Safilo released disappointing first-quarter results, with the top line affected by a decline in sales of Gucci eyewear sales and supply problems at the company's Italian plants.

Following a change in financial disclosure rules for public companies in Italy, Safilo released a simplified version of its first-quarter performance that showed a 7.0 percent drop in revenues to €301.6 million. At constant currency rates, sales were down by 6.6 percent

Excluding brands that have been stopped or will be discontinued, for the so-called going-forward brands, revenues grew by 1.0 percent at similar currency rates. Gucci is one of the brands that Safilo will lose. The group previously said that it will have the right to sell the January and April collections until the end of this year and will skip the design of the August collection (see Eyewear Intelligence, Vol. 17 n 4+5).

In a conference call with analysts, the group's chief executive officer, Luisa Delgado, said she was not satisfied with the sales performance of the going-forward brands because production woes prevented the group from fulfilling orders that were up by a mid-single rate. She said that Safilo has not yet seen any order cancellations but this could happen during the second quarter. “We have conservatively assumed some losses. But we are seeing orders coming in more than ever” especially for top-end models and brands, she added.

Sales of going-forward brands went up by 3.6 percent in Europe, led by France and Italy, where the growth reached double-digit rates, and Eastern Europe. In North America they increased by 0.8 percent, lifted by a 3.1 percent rise in wholesale revenues. In Asia, sales were down by 14.6 percent due to a weak business environment in Greater China and Japan. Safilo enjoyed positive trends in Australia and Southeast Asia. In the rest of the world revenues were up by 2.8 percent, driven by the Middle East and Africa, while the situation was described as challenging in Brazil.

The total revenues reported by the group suffered drops in all markets, with Europe down by 2.1 percent to €130.1 million. Overall, the business environment in the region remained solid and no significant deceleration in demand was observed, according to the management. It added that Russia, which was a difficult market a year ago, was “off to a pretty good start” this year.

North America was down by 4.3 percent to €127.2 million, due to a general decline in demand for sunglasses. At the group's Solstice retail chain in the U.S., sales fell by 15.2 percent in euros to €16.8 million, with a decline of 17.0 percent in local currencies, after the closure of 11 stores in the 12-month period through the end of March, ending up with 121 locations. Solstice also suffered from a decline in traffic at the remaining stores.

Safilo Group Net Sales by Geographical Area

(Million Euros. Quarter ended March 31)

 

2016

2015

Change
%

Change
% (*)

Europe

130.1

132.9

-2.1

-1.7

North America

127.2

132.9

-4.3

-5.6

Asia Pacific

26.7

37.5

-28.7

-28.3

Rest of the World

17.6

21.1

-16.3

-6.0

T O T A L

301.6

324.4

-7.0

-6.6

(*) at constant exchange rate

Wholesale revenues fell by 2.4 percent to €110.4 million in North America, but Safilo pointed out that its products are performing very well in the department stores, where they are driven by high-end licensed brands such as Dior, Céline, Fendi and Jimmy Choo.

Sales dropped by 28.7 percent to €26.7 million in the Asia-Pacific region and by 16.3 percent to €17.6 million in rest of the world. The performance was negative for all regions at constant currency rates as well, with Europe falling by 1.7 percent, North America by 5.6 percent, Asia-Pacific by 28.3 percent and the rest of the world by 6.0 percent.

Safilo's management added that licensed brands generally showed a strong performance during the quarter, with Dior posting “excellent” growth. The group's so-called “rocket brands” - namely Fendi, Celine and Jimmy Choo - also registered “significant” growth.

Conversely, the company's “future core brands,” which include Boss, Tommy Hilfiger, Max Mara, Marc Jacobs and Kate Spade, showed mixed results. It was noted that Boss, Kate Spade and Max Mara were “doing very well.” On the other hand, the Marc Jacobs brand was hamstrung by efforts to merge two collections, after the license for the Marc by Marc Jacobs brand was terminated.

Among the proprietary brands of the group, the management expressed satisfaction for Smith Sports Optics and pointed out that a large advertising and marketing campaign for Polaroid Eyewear is starting in the second quarter. Safilo has focused its efforts to relaunch the Carrera brand on a limited number of countries. It estimates that it needs to differentiate the label's collections by market.

Safilo admitted that all its collections suffered from supply shortcomings at its Italian plants. Delgado explained that the output was strained by a series of factors such as plans to increase the amount of work done in-house, the repatriation to Italy of some manufacturing previously done in China, the increased complexity of the models being produced and higher-than-expected orders for top-end brands. The executive stressed that the group had hired over a 100 temporary workers last year in view of the increased workload and that she expects the bottlenecks at the Italian plants to be overcome by the end of June.

The group's gross profit fell to €184.2 million from €196.9 million a year earlier but the margin increased to 61.1 percent from 60.6 percent thanks to a positive price and product mix and lower obsolescence costs. Negative exchange rates however knocked 0.40 percentage points off the margin.

The gross operating profit before amortization, or Ebitda, fell by 36.8 percent to €19.8 million, so the Ebitda margin narrowed to 6.6 percent from 9.7 percent the previous year. Adjusted Ebitda, which excludes €5.4 million in restructuring costs, fell by 22.6 percent to €25.2 million, which had the effect of lowering the adjusted Ebitda margin to 8.4 percent from 10.0 percent.

Net debt stood at €109.7 million at the end of the period, down 14.5 percent from a year earlier but up by 22.0 percent compared with the end of 2015 due to seasonal factors. The group did not unveil its capital expenditures for the quarter but indicated that they were about €2 million higher than in the same quarter a year earlier, when Safilo invested €5 million.

Financial analysts issued a series of downgrades and downbeat comments after the release of Safilo's first-quarter results. Their consensus is for the group's sales to slip by about 2 percent in 2016 to around €1,260 million and the Ebitda to drop by around 5 percent to below €100 million for the year.