Safilo posted an encouraging 6.9 percent sales increase to €250.9 million in the first quarter of 2018, beating market expectations by nearly €12 million, and its profitability improved. At constant currency rates, sales were up by 15.4 percent and the increase reached 16.9 percent when excluding the Gucci business.
The growth benefited from a weak comparative base and the launch of the Moschino, Love Moschino and Rag & Bone licenses. In the first quarter of 2017, sales had been affected by shipping problems at the Padua distribution center stemming from difficulties in the start-up phase of a new information system.
From this quarter, the group is dropping its reference to its so-called “going-forward brands” but will nevertheless continue providing a sales metric for Europe that excludes the Gucci business, which it is losing.
In Europe, the group's sales rose by 25.5 percent to €123.5 million, with currency-neutral revenues up by 26.8 percent. Excluding the Gucci business, sales were up by 31.1 percent at constant currency rates. The group noted that it recorded significant growth in a majority of the markets in the region, but admitted that it was facing a weak start to the sun season. The overall underlying performance in Europe was “flattish,” admitted Safilo's chief financial officer, Gerd Graehsler, during a conference call. He added that Safilo suffered a “very soft” performance in April due to persisting weakness in the sun business. Sunglasses represent over 60 percent of Safilo's sales in the region.
In North America, sales were down by 17.2 percent to €94.8 million, with the wholesale business declining by 17.9 percent to €83.0 million. The top line was hit by the dollar's depreciation against the euro and a “weak and changing business environment in department stores.” In local currencies, sales were up in the region by 4.7 percent in the quarter and up by 5.5 percent at the wholesale level.
When adjusted for the Gucci business, North American wholesale revenues only dipped by 4.1 percent. Last year, sales in North America were not affected by the shipment disruption at the Padua distribution center, in contrast with Europe and emerging markets, thanks to the company's reliance on its U.S. distribution center in Colorado.
The group said that it is now offering more fashion and contemporary models in U.S. department stores, in line with an emerging trend in the channel. On the bright side, Safilo said it experienced a “resilient performance” in the independent U.S. optical retail channel and an overall positive trend in Canada.
Revenues at Solstice, the U.S. sunglass retailer owned by Safilo, amounted to the equivalent of €11.8 million in the quarter, up by 1.4 percent at constant currency rates, and its same-store sales grew by 2.5 percent. The group continued to trim the Solstice store network, which fell to 86 stores at the end of March from 105 a year earlier. The bulk of it, comprising 16 units, was closed during the first quarter of 2018. The group disposed of loss-making stores but the chain has yet to post positive Ebitda. Toward the middle of this year, Safilo will analyze the impact of Solstice's turnaround strategy launched over a year ago. In April, Safilo performance in North America was similar to the trend registered in the first quarter.
In Asia-Pacific, revenues increased by 29.3 percent to €14.3 million, and they grew by 44.3 percent in local currencies. Safilo said the improvement was “significant” for most of its brands, key markets and channels.
In the rest of the world, sales surged by 72.1 percent to €18.2 million. At constant currency rates, the rise reached 95.2 percent, driven by Brazil, Mexico, India and Saudi Arabia as well as countries that the group recently entered through local distribution partnerships.
Safilo posted a gross profit of €127.5 million, up by 9.1 percent, and the gross margin widened to 50.8 percent from 49.8 percent in the year-ago quarter. Ebitda was a positive €11.4 million, against a negative €9.5 million a year earlier, representing a positive margin of 4.5 percent compared with a negative rate of 4.1 percent. Adjusted Ebitda increased to a €13.1 million profit from a €6.2 million loss. Adjustments for the first quarter of 2018 exclude a costs of €1.7 million related to the departure of the group's former chief executive, Luisa Delgado, and include a gain of €9.8 million, representing a pro-rata portion of the accounting compensation for the early termination of the Gucci license.
Net debt rose to €166.0 million at the end of March from €131.6 million three months earlier. Traditionally, Safilo absorbs cash in the first half of the year and generates cash in the latter part of the year. The group anticipates that its net debt at the end of 2018 to be in line with the level posted at the end of 2017.
Graehsler noted that Safilo enjoyed a continued reduction in inventories, while boasting the “good quality” of its receivables. He added that the group is actively discussing the refinancing of its €150 million revolving credit facility, which is expiring in July. The CFO said that the talks have been “productive” and “moving forward,” adding that it would be premature to consider a direct involvement of Safilo's main shareholder, Hal, in the refinancing program. Safilo reiterated that Hal is a long-term investor and is “very committed.”
Graehsler declined to issue any guidance for the full financial ear, citing the need to monitor the summer season to fully grasp the situation. An investment broker, Equita, estimates that full-year sales will total €1,044 million, up by an organic 3.4 percent. The overall market consensus is for a top line of €1,040 million and a pre-tax profit of €6 million in 2018. Last year, revenues totaled €1,047 million euros and the pre-tax loss reached €222.2 million, hit by a one-off impairment charge.
The company's newly appointed chief executive, Angelo Trocchia, assured financial analysts that Safilo will soon present a new business plan shedding light on the group's strategic direction. He noted that the priorities are to support the development of its sales with a “huge, huge focus” on customer service and significant attention to costs and efficiency.