Safilo warned that it could suffer a moderate decline in sales in the third quarter, despite the rebound experienced in July and the contribution of its new acquisitions Privé Revaux and Blenders, that propped up sales in the first half. The company is also negotiating with creditor banks a “significant” government-backed loan that it expects will help it weather a possible worsening of the macroeconomic environment.
In the second quarter of 2020, Safilo registered a 54.0 percent decrease in sales to €114.5 million as a consequence of coronavirus-related lockdowns and travel restrictions. At constant currency rates, the top line fell by 53.7 percent, but when excluding the contribution of the acquisitions, the decline reaches 60 percent. In April and May, the drop in sales amounted to 75 percent, but in June the decline had narrowed to 35 percent, when excluding the contribution of acquisitions.
Thanks to a mid-single digit growth rate posted in January and February, Safilo limited the drop in first-half sales at 32.3 percent or €335.6 million. On a currency-neutral basis, the contraction reached 32.7 percent with the acquisitions and 37 percent without their contribution.
In the second quarter, revenues in Europe declined by 52.8 percent at constant exchange rates. When excluding the agreement Safilo has with the French fashion house Kering for the production of Gucci eyewear, European sales were down by 55.9 percent. From the beginning of June, with most markets reopened, traffic and conversion rates started to improve in the region and Safilo’s sales to independent optician stores turned slightly positive driven by Italy, France and, to a lesser extent, Spain. Consumers focused on the company’s second and third tier contemporary and mass ”cool” products rather than on luxury brands. Meanwhile, small and medium-sized towns outperformed large cities, outlets and shopping malls, which were more affected by the lack of foreign tourists. In Northern Europe, Germany recorded the strongest improvement in June, driven by a double-digit growth rate in sales through pure online players.
In North America, revenues fell by 46.1 percent at constant exchange rates in the second quarter, but the wholesale business on its own posted about a 65 percent drop. Privé Revaux and Blenders more than doubled their own sales year-on-year and contributed €15.7 million to Safilo’s sales. Safilo only completed the purchase of Blenders on June 1, while Privé Revaux was bought on Feb. 10. Smith Optics’ online sales in the U.S. surged by some 40 percent in the quarter, limiting the overall sales decline of the brand to 9 percent at constant currency rates. In June, thanks to the reopening of brick-and-mortar sports stores, Smith’s aggregate sales rose by a double-digit growth rate compared with the same month a year earlier.
In Asia-Pacific, sales dropped by 65.5 percent on a currency-neutral basis due to a lack of business in the travel retail channel, which represents about 40 percent of Safilo’s business in the region. Business conditions were difficult in Hong Kong, South Korea, Japan and South East Asia.
On the bright side, Mainland China confirmed the recovery initiated in April, closing the second quarter slightly higher year-on-year and as the company’s best performing market worldwide with June sales up by a high-single digit rate.
In the rest of the world, sales contracted by 74.3 percent in local currencies due to the persistence of coronavirus outbreaks in key markets such as Brazil, Mexico and India.
The company’s overall online sales, at constant currency rates and excluding the acquisitions, rose by 38 percent in the second quarter and by 31 percent in the first half driven by the North American e-commerce business of the house brand Smith and sales to e-tailers. With the inclusion of Privé Revaux, which achieves about 20 percent of its sales online, and Blenders, which sells practically entirely through a proprietary direct-to-consumer e-commerce platform, Safilo’s e-commerce business doubled by the end of June, representing 11 percent of group sales compared with 4 percent a year earlier.
Global sales of the company’s core proprietary brands, Carrera, Polaroid and Smith, fell by 53 percent at similar exchange rates, but Carrera and Polaroid were among the drivers of Safilo’s sales rebound in Italy and France.
In the second quarter, Safilo’s gross profit margin narrowed to 34.2 percent from 54.7 percent a year earlier, after being impacted by €7 million in costs for higher accruals for obsolescence, product return, order cancellations and some fixed asset write-offs. On an adjusted basis, the Ebitda margin was a negative 29.8 percent in the second quarter compared with a positive 8.5 percent a year earlier. Safilo did not provide a quarterly bottom line, but in the first half the adjusted net loss was €63.7 million against a €8.5 million profit.
Safilo believes that it can return to a positive Ebitda in the third quarter if the sales trend is “supportive” as cost cutting will not be sufficient. The company achieved €28 million in savings during the first half thanks to structural and contingency measures. It noted that €9 million in structural savings will continue in the third quarter while the remaining €19 million in savings are temporary. They include government job retention schemes that may be scaled down in the future. Safilo noted that September it the most important month in the third quarter in terms of sales because it marks the beginning of shipments of the autumn/winter collection.
Safilo is also negotiating a review of minimum guaranteed royalties and marketing commitments with its licensors. Agreements have been reached with some brands, but fashion houses have held out to see the outcome of the first half. The company now expects to conclude talks with them in the coming weeks and to see the benefits of the review from the third quarter.
In the first half, Safilo posted a negative free cash flow of €109.2 million compared with a cash generation of €10.4 million a year earlier. When adjusted to the expenses for the acquisitions, the free cash flow was a positive €2.5 million.
At the end of June, Safilo’s debt had bloated to €188.5 million from €74.8 million at the end of December. Excluding the €111.7 million spent for the acquisitions and the IFRS 16 accounting rule, net debt slipped to €27.0 million from €27.8 million during the period.
In March, Safilo had fully drawn its €150 million term and revolving credit facility and as a result had a cash position of €110.9 million at the end of June. Nevertheless, it decided to take advantage of government measures to support the economy and is in talks with banks to obtain an additional loan that will be guaranteed by the Italian export credit agency Sace. Safilo declined to indicate the size of the new loan but said that it would be “significant” and protect it in the case the macroeconomic environment changes. The credit facility will include a new set of covenants and the cancellation of a test based on the debt at the end of June.