Safilo provided one of its strongest quarters in term of organic growth, and the company's new chief executive, Luisa Delgado, made a good impression when she presented her strategic views to the financial analysts who are following the company. Speaking in immaculate English, Delgado confirmed the main elements that have enabled the group to accomplish its return from the brink and announced new initiatives to push the company forward, including the establishment of a new information technology (IT) platform for the group.
Delgado gave credit to her predecessor, Roberto Vedovotto, for initiating some other important new strategies. Vedovotto was going to remain on Safilo's board of directors in a non-executive function, but the company announced that he was leaving to pursue new professional opportunities. Safilo added that Vedovotto did not own any more shares in the company.
For the third quarter ended Sept. 30, Safilo posted its first net profit for the period since 2007. The company beat market expectations by posting a drop of only 2.3 percent in total revenues to €234.4 million for the quarter as compared to the same period a year ago, in spite of adverse currency fluctuations and the loss of the Giorgio Armani, Emporio Armani and A/X Armani Exchange licenses after the end of 2012. Last year, the Armani brands had generated sales of some €30 million in the third quarter and €100 million for the first nine months of the year.
Safilo Consolidated Income Statement
(Million Euros, Third Quarter ended Sept 30)
Cost of Sales
Selling & Marketing
G. & A.
Other (Expense) Income
NET PROFIT (LOSS)
At constant currency rates, third-quarter sales were up by 2.9 percent. Furthermore, on an organic basis, the group's wholesale business rose by 17.0 percent in the quarter, lifting the rate of increase for the first nine months of the year to 10.0 percent and more than compensating for the loss of the Armani brands in terms of local currencies. The company believes that it can achieve organic growth of around 10.0 percent in the fourth quarter as well.
Safilo's third-quarter revenues were lifted by higher volumes and an improved sales mix. The group said that all main high-end licensed brands performed well, led by Gucci, Dior, Hugo Boss, Marc Jacobs, Celine and Jimmy Choo. Second-tier brands also enjoyed strong growth led by Tommy Hilfiger and Boss Orange. Among the company's house brands, Carrera lifted its sales thanks to prescription frames and key accounts while Polaroid continued to expand abroad, especially in the U.S., Brazil, Mexico and in the travel retail channel worldwide. Polaroid also increased its presence in Europe.
The group's European sales were up by 6.3 percent to €96.8 million, or by 7.7 percent at stable currency rates. Organically, Europe enjoyed the strongest growth at more than 25 percent. This compares with organic growth rates of almost ten percent in the Americas, almost 15 percent in Asia and about 18 percent in emerging markets.
Excluding independent opticians in Italy, all European markets showed a positive development, led by the U.K., France and Germany. Safilo also saw “encouraging” signs of recovery in Spain and Portugal. The group does see signs of improvement among Italian independent retailers and its sales to key domestic accounts were on the rise. The management noted that the Italian eyewear market is more skewed toward sunglasses than the traditionally more resilient optical market.
In the Americas, Safilo's sales fell by 5.2 percent to €109.7 million, but rose by 1.7 percent on a currency-neutral basis. Organic sales were up by 7.0 percent in North America, but U.S. demand remains uncertain and Safilo has a prudent approach regarding the market. During the quarter, sales trends were positive with independent U.S. opticians, while sunglasses sales improved in U.S. department stores and comparable store sales went up by 3.5 percent for the group's own Solstice stores. In Brazil and Mexico, organic sales were up by high double-digit rates but the growth pace was below last year's due to a general slowdown of the two countries' economies.
Asian sales were down by 11.7 percent to €34.1 million, falling by 3.5 percent at constant currency rates. Adjusted sales in the region were underpinned by higher sales in Japan, China and the travel retail channel, while Hong Kong and South Korea underperformed. Sales in the rest of the world were down by 24.3 percent to €2.8 million, and they were off by 13.5 percent at constant foreign exchange rates.
Across the group's brands, sales of prescription frames dropped by 1.8 percent to €97.4 million, but rose by 3.8 percent at constant currency rates. Sales of sunglasses fell by 3.2 percent to €121.9 million, but increased by 1.8 percent on a currency-neutral basis. Sales of snow helmets and other sports products were up by 2.3 percent to €22.2 million, and they went up by 6.4 percent in local currencies.
Wholesale revenues were down by 2.5 percent to €222.5 million, but they showed an increase of 2.6 percent at constant currency rates. Retail sales rose by 0.3 percent to €20.9 million, and they went up by 6.1 percent on a currency-neutral basis.
The group's gross margin advanced to 59.5 percent from 57.7 percent in the year-ago period. The operating margin before amortization and depreciation (Ebitda) widened to 6.7 percent from 6.1 percent, benefitting from an improved sales mix and efficiencies in product and stock management. While Ebitda margin improved at the wholesale level to 6.1 percent, up by 0.6 percentage points from a year earlier, the retail margin narrowed by 0.3 percentage points to 13.0 percent.
Safilo ended the third quarter with a net profit of €1.7 million, compared with a loss of €0.6 million in the year-ago period, and generated free cash flow of €22.5 million, compared with only €9.2 million a year earlier. The net debt stood at €180.7 million at the end of the September, representing 1.5 times Safilo's adjusted 12-month Ebitda, a new record low in the company's history.
Commenting on the results, Delgado, who spent 21 years at Procter & Gamble and was head of human resources at SAP, the German business software company, before joining Safilo, confirmed the four pillars of the company's relaunch plan set by Vedovotto in 2011: a strong, well balanced licensed brand portfolio, a well developed proprietary brand portfolio, expansion of the group's international presence and optimization of its manufacturing base.
Delgado stressed that the potential of the company's house brands has not been fully exploited yet. She said it is reasonable to assume that the turnover generated by Safilo's proprietary brands could double but added that it is premature to give specific numbers. “The question is how fast and what it takes” to achieve the brands' potential, she added.
Geographical expansion means bolstering the group's presence in the U.S. and Western Europe as well as consolidating and penetrating developing markets, she said. On the other hand, the group is on the “right track” to achieve improved manufacturing efficiencies and higher capacity utilization, according to Delgado.
She pointed out that the production of the first Fendi collections started in the fourth quarter and the frames will reach the stores at the beginning of 2014. The group plans to produce other frames in-house such as the high-end collections of the Safilo brand.
Safilo's capacity utilization ratio was around 65 percent before the loss of the Armani licenses and is now around 50-55 percent. The group expects to rapidly return to previous levels, and even beat them, thanks to Fendi and other growth initiatives.
On top of these guidelines, Safilo has to refine its commercial strategy and differentiate the ways in which it works with specific trade partners, as well as develop its e-commerce capabilities, according to Delgado. “Safilo has further potential in terms of commercial strategy,” she said.
GrandVision, which is owned by Safilo's main shareholder, Hal, will benefit, like other large key accounts, from joint business planning with the eyewear manufacturer, she noted. Safilo's revenues with GrandVision were flat overall in the third quarter, but they went up by a mid-single digit rate in the first nine months. Its business with GrandVision would register “very strong” growth also in the quarter on an organic basis, as the Armani licenses were an important component of its relationship with the chain.
The group plans to overhaul its IT platform over the next three to five years. Delgado said that the group has to modernize its “fragmented” IT system and transform itself from an “international set of companies into an integrated modern global company.” The investment will boost the group's efficiency in processing data and help decision-making. She pledged that the company would engage in “systemic operational interventions” and “continuous commercial heavy lifting” in the coming quarters and years, indicating that Safilo is still in a turnaround phase.
Delgado said that the latest quarterly results were satisfactory and that the group is on track to meet its full-year objectives of offsetting the loss of the Armani brands, improving gross and operating margins and generating cash.
Financial analysts predict the group will book full-year sales of about €1.140 billion, down from €1.175 billion in 2012. This year's net profit is seen at around €30 million, against €25.9 million in 2012. For 2014, Safilo is expected to post sales of around €1.24 billion and a net profit of about €55 million. At the end of next year, net debt is seen falling to €155 million, roughly in line with Ebitda. When asked if the group could seek to buy another house brand, Delgado said that “everything is open.”