Safilo is cutting costs everywhere to get back to its former levels of profitability and regain the confidence of its creditors after posting a consolidated net loss of €6,350,000 for the 9 months ended last Sept. 30, as compared to the profit of €19,760,000 of the same period of 2002. Among other cutbacks, besides the shutdown of its large manufacturing facilities in Austria, which we discussed in the detail in the previous issue of EyeWear Intelligence, Safilo is producing more in Slovenia and relying more on third-party suppliers in Italy.

It has no plans to outsource more in Asia, in spite of the weakening dollar and the fact that Elegance International, the large Chinese eyewear manufacturer in which it has a 23.05 percent stake, is building a new factory with a larger capacity in Shenzen (more on this firm separately). While the demand for items made in Italy has increased for Safilo, the number of its directly employed factory workers in Italy fell from 5,060 to 4,754 persons in the first 9 months of 2003, even before the decision to close its Austrian plant.

The world's second-largest supplier of eyewear frames and sunglasses, which is deeply indebted following its temporary pullout from the stock exchange, admits that it was in marginal breach of loan covenants with its 3 senior bank lenders, but stresses that this would not have occurred if the impact of its ongoing currency hedging program had been included in the calculations. The banks have granted an unconditional waiver and the management claims that Safilo has no liquidity issues. Cash flow for the first 9 months grew to €45.8 million compared with €32.8 million for the same period last year, while debt grew marginally to €852.8 million.

Anyhow, the combined effect of the broad-based cost reduction program underway and the growth in revenues expected from new licenses should take the group back into the black, company executives say. Sales and margins were off in the 9-month period ended last Sept. 30, mainly due to adverse exchange rates, as the dollar continued its slide against the euro, but the 3rd quarter began to show a certain improvement which, company officials say, continued into the 4th one.

Revenues for the 9 months fell by 2.3 percent year-on-year to €673.9 million, but they were actually up by 7.3 percent in volume to 19 million pairs, with prescription frames up 10.0 percent and sunglasses up 4.5 percent. The gross operating profit (Ebitda) fell during the same period by 29.5 percent, going down from 20.3 to 14.7 percent of turnover, but on a constant currency basis it would have been €7 billion higher.

Operating income declined to €70.9 million from €116.3 million in the first 9 months of last year, partly also because of higher personnel expenses related to the new licenses, with particularly high start-up costs for Giorgio Armani's collections, as well as higher advertising and marketing expenses agreed with the licensors. Advertising and promotion spending grew to €65.3 million.



In the 3rd quarter, however, group revenues rose by 9.6 percent year-on-year, with an increase of 17.6 percent on a constant currency basis. Sales of prescription frames grew by a full 11.7 percent to €112.5 million. Even sunglass sales, whose revenues were off by 8 percent over the 9 month period, regained lost ground with a 5 percent increase in the quarter. France and Germany showed the strongest sales results, growing by 29 and 33 percent, respectively.

Sales in North America, which still represent 44.5 percent of total sales, declined by 12.1 percent in euros during the 9-month period, due in part to the war in Iraq and to bad weather conditions, but they were stable in dollars, and in the 3rd quarter they went up by 2.4 percent in euros. Among the various products, the Burberry and Kate Spade lines showed the strongest performance, followed by Valentino and Yves Saint Laurent. A similar pattern could be observed on the Italian market. In the 9-month period volume sales in the rest of Europe were up 6.9 percent to 5.4 million units, and Spain participated in the growth. The strongest brands were Christian Dior, Oxydo, Polo Ralph Lauren and YSL. With global orders reaching a record of €110 million in October alone and after a successful SILMO, the management is now forecasting an even stronger recovery in the 4th quarter.

Reports indicate that the Polo license, which generates annual sales of $150-200 million, has been extended for another 3 years. While it would not confirm this report, Safilo has officially denied another rumor about a financial stake in a Luxembourg holding company, Angiolucci International, that has apparently acquired Emporio Optical, a company that runs 70 Loop Vision stores in Spain. Angiolucci, a very secretive Sicilian optical retail group, was reported to be making acquisitions in Spain already two years ago, but the information could not be verified.