Mark Lee, chief executive of Gucci, told an Italian newspaper that his company is in talks to renegotiate an eyewear licensing agreement with Safilo Group, but sees no reason to end it. He described the relationship with Safilo as solid, claiming that the Gucci brand is No. 1 in the world in the eyewear category.
The license expires in 2010 and represents between 15 and 20 percent of Safilo's annual sales, according to analysts' estimates. Referring to the interview, carried in the MF daily, an investment broker, Santander Private Banking, said it is keeping a BUY recommendation for Safilo, with a target price of €3.0, much higher than the current price of about €1.83 per share.
Like the Gucci license, Safilo's deal for Christian Dior expires in 2010. Dior is part of the LVMH group, which is consolidating its relations with Marchon. On the other hand, the Gucci Group has begun to work together with Luxottica through its deal with Stella McCartney. Safilo insists that it wants to keep both licenses, but some analysts are concerned that the group may be led to offer more competitive terms to retain them, something that could reduce its profitability.
Safilo's net profit fell by 36.7 percent in the first quarter of this year to €13.2 million, affected by the dollar's weakness against the euro. The company also faced a tough comparison, because the first quarter of 2007 was its strongest last year, when sales rose by 13.0 percent in euros and by 16.8 percent at constant rates.
In the latest quarter, ended March 31, sales dropped by 4.5 percent to €326.0 million. At constant currency rates, they would have risen by 0.9 percent. Safilo generates about 45 percent of its revenues in dollars.
Adverse currency movements knocked 5.4 percentage points off sales growth, while harder comparatives and a drop in retail sales on a comparable store basis trimmed growth by 2.0 points. Conversely, the acquisition of 77 stores in Mexico and Australia boosted sales growth by 2.9 percentage points.
By region, sales in the Americas rose by 2.4 percent, but jumped 14.9 percent on a homogeneous currency basis, underpinned by sales of prescription frames to third parties and the contribution of the Mexican retailer Sunglass Island, bought earlier this year. Asian sales were down by 3.0 percent, but up 4.5 percent at constant currency rates, as a strong performance in China and Korea offset a weak Japanese market. In Europe, sales dropped 3.2 percent.
The wholesale business, which represents 92 percent of revenues compared with 95 percent a year earlier, booked a 7.5 percent fall in sales to €301.4 million euros. At constant exchange rates, the decline was 2.5 percent. The business suffered from sluggish or weak trends in Spain, the U.K. and Japan and different delivery timings in some Asian countries. Wholesale was also negatively affected by the Easter holidays falling in March, which slowed down the division's activity.
Nevertheless, the wholesale order backlog rose by the mid-single digits in all regions. Safilo said the backlog gives it some visibility for the second quarter but the market's outlook remains uncertain, prompting it to keep inventory levels low, which stopped it from optimizing production efficiency.
Retail sales rose by 56.9 percent to €24.6 million euros, boosted by the acquisition of 45 stores in Mexico and 32 in Australia, as well as 36 Solstice stores openings in the USA and the remodeling of some Loop Vision stores in Spain. At constant rates, sales were up by 71.8 percent. Retail represented 8 percent of total sales against 5 percent in the first three months of 2007. The shift is part of the group's efforts to increase its share to 9-10 percent of sales this year and to at least 20 percent in 2012.
However, comparable store sales fell by 2 percent in the quarter, with sales going down by 1 percent in the Americas, declining by 3 percent in Europe and rising 1 percent in the rest of the world. The company added that in North America comparable store sales fell by 5.0 percent in the quarter, while its Mexican stores enjoyed double-digit growth.
Claudio Gottardi, the company's chief executive, said the trend in comparable store sales improved in April compared with the first quarter and that the group can achieve its target of flat comparable store sales for the full year. He emphasized that sunglasses represent 80 percent of the retail business and that the second and third quarters are the company's strongest in that segment, while the first one is the weakest.
Safilo's gross margin fell by 0.7 percentage points to 59.2 percent of sales. Among the factors that negatively affected the group's profitability were the slowdown in production, adverse foreign exchange and a reduction in its inventory of ?slow-moving? items. Conversely, the change in the channel mix and the first effects of its ?top priorities? efficiency program boosted gross profitability.
Another positive factor was the absence of no-margin products from the price mix. Last year, following the loss of the Polo Ralph Lauren license to Luxottica, Safilo had sold its inventory of Polo Ralph Lauren frames at cost.
Operating profit before amortization and depreciation (EBITDA) was down by 20.2 percent to €46.7 million, with the margin falling by 2.8 percentage points to 14.3 percent. Higher selling, general and administration costs accounted for 1.5 points in the margin's decline. Safilo indicated that it is acting to reduce G&A and marketing expenses but the result in the outlay cut will only be seen in the second half of the year. The company ruled out any job cuts.
The wholesale operations contributed €46.6 million to EBITDA, but the margin fell by 2.3 percentage points to 15.5 percent. The retail division provided €0.1 million to group EBITDA, with a margin shrinking by 3.5 percentage points to 0.2 percent. Group operating profit before interest and tax (EBIT) was down by 24.6 percent to €36.9 million.
Overall, Safilo's results were below the forecasts of financial analysts, who were expecting sales of about €329 million , EBITDA of nearly €50 million, EBIT of around €40 million and net profits of €16 million. Safilo nevertheless confirmed its guidance that sales should increase by 4 percent to 5 percent in 2008 and that the EBITDA margin on sales should rise to 15.0 percent from 14.7 percent in 2007. Net profits are also forecast to increase by 4.5-5.0 percent this year.
The company will benefit from easier comparative figures as the year unfolds. In the second quarter of last year sales rose by 7.6 percent year-on-year at actual exchange rates, fell 0.9 percent in the third quarter and increased again by 2.9 percent in the last quarter.
Gottardi added that the underlying trend of the group's high-end brands is satisfactory and that the performance of its home brands such as Carrera is very positive. With eyewear sales declining in many markets, the group's brands are holding or gaining market share, he said.
The company appointed Massimiliano Tabacchi as executive vice chairman. He is the son of Vittorio Tabacchi, who is confirmed as chairman. Gottardi is confirmed as chief executive. Safilo has also opened a prestigeous new showroom at viaq Montenapoleone 29 in Milan.