Ferragamo Cautious About 2016 As Headwinds Remain

Salvatore Ferragamo S.p.A. is cautious about the year ahead even as it comes off another strong year of profits and sales growth in 2015.

On a conference call with analysts, CEO Michele Norsa commented that the beginning of the year was “not particularly good,” in part because of continued volatility in financial markets, the different timing of the Chinese new year and tourist flows that were not captured as tourists traveled to “unusual locations.”

He confirmed that Ferragamo — like many other luxury brands — is facing a complex situation in China, but remained optimistic, pointing out that the government has reaffirmed its commitment to grow domestic consumption. “We are seeing better performance, and I would say the general mood on the domestic market is improving.”

Hong Kong — which Norsa termed “consistently negative” — and Macau are still suffering, also due to a drop in travel from mainland tourists, while Japan and Korea are attracting more mainland shoppers. With regard to Europe, he said France had been penalized after the November terrorist attacks there but that Italy — especially Milan and Florence — “have been over-performing.”

The improving U.S. economy was boosting consumer confidence, Norsa said, but he pointed out that the strength of the dollar compared to the Canadian dollar and Mexican peso “has probably diverted some tourism to different destinations. We’ve seen strong increases in tourism in countries bordering the U.S.”

For Ferragamo, Norsa said Mexico, Australia and Canada have been fast-growing markets.

The CEO said travel retail has continued growing with January sales in the channel accelerating by 7.1 percent, compared to 5.4 percent in December, and with some markets — like Dubai — putting in double-digit growth. Travel retail growth has given a boost to wholesale revenues, he said.

Travel patterns have changed, Norsa pointed out later in the call, with more Chinese traveling to Canada, for example, because it is easier to get visas. Consequently, Vancouver and Toronto have seen large inflows of Asians. Mexico is enjoying a resurgence of U.S. tourism as many Americans have been turned off by the high cost and perceived security risks of traveling to Europe.

For the year, net profit increased 6.7 percent on the back of strong sales of leather goods and a solid performance in Europe even as operating costs increased on the year before.

In a statement after the close of trading in Milan, where Ferragamo is listed, the company said its bottom line reached 174.5 million euros, or $190.6 million, while revenues rose 7.4 percent to 1.43 billion euros, or $1.58 billion. This included a negative hedging effect of 51 million euros, or $56.6 million. At constant exchange rates, sales grew 1.4 percent, the Florence-based company said.

Net financial debt was slashed in the year to 10 million euros, or $11 million, from 49 million euros, or $65 million, helped by an almost 40 percent jump in net operating cash flow, the company said.

The top line was helped by a 7.3 percent increase in sales in Europe, which rose 6 percent at constant exchange. This is the group’s second-largest market, representing 27 percent of revenues. European sales rose 6 percent. Sales in the Asia-Pacific region — Ferragamo’s largest single market at 36 percent of turnover — increased by 4 percent, although at constant currencies they were down 3.2 percent. North America, accounting for 23 percent of group revenues, grew 9.5 percent, but declined 1.6 percent, while Japan — which accounts for about 9 percent of group sales —  increased turnover 14.2 percent and rose 15 percent. All were reported at constant exchange.

Footwear sales, which make up nearly half of group turnover, increased 5.7 percent at current exchange, but dropped 1 percent at constant currencies, while leather goods, which make up just over one-third of group turnover, grew 12 percent and rose 6.4 percent at constant currencies.

Responding to an analyst who pointed out that shoe sales were weak last year, Norsa said the group had been focusing on leather goods and small leather goods, which produce good margins. While men’s and women’s shoes had been performing well over the past five years, Norsa said, the problem is that Ferragamo “probably lost some volume in men’s shoes in the U.S.,” where a large part of the shoe business is wholesale and “department stores have not been performing very well.” He said the group has already taken action on shoes, including launching kids’ collections — mostly aimed at young girls — and sneakers, “where we have extremely good turnover now and have sold out in most stores.”

Asked about Ferragamo’s retail-development plans, Norsa said the focus would be on travel retail, with about five or six locations (but not directly operated) planned for airports. “In terms of DOS, we opened more than 15 last year,” Norsa said. “I would expect the number this year to be smaller,” he said, pointing out that some projects would reach into 2017.

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