While analysts believe that Safilo is undervalued at its current share price, they remain wary about the group's outlook. On top of the uncertainty regarding the LVMH licenses, observers have often criticized the company's business model, under which the bulk of its production is outsourced, forcing the company to yield part of its manufacturing margins to suppliers. Advocating the model's flexibility, the management has dismissed claims that it puts pressure on its margins because suppliers are selected for their competitiveness over its own sites. However, sourcing in the Far East requires stringent quality control and longer lead times. Safilo has four production sites in Italy, including the Lenti lens facility, one in Slovenia, one in China and one in the U.S.
Oddly, the loss of Dior and other LVMH brands would actually re-balance Safilo's portfolio, which has been over-exposed to a fistful of licensors. In the past, the loss of leading brands prompted the group to undergo a severe downsizing, such as in the case of Giorgio Armani switching over to Luxottica, or to settle for a low-margin production agreement, like the one it has had recently with Gucci.
Safilo “is working well with LVMH” and “will stay in the running until the last minute” to retain its licenses, insists Angelo Trocchia, Safilo's new chief executive. The company is aware of the risk of losing the licenses and is aiming to be streamlined and “fit” to handle such an outcome, he stressed.
Trocchia is confident that by the end of its business plan through to 2020, Safilo will have reduced costs by 10-20 percent along the value chain from the design to the delivery of glasses.
Safilo has indicated that there are many opportunities to reinforce its portfolio by gaining new licenses with significant and minor fashion and luxury goods brands. The group has also pointed out that it has the skills to help existing brands enhance their positioning in the eyewear market.
Safilo's Italian factories, which bear high costs despite the efforts to reduce them, need to be supported by a large-volume of top-notch and high-margin brands. While the demand for Italian-made eyewear remains strong, especially in China and other parts of Asia, producing in Italy, Trocchia admitted, is a “challenge” because of competition from lower-cost countries.
Safilo currently generates nearly 60 percent of its revenues from second-tier licenses in the so-called premium, contemporary and lifestyle segments of its business, which Trocchia described as “very profitable.” This segment was reinforced under the management of the previous CEO, Luisa Delgado, who also expanded Safilo's reach in emerging markets.