always just about olfactory profile, but also the consumer proposition, packaging and concept. This is why development takes time. Another element affecting cannibalization is the level of incremental investment. If you move investment from one franchise to another, you may see cannibalization. So part of our planning for 2027 is deciding how aggressively to invest relative to the potential risk of cannibalization, always privileging profitable top-line growth.
Our next question comes from Fraser Donlon with Berenberg.
I have two. First, could you comment on some of the smaller retail brands in the portfolio where contracts are expiring in 2026 or where extension options may not be taken up? How are you thinking about those internally? And related, is there still an appetite to add potentially larger brands to either the EU operations or the U.S. operations? Second, on your inventory into year-end: how should we think about that given you have a strong pipeline building for 2027 when it comes to your own inventory?
When we look at our portfolio, we have added a lot of larger brands, and we also have a pipeline of brands coming, including Nautica and David Beckham. Ultimately, while our business model enables us to manage all types of brands efficiently, we always look at smaller brands toward the end of their life cycles and make decisions in conjunction with the existing license partners. We typically can't comment on specific contractual negotiations until we are more advanced. Generally, smaller brands that reach the end of their useful life and don't make sense in our portfolio are things we consider and we have accounted for potential headwinds when modeling. Jean?
I agree. We are still actively looking for more licenses. As Michel mentioned, David Beckham and Nautica are joining the portfolio when the licenses are finalized. We are actively talking to other brands, both those that have fragrance licenses already and some that do not. With the organization and diverse portfolio we have, we can still accommodate new brands either from Paris or New York.
On inventory, the buildup will depend on when we phase and launch. Overall, we're feeling good about the progress we've been making on inventory and feel confident we should be in a much better position at year-end than last year. Not all our launches will happen on January 1 next year; some will happen in the back half of the year, so we should see improvements continuing into year-end.
We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Michel Atwood for closing comments.
All right. Thank you, Rob. Thank you all for joining us today. Jean and I really want to recognize our teams, our partners, our brands and all of our stakeholders whose dedication, trust and agility continue to drive efficiency and support our success as we navigate our uncertain environment together. I would also like to mention that I'll be participating in the Canaccord Annual Growth Conference in Boston on August 11 and 12, next week. If you'd like to participate, please reach out to your sales representative at Canaccord for information. If you have any additional questions, please contact Devin Sullivan or Conor Rodriguez from The Equity Group, our Investor Relations representatives. Thank you, and have a great day.
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.