In the first quarter of 2019, Safilo posted a surprisingly strong recovery in profitability, indicating that the company is delivering on its pledge to cut costs. On a reported basis, the Ebitda, margin on revenues from continuing operations rose to 7.6 percent from 6.1 percent a year earlier. These other results published by Safilo do not include the loss-making U.S. retail chain of the group, Solstice, which is being sold (see adjoining article).
After the elimination of €1.1 million in one-off restructuring costs, the Ebitda margin was even higher at 8.1 percent against 6.8 percent. Excluding the impact of the IFRS 16 accounting standard introduced this year, the Ebitda margin in the first quarter stood at 6.7 percent. Financial analysts were expecting an adjusted Ebitda margin of 3.8 percent.
The group benefited from an improvement of two full percentage points to 52.7 percent in the gross margin, mainly thanks to higher manufacturing efficiencies, lower product obsolescence costs and various cost savings. The group trimmed overhead costs by €3-4 million in the quarter.
Safilo's Chinese plant in Suzhou continued to insource production from third parties thanks to an enhanced level of competitiveness, leading to higher manufacturing volumes, while the group's Italian manufacturing facilities benefited from the “very good performance” of luxury fashion models, the management said, which led to a higher use of the existing production capacity.
At group level, sales from continuing operations rose by 3.4 percent to €247.3 million, with growth of 0.6 percent at constant currency rates. Excluding the company's production agreement with Kering Eyewear, wholesale revenues grew by 0.8 percent in local currencies.
Safilo does not expect any changes in the terms of the supply deal with Kering, which concerns the Gucci label previously licensed by the group. Its impact was reduced this year and is scheduled to end in December 2020. During a conference call, Safilo's chief executive, Angelo Trocchia, noted, however, that “we live in an environment, these days, where players and competitors are somehow changing their approach, so we will see.”
In general, Safilo registered positive trends in prescription frames and e-commerce. The company singled out Polaroid, Smith, Kate Spade and Dior as key contributors to the revenue growth. The recovery at Dior came after two years of decline and ahead of LVMH's deadline for its decision to end or renew the license agreement for the brand, which expires at the end of 2020. Trocchia disclosed that “a lot of contacts” are underway to seek to extend the license. He added that, overall, Safilo will be “very active” in defending its license portfolio.
The group has also been more aggressive in promoting its core house brands by increasing marketing expenses for this category by about €1.5 million in the quarter, while the rest of the marketing budget remained steady.
In Europe, overall sales rose by a reported 0.8 percent to €124.6 million, while growing by 1.3 percent at constant-currency rates, with wholesale revenues advancing by 1.8 percent. Total European turnover included revenues from the Kering production agreement, which are not accounted for in wholesale. Safilo pointed out that both sun and prescription frames grew in Europe, accounting for 50.4 percent of revenues.
The top line was underpinned by a positive trend in Italy, driven by the fashion luxury segment, in turn led by Dior, as well as the brands Polaroid, Hugo Boss, Tommy Hilfiger, Max Mara and Havaianas. The group also enjoyed an improvement in Northern Europe, especially with key accounts.
In North America, Safilo's sales rose by 7.1 percent to €88.9 million, but dropped by 0.6 percent in local currencies. According to the company, it has succeeded in stabilizing revenues in the region after two years of decline. Nevertheless, the management indicated that Safilo is not yet where it “should be in the U.S.” and needs to improve its performance in the independent optician channel to build up “a positive momentum in the coming quarters” like the one it has achieved in other sectors. It also noted that currency-neutral sales were up by 0.6 percent in the region excluding the Bobbi Brown license, which was not renewed at the end of 2018.
The key performers in North America, which generated 36.0 percent of revenues, were Smith, driven by a 13 percent gain in its online business-to-consumer (B2C) activity, as well as Kate Spade and Tommy Hilfiger.
In Asia-Pacific, sales rose by 23.8 percent to €17.7 million, or by 17.4 percent in local currencies, lifted by a strong travel retail business in South Korea and Greater China. The main drivers were brands like Max Mara and Tommy Hilfiger, while Smith grew in Australia.
In the rest of the world, Safilo's sales fell by 11.8 percent to €16.1 million, with constant-currency revenues down by 12.0 percent. Safilo suffered from “subdued” sales in the India, Middle East and Africa (IMEA) business region, while Latin America found support from key chains in Brazil and Mexico. The IMEA region was affected by high inventories. The group said that its turnaround in the region has continued and is expected to generate improvements in the coming quarters.
The company's adjusted Ebitda rose by 2.4 percent to €16.5 million in the quarter as operational efficiencies more than offset the €9.8 million compensation booked in the first quarter of 2018 for the early termination of the Gucci license.
Due to the application of IFRS 16, net debt surged to €105.7 million at the end of March. On an adjusted basis, net debt dropped to €26.4 million from €32.9 million at the end of December, after Safilo received €17.7 million in cash on Jan. 2, corresponding to the remaining proceeds from a capital increase carried out at the end of last year. The brokerage firm Equita was expecting adjusted net debt of €36 million.
The second quarter started out well. Safilo said that April was a “very positive” month, especially for sunglasses, and that it expects a strong summer season for its luxury brands, but warned that its performance in the first half will be influenced by the key months of May and June.
Trocchia also stressed that the eyewear market is becoming more competitive due to the increase in niche and regional brands, especially in Europe and in the U.S. He added that this trend is likely to become more acute.