The change at the helm of Safilo (see Eyewear Intelligence Vol. 19 n. 2+3) has prompted a clean-up of the group's balance sheet, pushing its bottom line further into the red. The company booked a non-cash goodwill impairment charge of €192.0 million on its 2017 accounts as well as one-off costs of €15.3 million related to the reorganization of its Ormoz plant in Slovenia, restructuring initiatives and legal disputes.

As a result, the group reported yesterday a net loss for the full year of €251.6 million, deeper than a loss of 142.1 million a year earlier. On an adjusted basis, the net loss narrowed to €47.1 million, which compares with the adjusted profit of €15.4 million reported for 2016. Financial analysts were expecting an adjusted net loss of only €33.0 million while operating profits were actually higher than anticipated. In mid afternoon trade , the stock was down by 3.37 percent at €4.45 after actually rising in opening trade.

Financial analysts noted that the impairment charge compares with a current market capitalization of less than €300 million and that the group's equity shrank to €533.2 million at the end of 2017 from €872.8 million a year earlier.

As previously reported, Safilo's sales fell by 16.4 percent to €1,047 million in 2017. At constant currency rates, they dropped by 15.5 percent, with sales of going-forward brands slipping by 3.9 percent (see Eyewear Intelligence Vol. 19 n.1). The company pointed out that 13.3 percentage points of the currency-neutral sales decline stemmed from the transformation of the Gucci license into a supply agreement. A further 3.2 percentage points derived from difficulties encountered in the first part of the year in the implementation of a new information technology system at Safilo's distribution center in Padua, which affected reorders for the spring/summer collections and then the order intake for the autumn/winter collections.

The gross margin narrowed to 49.6 percent in 2017 from 57.1 percent a year earlier due to the change in the Gucci agreement, a drop in production volumes and a negative sales mix. In the fourth quarter, the margin reached 44.9 percent, but the decline was less severe than in the full year, falling by 3.40 percentage points.

Adjusted Ebitda declined by 53.7 percent to €41.1 million for the year, with the margin narrowing to 3.9 percent from 7.1 percent. Financial analysts had forecast a lower margin of 3.5 percent. Adjusted Ebitda included a €13 million contribution from the group's efficiency measures and a €43 million boost from compensation received for the early termination of the Gucci licensing agreement. Under the deal reached with Gucci's parent company, Kering, Safilo will receive €90 million in compensation in three instalments of €30 million each. The first instalment was paid in January 2015, the second in December 2016 and the last one is due next September. But for accounting purposes, Safilo booked a first compensation of €8 million in 2016 and €43 million in 2017. The final €39 million will be accounted for this year.

Safilo Group Consolidated Income Statement

Million Euros, Year ended Dec. 31

 

2017

2016

%
Change

Europe

469.3

537.6

-12.7

North America

422.3

509.5

-17.1

Asia Pacific

64.3

114.7

-43.9

Rest of the World

91.0

91.2

-0.2

NET SALES

1,047.0

1,252.9

-16.4

Cost of Sales

527.4

537.3

-1.8

Selling and Marketing

415.5

512.8

-19.0

General and Administrative

153.4

167.8

-8.6

Other Income (Expense)

33.1

(1.3)

-

Financial Charges, net

14.0

6.4

118.8

Pre-Tax Loss

222.1

122.6

81.2

Tax

29.4

19.5

50.8

NET LOSS

251.6

142.1

77.1

Earnings (Losses) / Share - Diluted

(4.014)

(2.267)

77.1

After amortization and depreciation, adjusted Ebit was a negative €0.8 million, down from a positive €43.5 million in 2016, resulting in a negative margin of 0.1 percent against a positive margin of 3.5 percent. The market consensus prior to the release of Safilo's results was for a more negative margin of 1.5 percent.

The group's cash flow from operating activities dived to a negative level of €31.1 million from a positive €89.1 million, although capital expenditures were reduced to €39.0 million from €44.3 million. Investments were made to upgrade the product supply chain and logistics network and to roll out the group's IT system, EyeWay. Safilo's management expects the cash generation to be “flattish” or slightly positive this year. It also forecasts a “solid level” of investments but the amount will nevertheless be lower than last year.

Net debt surged to €131.6 million at the end of 2017 from 48.4 million a year earlier, lifting the leverage to 2.0 times adjusted Ebitda from 0.5 times for the previous year.

Safilo forecasts that “normal operating conditions will be progressively restored” in the more developed markets, while emerging markets should continue outperforming. It anticipates that the company's so-called “going forward brand portfolio,” consisting of house brands like Polaroid Eyewear, will return to growth this year, after falling by 3.9 percent at constant currency rates in 2017, and thus offset the loss of the Céline license.

The license ended on Dec. 31, 2017. It has been taken up by Thelios, the new joint venture between Marcolin and LVMH, which owns the brand. In 2016, Céline represented slightly more than 3 percent of Safilo's global sales, largely achieved in Europe and North America. The share is estimated to have risen closer to 4 percent in 2017.

During a conference call, Safilo's chief financial officer, Gerd Graehsler, said that the opening two months of this year “are confirming expectations.” He noted that the group will benefit from an easier comparable basis, in the first quarter in all markets, except North America, due to the delivery problems faced by the group in the first three months of 2017. The North American market was not affected by the shortcomings at the Padua distribution center.

He added that there were signs of “good underlying improvement” in some of the most difficult markets, especially France and Spain. The group expects Spanish sales to benefit from the launch of the new Love Moschino license.

Graehsler said that the order intake has “started well,” with the group delivering at “normal levels.” Safilo reiterated that the delivery issues have been overcome since mid-2017.

The group also expects to post an improvement in the gross margin and the adjusted Ebitda margin thanks a better price mix, further efficiencies and cost savings. Safilo anticipates €15 million in additional cost savings in 2018, thus achieving a year early its target of €25-30 million in cumulative savings earmarked in its business plan to 2020.

The CFO expressed confidence that Safilo will meet market expectations of 1,060-1,070 millio euros in sales and Ebitda of about €60 million in 2018 but warned that the strengthening of the euro against the dollar will be a headwind.

Safilo is due to assess toward the middle of this year whether to keep or sell its Solstice chain of retail stores in the U.S. At the end of December, the U.S. chain had 102 stores against 116 a year earlier. Its revenues totaled €65.3 million last year, down by 11.3 percent at constant exchange rates. However, Solstice posted a 2.7 percent rise in currency-neutral revenues in the fourth quarter and the trend continued in the first months of 2018. The group will continue to close some of the chain's non-profitable stores.

Safilo put a lot of emphasis on the fact that it sees 2018 as a new start under the management of a new chief executive, Angelo Trocchia, and that the focus will be on the successful execution of its commercial strategy. Its plans for this year include the launch of the e-commerce platforms of two house brands, Polaroid and Carrera. The company also wants to obtain faster growth in optical frames by leveraging the Safilo brand name and consolidate the growth of its Smith brand. The company is also launching new licensed collections under the Moschino, Love Moschino and Rag & Bone brand names.

Trocchia, who comes from Unilever, is due to start with his new functions at Safilo on April 1, taking over from Luisa Delgado, who officially retired from Safilo on Feb. 28 (see our previous issue from Feb. 27). Eugenio Razelli, a former CEO of Magneti Marelli who became chairman of the group last year, is handling the interim.