Safilo reported third-quarter results that beat market expectations but observers remained wary about the group's outlook over the next couple of years as it manages the exit of the Gucci and Céline licences. However, the Italian group had the satisfaction a few days later to announce the renewal of its crucial license for Christian Dior eyewear (see the adjoining article).

Safilo's sales rose by 1.1 percent to €288.0 million in the third quarter ended Sept. 30, nearly €10 million more than the level that financial analysts had guessed. At constant currency rates, the top line went up by 1.7 percent. Revenue growth was driven by a 3 percent currency-neutral increase for the group's so-called going-forward brands, which exclude brands that have been stopped or will be discontinued. The sales increase amounted to 4.3 percent excluding Safilo's retail division.

In the third quarter, the company's going-forward brands raised their currency-neutral sales by 9.5 percent in Europe, with broad-based growth ranging from high-end luxury brands such as Dior to Safilo's so-called “mass cool” brands, for instance Polaroid Eyewear. The group pointed out that Polaroid is “growing well” in Italy, Germany, Portugal and Russia.

Safilo's largest market in Europe is France, where the company enjoyed double-digit growth for ongoing brands. The group's performance in its second-biggest market in the region, Italy, was satisfactory considering a subdued business environment, according to Safilo. Sales were “very strong” in the U.K., the management indicated.

The revenues generated by the going-forward brands dropped by 2.2 percent in North America, hit by a slowdown in the independent opticians channel, both for prescription frames and sunglasses, and a negative trend for the company's Solstice chain of sunglass stores.

Wholesale revenues were down by 0.6 percent in the region, but Smith, a house brand which is Safilo's main label in North America, posted a “solid” performance, especially in Canada and in sports products, confirming its leadership in goggles and helmets, according to the group. Safilo also expressed satisfaction about Kate Spade, which is its largest American eyewear license.

In Asia-Pacific, sales of Safilo's continuing brands were down by 2.5 percent in the third quarter, but they improved greatly from the previous three months thanks to progress in the Australian market. After a thorough overhaul in the region, the group now believes to have built-up a management team capable of developing its activities in Greater China, and more broadly in the Asia-Pacific region. Nevertheless, the business environment remains “difficult and volatile” in the region, the management noted.

In the rest of the world, ongoing brands saw revenues go up by 11.5 percent driven by India and the Middle East. Latin America progressed positively, thanks to sales increases in Mexico and Brazil, where the group launched its new licensed Havaianas collection.

Turning to the group's outgoing brands, sales of Gucci eyewear were positive thanks to a recovery from production issues suffered earlier in the year and to a first delivery of eyewear to Gucci's parent company, Kering. The delivery represented revenues of less than €1 million, and was the first under a new supply agreement that replaces a previous licensing deal (see Eyewear Intelligence Vol. 17 n° 4+5).

Safilo Consolidated Net Sales

(Million Euros, Third Quarter ended Sept. 30)

 

2016

2015

%
Change

By Distribution Channel

Wholesale

268.9

262.7

2.4

Retail

19.0

22.1

-14.0

By Geographical Area

Europe

107.6

101.7

5.8

North America

126.5

133.1

-5.0

Asia Pacific

31.3

29.9

4.7

Rest of the World

22.6

20.1

12.4

TOTAL

288.0

284.8

1.1

Safilo delivered a further two small batches of Gucci eyewear to Kering in October and November and the first meaningful delivery was scheduled to take place in December. Until the end of this year, Safilo has the right to sell Gucci's January and April collections, which were developed when the company still was the licensee.

In 2017, Safilo will lose the revenues generated by the Gucci license, which represented an estimated 15-17 percent of the group's total sales in 2016. However, about a third of those lost sales will be offset by revenues generated through the supply agreement.

The group's overall wholesale revenues rose in the third quarter by 2.4 percent to €268.9 million, while its retail sales slumped by 13.8 percent to 19.0 million. In local currencies, wholesale revenues were up by 3.0 percent and retail were off by 13.4 percent.

The Solstice chain had 116 locations at the end of September, down from 118 locations at the end of June, and its sales declined by 9.1 percent on a same-store basis during the period. The management stated that Solstice is now considered a core business, thus putting aside the risk of the business being sold in the immediate future. The company is fully committed to turning it around. It will examine all the aspects of the retail business, with a special emphasis on traffic generation. The review will involve some store closures, but it should have a meaningful impact on results from next year.

In wholesale, the rollout of the Smile vendor management inventory system continued at a speedy pace, with about 600 doors equipped since August to reach 5,300 at the end of October.

By region, the group's total rose by 5.9 percent to €107.6 million in Europe during the quarter. They dropped by 5.0 percent to €126.5 million in North America, but they rose by 4.5 percent to €31.3 million in Asia-Pacific and surged by 12.3 percent to €22.6 million in the rest of the world. On a currency-neutral basis, revenues rose by 7.8 percent in Europe, fell by 4.7 percent in North America, grew by 2.8 percent in Asia-Pacific and advanced by 12.0 percent in the rest of the world.

The group's gross margin was flat at 58.8 percent in the third quarter, but the wholesale margin rose to 58.8 percent from 58.6 percent a year earlier. The adjusted Ebitda margin widened by 1.40 percentage points for the group to 6.6 percent thanks to cost savings and the improved wholesale business, whose Ebitda margin expanded to 7.3 percent from 5.2 percent.

For the first nine months of the year, Safilo's revenues were down by 2.2 percent in euros to €939.1 million, with a 1.0 percent decline at constant exchange rates. The adjusted Ebitda margin increased to 8.2 percent from 8.1 percent, although the reported Ebitda margin slipped to 7.6 percent from 7.8 percent.

Net debt stood at €11.5 million at the end of September, up by 8.5 percent from the end of June and up by 14.8 percent year-on-year.

For 2017, Safilo anticipates a mid-single-digit decline in revenues due to the loss of the Gucci license, which will be partially offset by growth in going-forward brands. Ebitda will also be affected by Gucci's exit, but Safilo expects to stabilize its Ebitda margin thanks to a cash settlement that Kering agreed to pay for the early cancellation of the license. Kering agreed to pay €90 million in compensation to Safilo, of which €30 million was paid in 2015. A second instalment is scheduled in December 2016 and a third in September 2018.

After the release of the results, financial analysts expected Safilo to post 2016 sales of €1,245 million and an Ebitda margin of 7.1 percent. For 2017, their consensus was for revenues of €1,192 million and a margin of 7.2 percent.