Safilo wants to raise its annual turnover by about 40 percent to a level of between €1.6 billion and €1.7 billion by 2020, compared with the revenues of €1,179 million posted in 2014, driven by a doubling in the sales of its proprietary brands. The increase in the top line represents an annual average growth rate of 6 percent but the ride will be uneven, with a likely drop in 2017, the first year after the expiry of its licensing contract for the Gucci brand.
The business plan presented to financial analysts on Monday calls for faster growth than the overall market. Safilo estimates that the global market for eyewear will grow at the wholesale stage by between 3 and 4 percent a year, rising from €16.0 billion in 2014 to €20.0 billion in 2020. Sales of frames are seen growing at an annual average rate of 3 percent in value and sunglasses by 5 percent. Sales in emerging markets are seen going up by 6-7 percent a year over the period, in contrast with annual increases of 2-3 percent in developed markets.
By region, sales of eyewear are expected to rise annually by 2-3 percent in Europe, by about 3 percent in North America, by 5-6 percent in Latin America, by 8-10 percent in China, by 4-5 percent in Asia-Pacific and by 4-5 percent in the Middle East and Africa. Branded eyeglasses are expected to outperform the overall market trends, with their sales rising by 8 percent a year in emerging markets and by 3 percent a year in developed countries, according to Safilo.
A year and a half after her appointment as Safilo's chief executive, Luisa Delgado discussed her business plan with 100 managers of the group at a special event near Venice and presented it to financial analysts on Monday, pointing out that it does not include the impact of potential new takeovers. The company does not exclude the acquisition of new licenses, brands, businesses or industrial capacity to boost the company's development.
Safilo predicts that 3.5 percentage points of its expected annual growth will come from natural market growth, with its own sales rising by 2.5 percent a year in developed markets and by 5.0 percent in emerging markets. One additional percentage point should stem from increased market shares, generated mainly by a 15 percent increase in the number of stores served and a 10 percent increase in sales per account. This will be partially offset by the loss of brands owned by the French Kering group - namely Gucci, Alexander McQueen, Bottega Veneta and Saint Laurent. The group estimates that the newly acquired Givenchy brand and the strengthening of the group's presence in Latin America, Asia, the Middle East and Africa will contribute 1.5 percentage points to its annual revenue growth. Safilo is scheduled to open a design studio in Asia toward the beginning of 2016.
On a comparable basis, the group's sales are projected to grow by 10 percent a year during the 2015-2020 period, with proprietary brands going up by 15 percent a year and licensed labels up by 8 percent. Safilo expects a high single-digit organic sales increase this year and next. The loss of the Gucci license could lead to a mid-single-digit decline in 2017, in spite of sales increases of 15 percent for its house brands and 10 percent for other licensed brands. The overall growth rate is expected to return to a high single-digit rate during the 2018-20 period.
However, the group's operating margin before amortization (Ebitda) should remain flat in 2017, compared with 2016, thanks to the four-year strategic product partnership agreement concluded with Kering as part of the divorce proceedings. In the first two years of the contract, Gucci will guarantee volumes close to the brand's current production levels.
Safilo plans to double the revenues generated by proprietary brands between now and 2020, raising their share of the total turnover to 40 percent from 25 percent in 2014. Polaroid will lead the pack with an expected tripling of its sales. Carrera and Smith Optics are seen doubling their revenues. Carrera is due to benefit from a repositioning of the brand and a doubling of marketing expenses for its new “Out there” advertising campaign. The Smith brand will be lifted by efforts to transform it into a global eyewear brand, with a focus on sports with a high level of participation. The Safilo brand, which specializes in optical frames, is also expected to post double-digit annual growth.
In an interview last month during Ispo, the world's largest sporting goods fair, Delgado noted that Smith had been largely related to the northern part of the U.S., without being integrated into the group's global strategy, before she joined Safilo's board of directors in August 2012. She told us there that she sees Smith moving into new sports such as cycling, hiking and fishing, while retaining its roots in snow sports. She wants to develop the Smith brand into the broader lifestyle segment with functional sunwear for opticians and the department stores, moving it “from the mountains to the streets,” keeping it at a higher level than the more mass-market oriented Polaroid brand. More aesthetic models will be added for the female customers (more in Sporting Goods Intelligence Europe).
Among the brands licensed by the group, its flagship label, Christian Dior, is anticipated to experience annual growth in the mid- to high single digits in 2015-2020 despite an ongoing selective distribution policy. Over the past five years, the group has halved the number of points of sales offering Dior while doubling the volumes sold by the remaining doors. Over the next five years, Safilo intends to pursue cherry-picking accounts while striving for double-digit growth at each store.
Safilo is lumping a group of licensed brands comprising Marc by Marc Jacobs, Max Mara, Boss, Tommy Hilfiger and Kate Spade into a “future core brands” segment. Their eyewear lines have enjoyed significant growth over the past years and built solid positions in Europe and/or North America. This cluster of brands is expected to enjoy aggregate high single-digit growth over the coming years, thanks especially to their expansion in Asia and Latin America, the development of new men's styles and prescription frames. Their sales in the licensors' own stores are supposed to treble.
Among the three licenses held with the Hugo Boss group -- Boss, Boss Orange and Hugo -- Safilo will focus on Boss. Max Mara is supposed to increase its presence in all regions. Kate Spade should move from being a successful U.S. brand into the position of a global label, focusing on Asia-Pacific and Latin America. Tommy Hilfiger will consolidate its presence in Europe and expand its reach in China and Latin America. For Marc by Marc Jacobs, Safilo wants to enlarge its distribution network, mainly in Asia.
Safilo has identified Fendi, Givenchy, Jimmy Choo and Céline as “rockets” - with a potential to generate annual double-digit growth rates in 2015-2020. Fendi, a former Marchon license that Safilo has held since last year, will be supported by the rollout of a selective distribution policy. Jimmy Choo will be underpinned by a wider distribution footprint in all countries and a larger product assortment, while Céline will see a planned tripling of its distribution network.
In Europe and North America, Safilo hopes to gain market share by growing at an annual rate in the mid-single digits. In Europe, it will focus on Germany, the U.K. and France, where its business is relatively underdeveloped. In emerging markets, it expects revenues to rise at annual rate of between a high single digit and a double digit. It plans to diversify its product offering in those markets, where it often relies heavily on only a few brands. In Latin America, where Safilo sees room to expand distribution, its house brands already represent 40 percent of group sales.
Safilo estimates that, if it can add one brand in every door it now serves globally, it could boost its annual sales by €150 million by 2020.
The company wants to see its operating earnings before amortization, or Ebitda, growing at twice the pace of the top line, doubling between 2014 and 2020, and eventually reaching an Ebitda margin of 14 percent, compared with the adjusted margin of 10 percent reached in 2014. The improvement is set to come from higher gross margins, royalties and productivity, which will be partly offset by increased marketing and selling costs. The company plans to invest €1.1 billion in marketing over six years, with 45 percent of this amount earmarked for its house brands.
The group expects “strong cash flow generation” over the next six years, with free cash flow totaling €350-400 million in the 2015-2020 period. This would lead the company to becoming debt-free from 2017, barring any major acquisitions. Its net cash position would be equivalent to one year worth of Ebitda by 2020, or about €210-240 million. At the end of 2014, the company's net debt stood at €163.3 million, representing 1.4 times adjusted Ebitda.
Cumulative capital investments of €260-280 million are planned over the six-year period, with the bulk of €150 million destined to re-engineering the group's supply chain and €50 million to overhaul the information technology platform.
Safilo has singled out the structure of its supply chain and its information technology platform as its main shortcomings. One of the chief targets set by the company is the in-sourcing of finished products, 70 percent of which are due to be produced in-house by 2020 against 30 percent in 2014. The management noted that it is currently manufacturing 10 models of Smith glasses in its Chinese plant in Suzhou at lower prices and with shorter development and lead times than if they were outsourced to third parties. Among other measures, Safilo wants 75 percent of products to be made in that plant, against 25 percent in 2014, and to cut the lead time between the design stage and the production by two thirds.
Safilo plans to slash the number of distribution centers from over 20 to between three and six in 2020, limiting the order cycle time to less than four hours. The group is also running 11 different enterprise resource planning systems, resulting in “overlapping solutions combined with technological obsolescence and lack of coverage,” so it is aiming to gradually establish a single global framework, with most of the functions in place by 2018. With these improvements, the company's working capital requirement should grow half as fast as revenues over the next few years.
Safilo plans to implement the 2.0 version of its Smile vendor management inventory system next year. The platform is being rolled out globally and is currently used by 2,500 doors in the Europe, Middle East and Africa region and Latin America. Safilo believes that the system could be extended to nearly 20,000 doors among the 89,000 doors it services in about 130 countries around the world.