Tod’s Reveals New Strategy After Difficult First Half

While closing a disappointing first half, Tod’s SpA is banking on quality and a better product and distribution mix to improve its performance going forward.

In the six months ended June 30, the Italian luxury goods group saw its net profit drop 25.6 percent to 37.4 million euros, or $41.8 million, from 50.3 million euros, or $58.8 million, in the same period last year.

As reported in July, in the six months ended June 30, the Italian luxury goods group registered a 3.4 percent decline in sales to 497.6 million euros, or $557.3 million,  compared with 515.3 million euros, or $603 million, in the same period last year.  At constant exchange rates and including the related effects of hedging contracts, sales would have been down 4.3 percent.

“As seen in July, half year sales results were affected by the industry environment and the volatile and uncertain markets,” said chairman and CEO Diego Della Valle. “The negative impact on margins of the organic growth of the stores was partially offset by cost containment and a rationalization plan in place, a plan that will continue to yield results in the coming months. As for the future, our strategy will be to focus more and more in the world of high-quality products, footwear, handbags and small leather goods, noting more and more the values that have made famous our brands, the craftsmanship, the Italian way of life and the strong innovation. To achieve these goals, we hired people with specific characteristics from a stylistic, marketing, management point of view. Communication strategy will be even stronger, to enhance these values, with particular attention paid to digital.”

Operating profit decreased 20 percent to 62 million euros, or $69.4 million, from 77.5 million euros, or $90.6 million, last year.

Earnings before interest, taxes, depreciation and amortization dropped 16.2 percent to 86.3 million euros, or $96.6 million,  from 103 million euros, or $120.5 million, attributed by the company to a less favorable product, area and distribution channel mix. The incidence on sales of rents and labour costs was also higher and the group’s headcount grew to 4,531 compared with 4,504 at the end of June 2015.

Diego Della Valle
Diego Della Valle.
CREDIT: REX Shutterstock.

During a conference call with analysts, CFO Emilio Macellari said the company is considering closing stores in 2017. From January to Sept. 14, the group has closed eight banners. Macellari said the company does not close stores “if it believes the situation is temporary, but this is not the case for some in Hong Kong because of the market, which does not allow to have stores that are not profitable.” He added that openings in 2017 will be “limited. I wonder if it will be a different number from single-digit.”

However, he said that closures being in line with openings, the figure should be neutral. Della Valle also addressed the issue: “As for the development of the store network, few openings will be made, and only for special locations, focusing more on organic growth of the existing distribution network. We are very satisfied with the production structure, both for its size and the quality of the people.”

In the six months, sales of the group’s core footwear category were down 2.5 percent to 400.3 million euros, or $448.3 million. The company underscored a “very challenging comparison basis, linked to the different timing of deliveries.”

Leather goods and accessories decreased 10.7 percent to 69.3 million euros, or $77.6 million. “The figure for the first half reflects the negative trend of a part of the Tod’s collection,” said the company.

Sales of apparel rose 3.7 percent to 27.3 million euros, or $30.5 million.

Macellari expected that, starting in October, the new handbags collection will help improve the “very poor” performance of leather goods in the first half, with “a stronger family of products.” This does not mean that Tod’s will distance itself from its core footwear business, Macellari observed. “This is part of our overall strategy for Tod’s, to follow our heritage, our roots, pay more attention to quality, iconic products and the Italian way of life,” he said.

Della Valle said that “with regard to the collections currently in stores, our consumer feedback is good and, if the market will be stable, it will allow us to achieve our targets. For the future, we are very confident that the strategic plan prepared is going in the right direction and we will obtain good results within the next year.”

During Milan Fashion Week, Tod’s will stage a presentation and no longer a fashion show as it did with former creative director Alessandra Facchinetti, who exited the brand in May.

The company expects the “novelty products to be represented in [Tod’s] ideal world, less fashion oriented and more effective,” explained Macellari. He also said that the group is not going to review its price positioning, but will focus more on the centrally priced products, rather than lower or higher. “The attitude is to move a bit the focus from the most expensive part of the offer to the one closer to the expectations of our target client,” he said. “Tod’s is not accessible luxury and quality has a cost.

In the first half, the group’s core Tod’s brand posted a 7.2 percent decrease in sales to 282.5 million euros, or $316.4 million, mainly due to a sharp fall in tourist spending in Europe and the U.S. and to the persistent weakness of the Greater China market.

Hogan sales dropped 2.5 percent to 106.1 million euros, or $118.8 million, mainly due to a local and tourist slowdown in consumer spending in Italy in the second quarter.

Fay was up 8.8 percent to 24.9 million euros or $27.8 million, lifted by growth in all geographic areas. The company noted a double-digit growth in Asian markets, where volumes are still not very significant.

Sales of Roger Vivier rose 6.2 percent to 83.4 million euros, or $93.4 million, growing globally except in America. The apparent slowdown in the second-quarter growth rate was caused by a different timing in deliveries, said the company, which released the figures following the close of trading in Milan, where it is publicly listed.

Roger Vivier Spring 2017 Rendezvous Collection
Roger Vivier spring '17 collection.
CREDIT: REX Shutterstock.

Revenues in Italy, the group’s largest market, dropped 2.7 percent to 148.8 million euros, or $166.6 million, mainly affected by the Hogan performance.

In the rest of Europe, sales were down 1.7 percent to 120.1 million euros, or $134.5 million, mainly due to a sharp slowdown in consumption, especially by tourists, registered in the second quarter for the entire sector, in addition to a very challenging comparison basis, as sales were up 22 percent in the second quarter last year. Reflecting the industry’s general woes, the weakest countries were France and the U.K.

Revenues were down 6 percent in the Americas, to 48.7 million euros, or $54.5 million, as a consequence of the sharp slowdown in the second quarter.

Sales in Greater China dropped 9.5 percent to 107 million euros, or $120 million, dented by ongoing weakness in Hong Kong. Sales in Mainland China, which represents slightly more than half of this region, were “slightly negative.”

In the “Rest of the World” area,  sales gained 4.1 percent to 73 million euros, or $81.7 million, mainly driven by Korea.

Dollar figures were converted from the euro at average exchange for the periods to which they refer.

Revenues at directly operated stores dropped 4.9 percent to 311.2 million euros, or $348.5 million.

The same-store sales growth (SSSG) rate, calculated as the worldwide average of sales growth rates at constant exchange rates registered by the directly operated stores already existing as of Jan. 1, 2015, was down 14.3 percent in the first half, reflecting weak consumer spending and the global luxury slowdown.

As of June 30, the group had 261 directly operated stores and 103 franchised units, compared to 251 directly operated stores and 93 franchised ones at the end of June last year.

Revenues to third parties totaled 186.4 million euros, or $208.7 million, down 1 percent.

In the first half, the group invested 18.6 million euros, or $20.8 million, in tangible and intangible fixed assets, compared with 27.5 million euros, or $32.1 million, net of the price paid to acquire the Roger Vivier brand (415 million euros, or $464.8 million). The majority of these investments were devoted to the widening and update of the DOS network, including the refurbishment and widening of the Tod’s boutique on Bond Street, in London.

As of June 30, 2016, the group’s net financial position was negative at 112.7 million euros, or $126.2 million, impacted by the acquisition of the Roger Vivier brand, announced in November 2015.

Macellari said the company was not reviewing its consensus. “We expect an improvement in like-for-like in the second half, we have confidence it can happen, after a first half that was weaker,” he added. Also, management will continue to pay dividends. “It’s part of the game we want to play,” said Macellari. “We will not change our attitude to reward shareholders.”

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