The management of Safilo believes that newly refinanced company can at least double its sales with Hal Holding, its new controlling shareholder and largest client, representing about 3.5 percent of its total turnover in 2009. The management of the Italian eyewear company also indicated that it could lose the Diesel and 55 DSL licenses because its current financial situation does not allow it to negotiate license agreements at just any cost.
These comments were made in connection with the release of the group's 2009 results, which show a massive net loss of €351.4 million for the year, compared with a €23.3 million loss in 2008, as the company posted €317.7 million in extraordinary provisions and writedowns. Excluding exceptional items in 2009 and 2008, the bottom lines still showed a net loss of €33.7 million loss against a net profit of €14.6 million. After the announcement of these results, Fitch Ratings improved its long-term default rating on Safilo from CC to B-, but said the outlook was still negative due to the uncertain market recovery.
Safilo's net debt stood at €588 million at the end of 2009, down slightly from €570 million at the end of 2008. This was essentially due to proceeds of €13.7 million from the sale on Dec. 29 of Safilo's Loop Vision stores in Spain and Just Spectacles shops in Australia to Hal.
To help straighten up the financial situation, Safilo raised another €270 million in February 2010 through two capital increases and the sale of rights to repay €185 million on its senior loan. As a result, the net debt has been subsequently trimmed down to €318 million.
The new debt level remains high, representing 4.8 times Safilo's adjusted Ebitda (operating profit before amortization and depreciation) for 2009, but is a far shot from the level of 8.9 times Ebitda reached at the end of 2009. Under its initial covenants, Safilo should have kept its debt below 3.5 times Ebitda but the limit was waived by creditor banks in 2008.
In 2009, the company posted Ebitda of €58.2 million, down by 53.9 percent from 2008. Adjusted to eliminate restructuring costs, Ebitda was down by 48.0 percent at €65.7 million.
The recent capital increases turned the Hal group into the company's largest shareholder, with a stake of 37.3 percent, and relegated the Tabacchi family, which previously owned nearly 30 percent of the company, to a secondary role (see adjacent article).
During a conference call, Safilo's chief executive, Roberto Vedovotto, who was confirmed in his post by the new board of directors, emphasized that after a difficult 2009 the group needed to be recapitalized and had to find a long-term partner to support its development. He added that Safilo received «plenty of support» from its creditor banks, which agreed to reschedule the debt as well as grant lower interest rates and a two-year holiday from loan covenants.
The group's former chairman, Vittorio Tabacchi, was more critical. In a newspaper interview, he claimed that the banks failed to support the company when it was hit by the economic crisis. If this had been the case, he believes he could have continued running the company, which has sound fundamentals. When asked if Safilo could have joined forces with its peers Luxottica or Marcolin, Tabacchi said there had been contacts with Luxottica, in which he was not involved, and that among many options, Hal's investment was considered the best solution for the company's future.
In 2009, Safilo suffered an 11.9 percent drop in sales to €1.011 billion. At constant currency rates, the decline widens to 13.1 percent. Apart from the drop in demand stemming from the economic recession, turnover, especially in the second part of the year, was hit by a decline in prices as Safilo introduced cheaper models. Vedovotto said that the price decrease in the second half of the year was on average a «low single digit» percentage figure.
The price reduction and adverse foreign exchange rates were the main factors behind the company's underperformance in the fourth quarter, when sales fell by 16.2 percent to €236.5 million, an 11.5 percent drop at constant rates. Wholesale revenues dropped by 15.8 percent in the quarter to €212.4 million and retail sales were down by 19.2 percent to €24.1 million. Comparable store sales fell by 5.7 percent.
Sunglass sales dropped by 19.1 percent to €113.8 million in the quarter, and prescription frame revenues slipped by 18.0 percent to €91.8 million, whereas the turnover stemming from sport products rose by 5.1 percent to €30.9 million. Revenues were down by 19.6 percent to €106.8 million in Europe, and Mediterranean markets were the worst performer along with some Nordic countries.
American sales slipped by 11.5 percent to €87.7 million, Asian sales fell by 9.4 percent to €32.4 million and sales in the rest of the world slumped by 33.4 percent to €9.6 million. But at constant currency rates, American sales were only down by just 1.7 percent thanks to resilience in the prescription segment and an upturn at department stores, while Asian revenues were up by 5.9 percent thanks to an improved business environment, except for Japan.
Safilo expects sales for the first quarter of 2010 to be roughly in line with the previous year as Asian markets, excluding Japan, continue to perform well and U.S. results improve. The group's upmarket U.S. retail chain, Solstice, booked positive comparable sales in the opening months of the year. Meanwhile, Europe is still showing signs of weakness affecting the order intake for high-end products.
After raising sales by more than 20 percent in 2009, the house brand Carrera continued to book strong results in Europe in the first quarter. Safilo is rolling out a new «Shine On» advertising campaign for Carrera in Europe and the U.S., supported by a new website called www.carreraworld.com.
Focus on house brands will be one of Safilo's priorities for 2010 along with seizing opportunities in the fashion segment, as demonstrated with the licensing agreement reached with the brand Tommy Hilfiger. The group will also continue to concentrate on its client management inventory service, Project Smile. The service has been implemented in 600 stores. Capital expenditure is forecast to reach €35-40 million, compared with €22.3 million in 2009, and will go mainly toward production facilities.
The group still has to renegotiate seven licenses expiring this year, including the heavyweight Christian Dior. According to the broker Centrobanca, Dior, Gucci and Armani represent 44 percent of Safilo's revenues. It is estimated that Dior on its own totals 10-15 percent of the group's turnover.
Vedovotto said that talks with Dior are progressing «reasonably well» but more time is needed to reach an agreement. He was also upbeat about the likelihood of renewing license agreements with Yves Saint Laurent, Bottega Veneta, Juicy Couture and Kate Spade. But he expressed doubt about renewing the deal with the Diesel and 55DSL. The two licenses are estimated to represent about 3 percent of Safilo's turnover.
The manager added that he would only renew license accords if they are profitable for Safilo and is only ready to make concessions to brands part of a larger group. YSL and Bottega Veneta are both owned by Gucci Group.
In 2009, due to the drop in demand, Safilo was very close, and some times reached, guaranteed minimum royalty levels set for some licensed brands.
The group is also expected to reinforce ties with Hal's network of 4,000 stores and aims in the future to at least double sales with its new shareholders but without jeopardizing its relationship with other clients. Vedovotto explained that in Germany the group's largest client is the retailer Fielmann and the second largest is a subsidiary of Hal, Apollo Optik. He stressed that Safilo wants to continue serving «in the best possible way» both companies and even increase business with Fielmann.
Safilo still has to complete the sale to Hal of its 60 percent stake in the Mexican retailer Sunglass Island, bought for €15 million in 2008. Vedovotto explained that a deal has to be reached with the Mexican partner to enable Hal to buy a 100 percent stake in the retailer. He added that the group is committed to keeping Solstice and the sports brand Smith Optics despite several expressions of interest for the two businesses.
The group expects 2010 results to benefit from lower production costs thanks to the start-up last year of a new Chinese factory, the sale of its loss-making retail businesses and lower financial costs.
The company described the 2009 Ebitda of €58.2 million, representing a margin on sales of 5.8 percent, as a record low. Financial analysts believe that this year sales could remain flat at around €1,015 billion but Ebitda could rise to about €75 million, boosting the margin to above 7 percent.