The Safilo Group improved its profitability and continued its sales growth in the third quarter, beating market expectations by about €3 million, despite another case of problems with logistics. A few years after a delay in European deliveries due to the slow ramp-up of a new distribution center near its head office in Padua, the difficult start-up of a new warehouse in Denver, Colorado, negatively affected the group's North American sales.
In the quarter, Safilo's global revenues from continuing operations rose by 2.2 percent to €212.8 million, thanks partly to the appreciation of the U.S. dollar. At constant current rates, the top line rose by just 0.1 percent.
Aside from the logistic snag in the U.S., the revenues were negatively impacted from a decrease in the supply of Gucci eyewear to Kering Eyewear, as agreed under a “strategic product partnership agreement” (SPPA) that started in January 2015. Under the deal, Kering had the right to halve the guaranteed volumes from 2019. Safilo noted that Kering's purchases only started to decline from the second part of the year and weren't halved, indicating that the partnership is progressing “well as testified by the renewal” of the SPPA for three years until December 2023, as reported in our last issue.
Excluding the SPPA, Safilo's wholesale revenues actually rose by 5.2 percent at current exchange rates. At constant currency rates, the increase stood at 2.8 percent, driven double-digit rises in Europe, the company's main distribution channels in Asia and core markets in Latin America.
According to the management, the quarter also registered “good growth” for two of Safilo's house brands, Carrera and Polaroid, but not for Smith Optics, due to American logistic problems.
In Europe, the group's quarterly sales went up by 4.2 percent to €95.5 million, with currency-neutral revenues up by 3.9 percent. Excluding the supply contract with Kering, which is accounted for in the European business unit, wholesale revenues grew by 12 percent in the quarter at constant currency rates, with the house brands Carrera, Polaroid and Smith up by about 11 percent in the region.
In Asia-Pacific, sales were up by 13.7 percent to €17.5 million, rising by 11.0 percent in local currencies, driven by Boss, Hugo, Dior, Max Mara and Carrera. Sales in China were supported by higher sales to major retail chains.
Safilo's total North American sales fell by 3.9 percent to €79.9 million, but in local currencies the decline reached 7.7 percent. The group did not release figures by brand, but did stress that the logistics problems affected mainly Smith. With adjustments for delays and actual orders taken into account, Smith would have grown by a high single-digit rate in the quarter and Safilo's overall North American sales would have been “flattish,” the management stressed.
Safilo previously had three logistics hubs in the U.S.: Clearfield in Utah, Parsippany in New Jersey, and Denver. It has decided to consolidate all American warehousing operations in Denver as part of a global policy of trimming the number of distribution centers. The Denver site, which is still in a ramp-up phase, has faced various issues including the upgrading of the IT platform. Safilo pointed out that the situation is improving and the warehouse is expected to be operating normally by the end of the year.
The shortcomings at Denver also affected Smith's e-commerce activity, which is handled from the warehouse. Safilo indicated that the management of online sales is improving and that orders are being shipped faster. Smith has kept a manufacturing facility in Clearfield.
The management also pointed out that it is facing a “more volatile and uncertain business environment” in the U.S. which is impacting the independent opticians' channel.
In the rest of the world, Safilo's sales increased by 10.8 percent to €19.8 million, with constant-currency revenues up by 7.4 percent, thanks to double-digit growth in Brazil and Mexico and improved trends in the Middle East. The top performers were Carrera, Tommy Hilfiger, Polaroid, Boss and Hugo.
In the third quarter, the group's gross margin improved by 0.7 percentage points year-on-year to 51.2 percent thanks to favorable foreign exchange rates and the decline in sales of Gucci products to Kering Eyewear, which generates low margins. In the first nine months, the improvement was greater, with the gross margin widening by 1.7 percentage points to 52.9 percent.
Before the impact of the newly introduced IFRS 16 accounting standards, the Ebitda margin fell by two full percentage points to 4.6 percent in the quarter and to 6.2 percent from 6.5 percent in the nine months. In 2018, however, the quarterly margin had benefitted from a €9.8 million accounting gain due to compensation paid by Kering for the early termination of the Gucci license. In the first nine months of 2018, the accounting gain reached €29.3 million.
Safilo achieved €4 million in overhead cost savings in the third quarter of this year and €13 million for the first nine months. The savings were partly reinvested into the group's house brands: Carrera, Polaroid and Smith.
Safilo's net debt fell to €24.3 million at the end of September from €32.9 million at the end of 2018, partly thanks €17.7 million in proceeds booked in early January as the tail end of a capital increase carried out in 2018. In the first nine months, the cash burn reached €10 million due to an inventory buildup in the third quarter ahead of the launch of new collections next year and due to the start-up of the expanded Denver facility.
In the new year, Safilo will be launching new lines under its new Missoni, Levi's and David Beckham licenses. Missoni, which Safilo says is well positioned to attract female clients and millennials, will be targeting key accounts and independent opticians, resulting in “quite expensive” distribution costs, the management warned in commenting on its latest results.
The eyewear group relies on the “very strong” Levi's brand to address millennials. It sees a “big opportunity” for it in Asia and Europe, and to a lesser degree in the U.S. The David Beckham brand will be positioned in the “upper premium” part of Safilo's portfolio and will enjoy a “very selective” distribution. The group sees strong interest for the brand in Hong Kong, the U.K. and the Middle East.
In the first nine months of this year, revenues from continuing operations rose by 5.2 percent to €708.7 million, with currency-neutral revenues up by 2.7 percent, in line with the management's expectations, and costs savings were higher than anticipated.
Equita, the Italian investment broker, improved its full-year forecasts for Safilo, predicting 2019 sales of €946 million and Ebitda of €50 million.