After making profits in the first half of the year, Safilo finished the third quarter with a €4.7 million loss stemming from weaker sales and the impact of foreign exchange adjustments. The top line slipped by 3.2 percent to €230.2 million due to negative exchange rates and the disposal of retail activities in Mexico, which had generated a turnover of €5.3 million in the third quarter of 2010. On a comparable basis, sales were up by 4.1 percent.

Safilo Consolidated Income Statement

(Million Euros, Third Quarter ended Sept 30)

 

2011

2010

%
Change

Prescription Frames

92.8

103.3

-10.2

Sunglasses

111.0

107.3

3.4

Sport

24.4

24.4

0.0

Others

2.0

3.2

-37.5

NET SALES

230.2

237.9

-3.2

Cost of Sales

97.0

101.6

-4.5

Selling & Marketing

92.4

95.5

-3.2

G. & A.

32.9

33.4

-1.5

Other income

0.1

0.3

-66.7

Net Interest

(11.6)

(0.4)

-

Pre-Tax

(3.4)

7.3

-146.6

Tax

(1.4)

(6.5)

-78.5

Minority Interest

-0.1

1.2

-108.3

NET LOSS

4.7

0.4

-

Sales in Europe were down by 4.8 percent to €81.4 million, largely due to poor performance in the southern part of the continent, where sales were off by 4.6 percent on a comparable. In a conference call, the chief executive of the company, Roberto Vedovotto, expressed disappointment about Safilo's performance in Italy. The group is suffering from a weak business environment and a loss of market share. He noted that competitors are being very aggressive regarding commercial terms and that the group has decided to bite the bullet rather than follow suit.

He said that Greece, which has introduced strict austerity measures to obtain aid from the European Union and the International Monetary Fund to avoid defaulting on its debt, is a “real disaster.” The group's business in the country is estimated to be about a third of what it was at its highest. Portugal and Spain are also showing signs of weakness. In the rest of Europe, Germany, the Nordic countries and France and showing positive signs, but Safilo is “struggling” in the U.K., he added.

Revenues in the Americas slipped by 5.4 percent to €110.6 million, but were up by 7.4 percent on a constant currency basis. The U.S. market proved to be resilient thanks to growing sales in sunglasses and prescription frames and an increase of about 7.0 percent in comparable sales at the group's Solstice stores. One of the company's house brands, Carrera, has reached the size of some of Safilo's top luxury brands in the U.S. market. Latin America, especially Brazil and Mexico, also supported growth in wholesale revenues in the region.

Asian sales grew by 10.7 percent to €35.2 million. On a constant currency basis, sales were up by 17.9 percent, driven by the travel retail business in China, Hong Kong, South Korea and India. The group said that it is growing very fast in China and could have registered stronger growth if it had not decided to set credit limits because there is the risk, especially with small retailers, of an unsustainable default rate on payments. Vedovotto expects sales in Asia to remain strong because there are no signs of a slowdown in the area, except in Japan, where market conditions are tough after the natural disasters that hit the country in March, stifling an economic recovery that had appeared in the opening months of the year. Sales in the rest of the world dropped by 17.8 percent to €3.0 million, with comparable sales down by 12.0 percent.

Globally, Safilo's sales of sunglasses increased by 3.5 percent in the third quarter to €111.0 million, prescription frames fell by 9.9 percent to €92.8 million, sporting goods grew by 0.2 percent to €24.4 million and other products plummeted by 37.9 percent to €2.0 million.

Wholesale turnover fell by 1.4 percent to €211.6 million, but in terms of local currencies, it went up by 3.4 percent. Retail sales were down by 19.8 percent to €18.6 million, but surged by 13.3 percent at constant currency rates and in terms of continuing operations. At the end of the quarter, the company had 156 stores, two fewer than three months ago as Solstice continues to close down its more poorly performing locations.

The company's gross margin widened to 57.9 percent in the third quarter from 57.3 percent a year earlier driven by higher sales volumes and a more favorable product mix.

The group's operating margin before amortization (Ebitda) rose slightly to 7.6 percent from 7.5 percent, supported by an increase in the retail margin to 14.7 percent from 4.9 percent, while the wholesale margin decreased to 7.0 percent from 7.7 percent. The Ebit margin reached 3.5 percent against 3.2 percent.

Free cash flow during the quarter was a negative €2.3 million and net debt reached €239.4 million at the end of September against €240.3 million three months earlier.

Vedovotto said that the group has completed its top management team with the appointment in September of Nicola Giorgi as global head of Safilo's house brands.