Safilo's revenues increased by 7.5 percent in the 1st quarter to €302.1 million, but they grew by 3 percent in local currencies. Orders were up by 15 percent at the beginning of the period, and they continued to increase through April, but the group was unable to respond to a higher than expected demand for its products, particularly in certain European countries, because of the reorganization of its production apparatus.
Internal production was off by 4.0 percent to 2.4 million pieces, as compared to one year ago. Safilo had to resort more to external sourcing, giving rise to additional charges and delays, especially during the months of January and February. The company plans to boost its production by 12.0 percent to 2.6 million units for the 2nd quarter, but further bottlenecks will be inevitable. With the demand likely to be more subdued during the summer months, Safilo should be able to catch up with it in the course of the 2nd half of the year, where the company will also draw more benefit from the introduction of new lean manufacturing processes.
Safilo's sales in Italy grew by 10.2 percent to €39.9 million during the 1st quarter, but because of these bottlenecks its sales in other European countries fell by 8.4 percent to €94.3 million, although the German and British markets performed very well for the company. Sales in the Americas were up by 19.4 percent in euros to €119.3 million, but in terms of dollars they were up by only slightly more than 7 percent. Sales in the Asia-Pacific region rose by 17.0 percent to €35.8 million, driven by the rapidly growing Chinese business.
Sunglasses again represented the lion's share, growing by 13.4 percent to €177.5 million, while sports eyewear increased by 7.3 percent to €13.2 million. Sales of prescription frames declined instead by 0.7 percent to €107.4 million. House brands generated increases in the high single digits.
Anyhow the consolidation of Safilo's Italian production into three factories allowed the group to reduce its overall manufacturing costs. Coupled with the exchange rate situation, which was responsible for one-third of the gain, the gross margin improved to 61.3 percent from 59.9 percent a year ago. Earnings before amortization and depreciation (EBITDA) rose by 9.1 percent to €52.9 million, growing to 17.5 percent of revenues, and the profit margin before interest and tax (EBIT) increased from 14.1 to 14.6 percent, in spite of higher marketing expenses.
Net income soared, rising by 163 percent to €17.0 million, or 5.6 percent of revenues. The bottom line benefited from lower taxes and from a sharp reduction in financial charges from €19.9 to €13.2 million, thanks largely to the appreciation of the dollar, a major drop in short-term and the repayment of a high-yield bond following the public offering. Net debt increased slightly since the end of last year, rising to €493.7 million as of March 31, but the management hopes to wind up before June 30 the renegotiation of its long-term debt on more favorable conditions.
Safilo's management says it is involved in discussions on several potential new licensing deals in order to make up for the loss next year of its Ralph Lauren business, which generated annual revenues of about €100 million. Sales of the line dropped slightly in the 1st quarter, but it should still contribute some €60 million to this year's revenues before the juicy license goes over to Luxottica. The uncertainty about Safilo's future revenue stream is leading the financial markets to continue to treat its share price with caution.
Safilo is evidently hoping to get extra business through its new Hugo Boss license, which reportedly generated annual sales of about $40 million while it was in Charmant's portfolio. Safilo is now contemplating a new A/X line of eyewear as part of its Armani collection, capitalizing on the fact that the Armani Exchange brand is popular in Asia and the USA, two of Safilo's key markets. Like Marcolin, which lost Dolce & Gabbana out to Luxottica, Safilo will also seek to increase the share of revenues derived from its own five labels ? Safilo, Oxydo, Blue Bay, Carrera and Smith - bringing it up from 20 to 40 percent of the total turnover through additional marketing. It continues to expand its Solstice chain in the USA, with a target of 65-70 stores by the end of this year, and their sales and profits are rising.
Meanwhile Safilo's board of directors has approved a 4-year stock option that will involve an equity increase of up to 3 percent. A total of 28 top managers, including all of Safilo's designers, will be allowed to buy the new shares at a price of at least €4.41, or with a 10 percent discount from the introduction price on the Milan Bourse, if certain levels of EBITDA are reached. These targets are those that were projected in the company's business plan when it went public. The price may change depending on the stock market value of the six months before the options are exercised.
For the moment the family of Vittorio Tabacchi holds 36.80 percent of Safilo's shares. Credit Suisse First Boston still has 9.57 percent of the shares but is expected to cash out at some point. Fidelity is the third-largest shareholder with a stake of 7.55 percent.
The company recently indicated that it was planning to boost its management, but no details could be obtained for the moment on this subject. According to a French press report, Nicola Zotta is leaving after 10 years at the head of Safilo France to run the group's international licensing and marketing business out of its head office. He is being replaced by Marco Biz.