Safilo presented last week a new business plan outlining its strategy to recoup lost revenues and reach sales of about €1,000 million in 2024 compared with an expected €960-1,000 million in 2020, despite the loss of important licenses that currently generate about €200 million in annual revenues. The 2020 estimate was trimmed from a previous forecast of €1,000-1,020 million due largely to the loss of Dior.
The adjusted Ebitda margin is seen reaching a rate of around 6 percent next year compared with a previous projection of 8 to 10 percent, but by 2024, the Ebitda margin is anticipated to increase to 9-11 percent, with one percentage point of the increase stemming from the newly introduced IFRS 16 accounting rules.
For the next five years, the adjusted Ebitda margin is not expected to fall below a rate of about 5.5 percent projected for 2019. The group warned that 2021 will be the toughest year in the plan, after which the adjusted Ebitda margin should go up thanks to sales growth and cost savings.
The new business plan has earmarked some €50 million in cumulative restructuring cash costs, with most of the charges due to be borne in the first two years. Safilo is also anticipating additional non-cash impairments on real estate and machinery.
The group is targeting €45 million in costs savings, 80 percent of which are expected in the first two years of the five-year business plan. In 2024, the cost of goods sold is anticipated to drop to 41-42 percent of sales from 45 percent currently, while general and administrative expenses are seen falling to 8-9 percent from 11 percent. But selling expenses are scheduled to rise to 11 percent of revenues from 8-9 percent currently, as Safilo wants to bolster its commercial efforts.
The group will be rebalancing its portfolio between branded licenses and house brands, each of which will be contributing 50 percent to overall revenues, compared with 70 percent for licensed brands and 30 percent for proprietary brands currently. It also plans to reduce its exposure to sunglasses, which generate 63 percent of the top line, down to 55 percent, while the share of revenues from optical frames would rise to 45 percent from 37 percent.
The proportion of revenues generated through the internet is expected to reach 15 percent in 2024 against 3 percent currently. Smith Optics is now the main contributor to Safilo's online sales, representing about two-thirds of the group's online turnover, while the remainder is generated with third-party platforms. The acquisition of Blenders Eyewear (see the related article in this issue) is expected to help Safilo reach this goal.
Safilo's top three house brands – Polaroid Eyewear, Carrera and Smith – are each expected to grow at an average annual rate of 6 percent between 2020 and 2024 compared with a projected annual growth of 1-2 percent for the whole group. With the Gucci supply contract with Kering Eyewear omitted, Safilo's revenues are expected to rise by 4 percent a year on average. It is interesting to note that Safilo is considering the extension of the supply agreement beyond its expiry date of the end of 2023 as part of its new business plan. The agreement has already been renewed for three years (see Eyewear Intelligence Vol. 20 n°13+14 of Nov. 4).
Four new licensing contracts recently signed up by the group – Missoni, Levi's, David Beckham and Under Armour – should add one percentage point to the annual growth of 3 percent that Safilo is projecting for those in its current brand portfolio that are due to stay with the group.
Polaroid will focus on expanding its sales in Russia, Spain, Italy, the U.S., Brazil and the retail travel channel, while seeking to double its exposure to prescription frames to 20 percent of its overall sales by 2024. Carrera will concentrate on the U.S., Italy, France, the Benelux countries, Spain and Mexico, while increasing the share of prescription frames to 55 percent of sales from 45 percent.
Both Polaroid and Carrera will have their own e-commerce platforms, but their online sales will remain marginal to avoid competition with the group's wholesale clients. The internet push will be driven by Smith and Blenders Eyewear. Overall, the group's online revenues are estimated to rise by double-digit rates over the next five years.
Revenues from licensed brands are predicted to rise by a low to mid-single-digit rate on average during the duration of the plan, while the overall optical business is seen growing by a mid-single digit rate.
By geographic area, group sales are projected to increase by a mid-single-digit rate annually in North America, at a low-single-digit pace in Europe and at a high-single-digit rate in emerging markets.
Safilo redefines its investment strategy
Over the five-year plan, Safilo anticipates cumulated capital expenditure (capex) to reach some €120 million, or €20-25 million a year compared with a current annual spend of €30 to 35 million. The reduction will result from Safilo's smaller production base, which has been absorbing 60 percent of its investments.
Over the next five years, about a quarter of capex will be destined to the group's digitalization initiatives. Safilo plans to redesign its business-to-business activity, with the introduction of new portal, the rebuilding of its customer relationship management service “from scratch” and the automation of its sales platform, for which it is in the process of choosing a solutions provider.
The group sees its free cash flow being positive in 2020, fluctuating between negative and breakeven in 2021 and returning to a positive level from 2022, enabling it to become free of net debt in 2024 compared with an estimated leverage of 1.0-1.5 times Ebitda in 2020, with the debt rising because of Blenders' acquisition.
The new business plan was presented by Safilo's chief executive, Angelo Trocchia. He pointed out that the group is “actively” looking for other acquisitions and licenses. He noted that there would be no problem for the company to obtain new financing in the existing business environment and that the ideal acquisition targets have to be “disruptive and fast-growing.”
He ruled out investments in physical stores, except for a few possible store openings for Blenders. He added that the group is “very carefully” evaluating new licenses but additions have to complement its geographical footprint and address specific consumer targets.