Safilo posted a 5.1 percent increase in its revenues to €1,179 million in 2014, accelerating in the fourth quarter with an increase of 11.2 percent to €311.2 million, partly thanks to the weakening of the euro against the dollar. At constant currency rates, revenues were up by 5.1 percent in the full year and by 7.2 percent in the last quarter.

A rise of one percent in the U.S. dollar roughly adds €4-5 million to Safilo's annual revenues and €0.4-0.5 million to its operating profits, but Luisa Delgado, chief executive of the group, stressed that the company has also benefited from management and operational restructuring that has led to sales growth in Germany, the Nordic countries, the U.K. and Latin America.

Safilo Group Consolidated Income Statement

Million Euros, Year ended Dec. 31

 

2014

2013

%
Change

NET SALES

1,178.7

1,121.5

5.1

Cost of Sales

460.1

437.8

5.1

Selling and Marketing

479.4

451.8

6.1

General and Administrative

157.5

149.0

5.7

Other Income (Expense)

(6.4)

(8.1)

-

Financial Charges, net

10.4

24.7

-57.9

Pre-Tax

64.9

50.1

29.5

Tax

25.4

34.1

-25.5

Minority Interest

0.4

0.5

-20.0

NET

39.1

15.5

152.3

In Europe, the group's sales rose by 3.4 percent for the year to €486.8 million but fell by 0.4 percent in the fourth quarter to €118.6 million. At constant currency rates, European sales rose by 3.7 percent in 2014 and fell by 0.1 percent in the final quarter. The decline in the fourth quarter stemmed from a drop of more than 30 percent in Russia in terms of rubles, while the rest of Europe grew by a low single-digit rate.

Russia represents about 3 percent of Safilo's European business. The crisis affecting Russia is to be blamed in part for the sharp fall, yet Delgado admitted that the group had rushed into that market, quickly pushing up sales without creating the leadership and commercial capacity to weather a crisis. She added that the company has intervened and will carry out further measures to beef up its Russian operations. The company said that one of its house brands, Polaroid Eyewear, is doing “pretty well” in Russia and could profit from the crisis to expand its commercial presence in partnership with local distributors.

Iberia turned out to be the group's “best-in-class” market during 2014. Italy showed signs of improvement, and Safilo registered market gains in the second part of the year, leading to sales growth for the whole year.

The group booked strong double-digit growth in Germany and Nordic countries after reorganizing its businesses in those markets. In Germany, sales of proprietary brands rose by over 25 percent and those of key licensed brands by more than 30 percent, thanks to the introduction of local styles and fittings, reinforced sales resources and the development of joint business plans with retailers, supported by digital tools.

The U.K. became a “strong contributor” to sales growth in 2014, and in the fourth quarter in particular, thanks to new long-term commercial agreements with local chains.

In the Americas, Safilo's sales rose by 8.0 percent to €494.7 million in 2014, while fourth-quarter sales grew at a much stronger pace of 23.2 percent to €133.6 million. On a currency-neutral basis, sales were up by 9.2 percent in 2014 and by 15.4 percent in the quarter.

At constant currency rates, sales in Latin America rose by more than 20 percent in the full year and by over 40 percent in the last quarter, underpinned by the establishment of a dedicated regional head office in Miami. In North America, the company's wholesale revenues were up by 8.6 percent in the full year and by 14.8 percent in the quarter.

Asian sales fell by 0.2 percent in 2014 to €177.1 million and quarterly revenues rose by 10.0 percent to €51.9 million. In local currencies, sales increased by 0.2 percent in the 12 months and by 3.4 percent in the last quarter. Sales in the region were hit by restructuring measures, including the creation of a specific business unit for China. The group also established a fully-owned subsidiary in Dubai to cover the Middle East.

Safilo Group - Sales Breakdown

Million Euros, Year ended Dec. 31

 

2014

% of
total

2013

%
Change

%
Change *

By georaphical area

Europe

486.8

41.3%

470.8

3.4%

3.7%

Americas

494.7

42.0%

457.9

8.0%

9.2%

Asia

177.1

15.0%

177.5

-0.2%

0.2%

RoW

20.2

1.7%

15.4

31.2%

38.8%

By product category

Sunglasses

653.3

55.4%

623.7

4.7%

5.5%

Prescription frames

431.6

36.6%

413.8

4.3%

5.4%

Sport products

86.2

7.3%

76.3

13.0%

13.1%

Other

7.4

0.6%

7.8

-5.1%

-4.5%

By distribution channel

Wholesale

1,096.7

93.0%

1,041.5

5.3%

6.2%

Retail

82.0

7.0%

80.0

2.5%

2.6%

TOTAL

1,178.7

100.0%

1,121.5

5.1%

5..9%

* At constant exchange rates

By product category, full-year sales showed increases of 4.4 percent in prescription frames to €431.8 million, 4.7 percent to €653.3 million for sunglasses and 13.0 percent to €86.2 million for sports products. At constant foreign exchange rates, prescription frames rose by 5.5 percent, sunglasses by 5.4 percent and sport products by 13.1 percent. All the categories saw accelerating sales in the fourth quarter in terms of euros, with prescription frames up by12.8 percent to €114.4 million, sunglasses by 9.3 percent at €163.3 million and sports products by 15.8 percent at €31.8 million. In local currencies, prescription frames were up by 9.4 percent, sunglasses by 5.0 percent and sports goods by 11.0 percent.

Among the group's proprietary brands, which represented 24-25 percent of group sales in 2014, Polaroid rose by more than 20 percent for the second year in a row. The brand gained market share in Spain, Germany and Russia and its distribution continued to be rolled out in the Americas and Asia. Smith Optics, the company's U.S.-based sports brand, booked a double-digit increase during the year. As reported in a separate article in this issue, it is undergoing a thorough restructuring with the objective of becoming a global brand and more than doubling sales by 2020.

Carrera, the group's largest house brand, suffered a decline in sunglass sales, while its revenues from prescription frames were flat. The group noted that Carrera kept its distribution channels “clean and lean” in view of a re-launch planned for the brand this year. Delgado said that the label suffered from a blurred image, becoming over the past three to five years “a brand of everything to everybody, but nothing really.”

She argued that one of Safilo's challenges has been a lack of brand-building skills, which explains why its house brands have had difficulties in taking off despite their heritage. The company has worked on Carrera's brand equity, considering that its essence represents the “thrill of life.” The concept has been applied to today's society through market research, leading to a new brand-building platform, a product strategy and the preparation of a campaign starting in five core countries. Safilo has been working with clients on the Carrera re-launch since November and selling started in the opening months of 2015. The campaign is scheduled to go live in the coming weeks. Safilo claims to have received a very good response from customers worldwide and aims to roughly double Carrera's sales over the next five years.

Delgado ruled out that Carrera could cannibalize Polaroid's revenues because the two brands are addressing different targets. Polaroid is positioned in the “mass cool segment” and is the “Ikea of eyewear,” she said, offering functional benefits thanks to its polarized lenses and an appealing design at affordable prices, as well as being widely available. Polaroid has an entry price of €45-50 and an average price of €75. Delgado noted that Carrera is priced “a step above” Polaroid and targets consumers seeking a lifestyle statement. She feels that the two brands are complementary, addressing different consumers with different design and communication strategies.

Among the group's licensed brands, Christian Dior posted solid sales growth last year, representing a benchmark for Safilo's most sophisticated products. Hugo Boss and Tommy Hilfiger also enjoyed strong sales trends and have the potential to become “future core brands” for Safilo, said Delgado. The licensed Max Mara collection grew at a double-digit rate, while Céline and Jimmy Choo grew significantly.

The launch of the Fendi brand taken over from Marchon in key international markets and of Bobbi Brown in the U.S. and Canada were in line with expectations, even though Safilo's introduction of its Fendi collection was hampered by close-out sales of Marchon's former line. Fendi is expected to continue growing this year.

The group's wholesale revenues were up by 5.3 percent to €1,097 million in 2014 and by 11.2 percent to €291.0 million in the fourth quarter. In local currencies, the annual revenues rose by 6.2 percent and the quarterly ones by 7.6 percent. Sales to the the group's top 100 clients represented 20 percent of total sales and grew by 15 percent in 2014 following joint business planning with them. GrandVision, whose controlling shareholder is also Safilo's biggest shareholder, made up about 6 percent of Safilo's sales.

Represented essentially by the Solstice chain in the U.S., Safilo's own retail sales increased by 2.6 percent to €82.0 million in the year and by 11.2 percent to €20.2 million in the quarter. In local currencies, they grew by 2.6 percent for the year and by 1.6 percent in the quarter.

The group's gross margin was steady at 61.0 percent in 2014 but slipped to 57.2 percent in the fourth quarter from 59.6 percent a year earlier due to excess inventories. Safilo explained that it reduced the channels it uses to flush out excess production in an effort to improve the quality of sales. This led to inventory levels rising and peaking on Sept.13. The group had to intervene in the production to stem the flow of new inventory and sell slow-moving or obsolete products.

Safilo has decided to introduce new processes and to invest in information technology to improve production and sales planning. The investments are expected to take up to six months to be efficient and sustainably reduce inventories. At the end of 2014, inventory levels were down by €8.7 million, or 3.4 percent, from the September peak and stood at €247.6 million.

The gross operating margin before amortization (Ebitda), adjusted to eliminate one-off items, fell 0.9 percentage points to 10.0 percent in the full year. But the decline accelerated in the fourth quarter, with the margin falling by 1.6 percentage points to 10.3 percent due to higher inventory obsolescence provisions as well as negative trends in price mix and plant utilization due to close-out sales and low production volumes. They were only partially offset by lower selling, general and administrative expenses.

The adjusted net profit rose by 14.1 percent in the full year to €44.5 million. The group posted negative free cash flow of €12.4 million against a positive flow of 28.4 million. The net debt fell by 10.5 percent during the year to €163.3 million, representing an adjusted gearing of 1.4.

Safilo expects to raise its revenues significantly this year and to improve profitability. It plans to return to a positive free cash flow, reducing net debt.