Safilo enjoyed a significant increase in profitability in the second quarter of the year but the company remains cautious about the rest of 2010 as consumer demand stays weak in Europe and the rebound seen in the U.S. could be flagging.
Safilo beat market expectations by posting a 7.3 percent increase in sales to €294.3 million in the quarter, and by more than doubling its gross operating profit (Ebitda) to €30.2 million from €13.9 million. In the second quarter of 2009, Ebitda was impacted by a €7.4 million one-time restructuring charge. The Ebitda margin surged to 10.2 percent of revenues from 5.1 percent. Excluding last year's non-recurrent cost, the margin improvement was 2.4 percentage points.
Financial analysts had forecast a turnover of €289 million and an Ebitda of €23.5 million for the second quarter.
Revenue growth was underpinned by Asian sales, up by 31.4 percent to €48.1 million, led by the Chinese market. Sales in the Americas rose by 15.3 percent to €122.5 million, European revenues were down by 3.8 percent to €120.5 million, and turnover generated in the rest of the world dropped by 48.4 percent to €3.2 million.
At constant currency rates and business size (like-for-like), sales were up by 21.5 percent in Asia, increased by 6.1 percent in the Americas and were unchanged in Europe. Overall, sales were up by 5.3 percent on a like-for-like basis.
The trends supporting sales growth were restocking by the group's clients and a recovery in demand in the U.S. for sunglasses, including top-end models. Nevertheless, Safilo's chief executive, Roberto Vedovotto, said that ?the resilience of the U.S. consumer can't be taken for granted? and that he remains very cautious about future sales because he believes that the recovery is already slowing down. He noted that demand remains weak in Europe, where consumers tend to focus on mid-tier models, while sales in emerging markets remain too limited to significantly impact the group's results.
The best-performing markets in Europe were France, Spain, Portugal and the Nordic countries, while Germany and the U.K. were weak. The weakest market on the continent was Italy.
He added that the evolution of the group's price/mix continues to be negative but that the trend seems to have reached a trough and the decline is waning. The manager was unable to forecast when the price mix could return to being positive because market conditions continue to be difficult.
Demand for sunglasses in the U.S. boost comparable store sales by 20.1 percent at the group's premium retail chain Solstice. Nevertheless, overall retail sales decreased by 12.4 percent to €25.4 million following the downsizing of the division through the sale of stores in Australia and Spain at the end of 2009.
Revenues from sunglass sales were up by 14.5 percent to €181.5 million. They dropped by 4.4 percent to €100.7 million for prescription frames and surged by 16.3 percent to €12.1 million for sport products and other goods. Sales of prescription frames were hit by weak demand especially in the U.S., while sunglasses benefited from the recovery in demand and a weak comparison basis. Looking ahead, the prescription business is showing some moderate signs of improvement, according to Vedovotto.
The group bolstered overall wholesale sales by 9.7 percent to €268.9 million in the second quarter thanks to volume growth, an improved price mix, double-digit sales growth for the Carrera brand outside Italy and a better performance of Safilo's main licensed brands.
Carrera has been benefiting from an increase in investments in advertising and promotion especially in Europe and in the U.S. Safilo expects its overall marketing expenses to reach about 10 percent of group sales in 2010.
Whoelsale Ebitda jumped by 28.4 percent to €27.3 million from €21.0 million for the wholesale business in the quarter, increasing the margin to 10.2 percent of revenues from 8.6 percent a year earlier. Profitability was lifted by the increase in volumes, which reduced the impact of fixed costs per single unit produced, as well as tighter control on general and administration expenses.
The improvement of gross operating profits was even more dramatic for retail, with Ebitda increasing to €2.9 million from €0.2 million and the margin soaring to 11.4 percent from 0.8 percent thanks to the disposal of loss-making stores.
The appreciation of the dollar against the euro did not significantly impact operating profits because Safilo achieves 45 to 50 percent of its revenues and a similar percentage of its costs with the U.S. currency.
Nevertheless, the reinforcement of the greenback took its toll on the bottom line because it increased the value of the group's liabilities. So notwithstanding an improvement in operating profits, Safilo booked a net loss of €5.0 million, albeit down from the €137.7 million loss seen a year earlier, which on top of the €7.4 million restructuring charge included €120.7 million in write-downs.
Meanwhile, the group's free cash flow nearly doubled to €48.8 million in the second quarter from €26.1 million a year earlier. At the end of June, the group's net debt shrank to €269 million from €315 million as of March 31. The company also reduced its capital expenditure during the quarter to €4.5 million from €6.8 million a year earlier.
Regarding talks to renew licenses expiring this year, including the key Dior brand, which is estimated to represent up to 15 percent of Safilo's sales, Vedovotto said they are ?progressing well? and expressed confidence in reaching agreements for their extension.
Along with Dior, the brand license agreements ending this year are Bottega Veneta, 55DSL, Kate Spade and Yves Saint Laurent. Safilo is currently discussing the renewal of all licenses except Kate Spade.
The 55DSL brand is owned by the Italian fashion group Diesel, with whom Safilo failed to reach an agreement to renew the license deal for the Diesel brand, which represents 2 percent of its sales. The Diesel deal expires at the end of 2010 and Safilo said that it has limited inventories for the collection.