Ferragamo Sees Profits Climb 10 Percent In Q1, Confirms Eraldo Poletto As CEO

Salvatore Ferragamo SpA on Thursday said net profits in the first quarter climbed 10 percent, despite a slight contraction in revenues, and confirmed that Eraldo Poletto will be the new CEO.

Poletto will join the board of directors on Aug. 2, 2017, when Ferragamo will hold its first-half board of directors meeting, which will mark the official end of CEO Michele Norsa’s tenure at the luxury goods maker. Poletto will then be nominated new chief executive.

In opening remarks during a conference call with analysts Thursday evening, president Ferruccio Ferragamo said, “I especially want to thank Michele for the 10 wonderful years he has been with the company, helped it grow, and to state what a wonderful job he has done in his tenure.”

For the first quarter of 2016, sales at Ferragamo dropped 1.8 percent to 321 million euros, or $353.1 million, following a continued weak economic climate, geopolitical instability and lower tourism, Norsa explained. The first quarter was also up against strong comparables in the year-earlier period, when revenues jumped 9.5 percent.

Despite the soft top-line performance, Ferragamo managed to increase profitability, with earnings before interest, taxes, depreciation and amortization (EBITDA) up five percent on the year-earlier period and on revenues of 20 percent, up from 18.7 percent in the first quarter of 2015.

Finance chief Ernesto Greco said increase was due to “very good cost control and efficiency in the use of our resources.”

Net profit climbed to 34.4 million euros, or $37.8 million, also thanks to a lower tax rate than in the previous year period. The performance in net profit growth, “confirms the trend that net profits are always growing faster than revenues — in this case, much faster,” Norsa said.

Ferragamo ended the first quarter with net cash of 25 million euros, or $27.5 million, compared with 34 million euros, or $38.1 million, in net debt at end-March 2015.

Weighing down on Ferragamo’s top line were disappointing sales in Asia-Pacific (especially in key markets such as China and Hong Kong), which accounts for 36 percent of group turnover and where revenues contracted by 3 percent at current exchange rates (down 2.3 percent at constant currencies). While China and Hong Kong were not positive in the first quarter, Norsa said the mainland experienced “strong” improvement in the past 45 days.

Barring Japan, where sales expanded slightly in both current and constant currencies — the result of a strengthening yen, mostly, and some more Chinese tourism — revenues in all other major geographical markets either contracted or were essentially flat. Only Latin America put in a strong performance, at constant currencies (up 8.4 percent), on the back of strengthening currencies, but it is Ferragamo’s smallest market, representing a mere 5 percent of total turnover.

On the U.S. market, Norsa said that because of the strong dollar, fewer tourists were visiting the country in favor of Canada and Mexico. Even destinations favored by many Latin Americans — such as Miami and Los Angeles — have suffered somewhat, Norsa noted. Looking ahead, Norsa said he does expect some improvement in the region for the second part of the year.

In Europe, economic prospects “remain uncertain” with tourist flows negatively impacted by the terrorist attacks in France and Belgium, while Korea, Australia and Mexico were “preferred destinations” for tourists, helped by favorable exchange rates. He also cited Thailand as a potential rising star. “For luxury industry, it will be important to cover [these markets],” he said.

Revenues were either flat or had negative growth at the company’s two biggest categories, shoes (42 percent of sales) and leather goods and handbags (37 percent of sales).

Gross profit in the period reached 67.2 percent of sales, one of the highest ever for Ferragamo, and this number will be difficult to improve upon, Greco said. “The environment is quite volatile and it is challenging to assume that 67.2 percent will be even exceeded. For the time being, this could be a reasonable target to project on a full year basis,” he added.

Part of the challenge will be keeping cost increases as low as they were in the first quarter. Costs increased only 1.3 percent in the three months to March 31 — accounting for unfavorable exchange rates they would have increased 1.8 percent — but this figure will likely rise to 2.5 to 3 percent for the full year, the finance chief said.

The company has various aces up its sleeve to maintain its profitability, Greco said, including its strong position with suppliers, from whom it can get better conditions, and its ability to squeeze out more manufacturing efficiencies. Other areas where the company will focus on are the product mix and rental costs — the latter of which accounted for the largest expense in the first quarter and increased on the same period of last year.

In terms of products, Greco said the company wants to have additional evergreen products because “by having a better offer in this category, we can have less discounts and protoyping costs.”

Increased control over sales activities and reduced discount levels will also contribute.

In terms of rents, the finance chief said had been successful in trying to renegotiate rental contracts in mainland China and expects to save high single-digit millions (in euros).

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