Safilo reported that its underlying sales, excluding the big Gucci license and those for other brands owned by Kering, rose by 4.5 percent on a currency-neutral basis in the second quarter, outpacing the first quarter performance and lifting growth in the first half to 4.0 percent. The group lost the licenses for Kering's minor brands - Alexander McQueen, Bottega Veneta and Saint Laurent - on June 30 and will lose Gucci next year.

Including all the Kering brands, the overall turnover of the group rose by 12.0 percent in the quarter to €350.6 million, lifted by the weakening of the euro. On a currency-neutral basis, sales were up by 1.2 percent.

In Europe, total sales rose by 6.1 percent in the quarter to €143.8 million. At constant currency rates, sales increased by 5.4 percent, boosted in part by tourists' purchases in the travel retail channel and driven by Iberia, Germany, Italy and France. Excluding Russia, where sales continued to decline, European sales were up by 6.4 percent in local currencies in the quarter.

In North America, sales grew by 23.5 percent to €137.6 million, but the growth narrowed to 0.8 percent in local currencies. The wholesale business was up by 25.2 percent on a reported basis and by 2.4 percent at constant currency rates, while retail sales at Safilo's local Solstice chain dropped by 5.3 percent in dollars, due to intense promotional activity by competitors and the closure of under-performing stores. The company noted that the turnover of the underlying wholesale business rose by a mid-single digit rate in the quarter, upheld by a strong trend in both the U.S. and Canada.

Safilo Consolidated Income Statement

('000 Euros, Second Quarter Ended June 30)

 

2015

2014

% Change

Europe

143,8XX

135,4XX

6,1

North America

137,6XX

111,4XX

23,5

Latin America

13,1XX

14,1XX

-6,9

Asia Pacific

47,5XX

46,1XX

3

Rest of the World

8,6XX

6,1XX

41,3

NET SALES

350 622

313 083

12,0

Cost of Sales

137 241

113 593

20,8

Selling & Marketing

149 942

131 238

14,3

G. & A.

43 754

40 741

7,4

Other Operating Expense

1 099

2 823

-61,1

Share of Loss of Associates

1 131

839

34,8

Net Interest Expense

3 930

2 179

80,4

Pre-Tax

13 525

21 670

-37,6

Tax

6 526

8 737

-25,3

Minority Interest

77

73

5,5

NET INCOME

6 999

12 933

-45,9

Diluted EPS (Euros)

0,110

0,206

-46,6

Revenues in Latin America totalled €13.1 million, down by 6.9 percent in euros and by 6.0 percent in local currencies, partly due to a different timing in deliveries in favor of the first quarter, especially in Mexico. The company also suffered from softening in sales in Brazil.

Asia-Pacific sales went up by 3.0 percent in the quarter to €47.5 million. In local currencies, they slumped by 13.4 percent largely due to restructuring measures undertaken in some markets and a subdued trading environment in China, Hong Kong and South Korea. The group booked growth in Australia and some Southeast Asian markets.

The rest of the world delivered sales increases of 42.5 percent in euros and by 41.3 percent at constant rates, lifted by the Middle East. They reached a total of €8.6 million.

Safilo no longer gives a breakdown by product line, but the management said that it was “very pleased” by the performance of its key remaining licensed brands, especially Fendi, Celine, Jimmy Choo, Max Mara, Hugo Boss and Kate Spade. It added that sales trends among its proprietary brands remained “patchy.” Polaroid Eyewear saw sales growth in the first half, while Smith was down slightly but booked positive orders for the second half of the year.

As for Carrera, this house brand performed well in the markets where the brand's relaunch campaign was executed properly and completely, Safilo's chief executive, Luisa Delgado, pointed out. The Carrera campaign has led to significant brand visibility in the group's key markets as well as through partnerships with key accounts such as Salmoiraghi & Viganò in Italy, El Corte Inglés in Spain and local chains in Mexico and the U.S. The group aims to accelerate Carrera's product re-assortment and merchandising to support distribution in the second half. It plans to boost momentum in optical sales and focus on Carrera's interchangeable fronts and its junior collection.

The group held its first ever television campaign in Spain for Polaroid. It has significantly expanded the number of points of sales offering the brand and intensified public relations activity. Delgado said that the Polaroid's sell-out has been so rapid that the group is having to bolster the sales team, creating a new division for the brand. The new division is headed up by a dedicated general manager, René Sketty, who previously worked for a lifestyle brand, Northsails.

She added that Polaroid's sell-out rate is above the levels usually seen in the eyewear industry and closer to those registered in the broader consumer goods industry. Polaroid Eyewear aims to focus on its Rainbow collection and children's line. Safilo anticipates stronger Christmas sales as Polaroid tracks fashion trends for some collections.

For Smith, Safilo has expanded the brand's distribution beyond the brand's traditional North American sports channel. It is now being sold with the group's other brands in the North American optical market. The group has also created a new sports channel in Europe, featuring Smith as its core brand.  According to Delgado, the new European unit is performing “very well” and ahead of expectations. E-commerce is also playing an increasing role for the brand in North America, and the brand will become available from this month also in Europe.

In the second half, Smith will focus on bolstering its snow and bicycle business as well as the fishing and marine segments. At the end of July, Safilo opened its Pacific Coast design center, focused on sports and outdoor products.

Safilo's profit margins continued to be under pressure in the second quarter as cost-saving projects lagged behind cost inflation, ongoing inventory obsolescence and investments in marketing and staff as well as restructuring costs.

The group's gross margin fell to 60.9 percent in the first quarter from 63.7 percent a year earlier. The Ebitda margin, adjusted to exclude restructuring costs, narrowed to 8.6 percent from 11.6 percent and the adjusted EBIT margin shrank to 5.6 percent from 8.8 percent. The adjusted net profit dropped by 49.0 percent to €7.4 million.

Free cash flow was a positive €19.6 million in the second quarter against a positive €18.2 million a year earlier. Net working capital management continued to improve in the quarter, freeing €22.9 million in cash against 3.6 million a year earlier. Inventories decreased by €9.5 million in the quarter.

For the whole first half, free cash flow was positive at €51.6 million against a negative level of €6.4 million a year earlier, as the group obtained the first of three €30 million compensation payments from Kering for the early termination of the Gucci license. Free cash flow would have been positive even without the payment.

Net debt dropped to €110.1 million at the end of June from €128.3 million at the end of March and €163.3 million at the end of last December.

Safilo expects sales growth to accelerate at constant currency rates in the second part of the year compared with the first six months. It also anticipates an increase in its full-year adjusted Ebitda, but it will likely grow less than sales due to ongoing investments. Safilo sees its cost savings initiatives starting to have a favorable impact on margins from the second half.

Financial analysts forecast Safilo's sales at over €1.3 billion in the full year, compared with €1,179 million in 2014, and Ebitda at around €130 million, against an adjusted Ebitda of €118.4 million the year before, but some are skeptical about its longterm recovery and feel that it should be part of a larger group.