Trick or treat? Safilo handed out both at Halloween by releasing third-quarter results that missed expectations for the top line but beat projections in terms of profitability thanks to higher-than-planned cost savings.
In the quarter, group sales fell by 9.0 percent to €221.5 million, short of analysts' expectations of €225 million. At constant-currency rates, the decline narrowed to 8.4 percent. Excluding its production agreement with Gucci, group revenues slumped by 11.1 percent on a currency-neutral basis.
Safilo has a four-year production deal with Gucci that replaced a license agreement that was prematurely terminated and for which the eyewear manufacturer has received €90 million in compensation. For 2017 and 2018, the production volumes under the accord are similar to those that Safilo had when it held the Gucci license, but they are due, by contract, to fall by 40-50 percent in 2019. Safilo is planning next year's production on this basis but does not rule out that the parties could agree on higher manufacturing levels.
The group flagged the positive quarterly performance posted by its Polaroid, Smith, Tommy Hilfiger, Kate Spade and Max Mara lines and in the travel retail and e-commerce channels, while sales to independent opticians declined. Overall, wholesale revenues dropped by 8.3 percent in the quarter to €208.1 million. In local currencies, the fall reached a rate of 7.7 percent.
The group's own retail sales, represented by its Solstice chain in the U.S., decreased by 17.9 percent to €13.4 million, or by 19.4 percent in dollars. Comparable store sales were down by 8.3 percent with a double-digit rate decline in store traffic partly offset by higher conversion and heftier transactions. Solstice had 81 stores at the end of September after closing 22 locations over the previous 12 months. The chain is still loss-making and Safilo is finalizing its considerations regarding its future. The investment broker Equita expects that the chain will be sold in the end.
By region, North American sales were down by 6.7 percent to €96.6 million in the third quarter. At constant currency rates, they dropped by 7.8 percent, with wholesale down by 5.6 percent. Safilo pointed out that it experienced an uplift from third-party e-commerce platforms, signaling a “promising start” with Amazon and an improvement in the trend with department stores.
In Europe, the top line fell by 7.1 percent to €91.7 million, with constant-currency sales down by 5.9 percent. The group enjoyed improved trends in France and Italy, while sales decelerated in Northern Europe and with some key accounts. Safilo said it is seeking to lift service levels and the availability of spare parts in the region.
In Asia-Pacific, sales dropped by 7.7 percent to €15.4 million, with local-currency revenue down by 8.3 percent, partially due to a weak performance in Japan.
In the rest of the world, revenues fell by 26.8 percent to €17.9 million, affected by a challenging comparable base. At constant currency rates, the decline narrowed to 21.5 percent. The group stressed that Brazil was affected by a difficult business environment, while India decelerated after a strong first half but growth is seen picking up again. Meanwhile, some distributors in other markets are suffering from high inventories and the current focus is on managing the sell-out.
In the first nine months, the group's overall sales were down by 9.7 percent to €713.7 million. At constant currency rates, they dropped by 5.6 percent, or 6.0 percent when excluding the Gucci business.
The gross margin improved by 1.2 percentage points to 50.7 percent in the third quarter thanks to efficiencies in the cost of goods sold (COGS). The margin improvement reached 1.8 percentage points at constant currency rates. COGS savings totaled €3-4 million in the quarter and €9 million in the first nine months.
The adjusted Ebitda margin decreased by 0.9 percentage points to 5.4 percent in the quarter, but was flat at constant-currency rates. In the nine-month period, the Ebitda margin lost 0.3 percentage points to 5.2 percent, but rose by 0.2 percentage points on a currency-neutral basis. The adjusted Ebitda was supported by overhead savings that reached €17.5 million in the first nine months, already exceeding a full-year target of €15.0 million.
In a conference call, Safilo's new chief executive, Angelo Trocchia, indicated that October was a “better month” and that the group's target of posting higher sales growth in the second half as compared with the first six months is still “within reach.” He warned that fourth-quarter profitability is likely to be below the level seen in the first nine months but the group is “working hard” to finish at the high end of its full-year guidance of a 4-5 percent adjusted Ebitda margin.
Safilo had net debt of €144.2 million at the end of September, down from €171.1 million three months earlier, thanks to the payment at the end of September of the last of three €30 million installments owed by Kering for the termination of the Gucci license.