Safilo's revenues slumped by 21.3 percent to €237.3 million in the first quarter due to delayed shipments from its logistics center in Padua, whose upgrade is taking longer than expected, and the end of the company's important licensing agreement with Gucci. At constant currency rates, revenues were off by 22.8 percent.
On the bright side, the decline was less than investors' expectations of a 25.1 percent drop to €226.0 million, and there were actually increases on a comparable basis. Sales of “going forward brands,” which exclude Gucci and other brands that Safilo has stopped servicing, only fell by 14.9 percent at constant exchange rates. When limited to the wholesale segment, the decline narrowed to 14.5 percent. The rate of the decline was at the bottom end the 15-20 percent range predicted by the management in March. The company claims that, without the delivery delays, its revenues from ongoing brands would have risen by a low single-digit rate, in line with its budget.
The group said that it has solved the problems linked to the migration to a program provided by SAP for the automation of the Padua warehouse and that it has gradually increased shipments from the site. At end of March, the group had over one million items in the warehouse with matching orders. It delivered 110,00 items during the month of April, which represented a 50 percent increase on February and an 8 percent rise compared with March. Around mid-May, the throughput at the facility was up by about 15 percent as compared to April, reaching higher levels than at the same time last year.
Safilo said it managed to process older orders during the months of March and April, rejuvenating its order backlog and reassuring clients that it will be able to sustain the order flow. Up to March the order intake was normal but softened slightly in April. The group claims that it did not suffer a significant increase in order cancellations. The management indicated that the months of May and June would be “crucial” for the company to erase the order backlog while fulfilling newly acquired orders. Safilo said it deployed “additional efforts” to “further widen the funnel” of deliveries. The firm declined to give a specific forecast on the stock clearance noting that its aim is to “recover as much as possible from the delay suffered in the first quarter.”
During the first quarter, the company's production deal with Kering, known as the Strategic Product Partnership Agreement (SPPA), generated revenues representing about one third of those stemming from Safilo's previous license agreements with the French fashion group, in line with its previous guidance.
By region, overall group sales were down at constant currency rates by 21.6 percent in Europe, by 59.5 percent in Asia and by 44.3 percent in the rest of the world. In North America, they dropped by 13.2 percent, with decreases of 11.8 percent at wholesale and 22.6 percent at retail. The lower rate of decline in the North American market was due to the fact that it was only partially affected by the technical issues in Padua.
When narrowed down to the company's going-forward brands, North American sales were down by only 0.7 percent on a currency-neutral basis, and they went up by 2.6 percent at the wholesale level. The group's troubled U.S. retail network, Solstice, suffered a 17.4 percent decline in comparable store sales, compounded by store closures. Same-store sales were dampened by a different timing in the important Easter break, which moved to April from March in 2016. Solstice booked a “very significant improvement” in comparable sales in April and Safilo anticipates the trend to continue thanks to its restructuring plan. During the first quarter, Safilo continued trimming the store network by closing 11 stores. At the end of March, Solstice had 105 locations against 116 at the end of 2016 and 121 a year before.
Safilo is analyzing the performance of the Solstice stores one by one. The management noted that the weakening of consumer trends in the U.S. is making it easier to renegotiate the stores' leases but it cannot rule out further store closures.
Safilo stressed that its house brands performed well in the North American market, with Smith rising by over 30 percent, driven by ski goggles and helmets thanks to a strong snow season. The brand's eyewear gained market share in the sports channel, according to Safilo. The firm added that it now ready to roll out the Smith brand in the North American optical channel.
Smith continues to be the group's trailblazer in e-commerce, achieving 30 percent of its sales online via its own site and third parties'. On the brand's e-commerce platform, eyewear represents about 45 percent of total sales.
Among its licensed brands, Safilo pointed out Kate Spade, Hugo Boss, Max Mara and Fendi as the best performers in their market segments.
Outside North America, the revenues from the company's going-forward brands were down by 23.9 percent in Europe, by 32.7 percent in Asia-Pacific and by 34.7 percent in the rest of the world.
On a reported basis, Safilo's overall sales were down by 10.0 percent to €114.5 million in North America, by 22.2 percent to €101.2 million in Europe, by 58.6 percent to €11.1 million in Asia-Pacific and by 40.0 percent to €10.6 million in the rest of the world. Global wholesale revenues declined by 21.4 percent to €223.9 million, while retail sales dropped by 19.9 percent to €13.4 million.
During the first quarter, the gross margin retreated by 11.9 percentage points to 49.2 percent. More than half of this strong margin dilution, or over six percentage points, stemmed from the loss of the high-margin Gucci license. Adverse currency exchange rates and the group's retail woes shaved off a further 0.6 percentage points. The rest of the margin dilution stemmed from the lower volumes, a negative product mix and obsolescence costs.
The company posted an operating loss of €9.5 million before amortization (Ebitda) against a €19.8 million profit a year earlier. The results included restructuring charges of €3.3 million, mainly related to the reorganization of the Ormoz plant in Slovenia, and a compensation of €10.8 million received from Kering for the early termination of the Gucci license, which matched the loss of profitability from the Gucci license during the quarter.
The group said that it is on track with its cost saving program and studying further measures to streamline the business. The adjusted Ebitda, which excludes the restructuring costs but includes the compensation for the Gucci license, showed a loss of €6.2 million, compared with a €25.2 million profit, with the margin declining by 11.0 percentage points to a negative level of 2.6 percent from a positive level of 8.4 percent a year earlier. The margin dilution stemmed from the weight of the fixed costs in the face of sharply lower revenues, compounded by currency effects and the difficulties encountered at retail.
Safilo's net debt stood at €111.3 million at the end of March, up from €48.4 million three months earlier, due to seasonal factors and the poor performance in the first quarter. Safilo does not expect a “meaningful improvement” in net debt in the second quarter but it stressed that it traditionally cashes-in higher receivables in the second part of the year.
No information was given about Safilo's net results for the period.