Tod’s efforts to make its women’s collections more fashion-oriented — and to catch new potential consumers — have not worked as well as hoped, so the brand will return to its roots, concentrating on luxury, high-quality leather goods that evoke the Italian lifestyle.
This was one of the messages that Emilio Macellari, CFO of Tod’s Group SpA (which includes the Tod’s, Hogan, Fay and Rover Vivier brands), drove home during a conference call with analysts after the company published disappointing first quarter sales results Wednesday.
During the call, Macellari said that the move to make Tod’s more “fashion-oriented,” spearheaded by recently departed creative director of women’s collections Alessandra Facchinetti, left traditional Tod’s customers “disoriented.”
The increased investments required to pursue this strategy also had a significant impact on the company’s profitability, Macellari said, as it led to higher costs. “The fee of the designer is expensive; the expenses related to the collections and the fashion shows are particularly high,” he said, answering an analyst’s questions on the impact of the strategy.
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He pointed out that before the arrival of Facchinetti some three years ago, Tod’s had an EBITDA (earnings before interest, taxes, depreciation and amortization) margin in the range of 24 percent, which dropped to 19.5 percent at the end of 2015. “That means a visible reduction in profitability, mostly due to this strategy,” he said.
Facchinetti’s departure from Tod’s was announced May 5, and the next day, WWD reported that Andrea Incontri — already the director of Tod’s menswear since 2014 — could be tapped to become the creative director also of women’s collections.
Macellari didn’t give any hints regarding who could replace Facchinetti, saying only that the company was considering its options.
The finance chief reminded that the company knew it was placing a long-term bet with its push into women’s fashion: “As we commented when we explained the strategy, we said we expected some benefit from this activity after five to six seasons, and if not, we will be ready to be coherent with the strategy.”
The end of the women’s ready-to-wear experience will also lead to cost savings, Macellari said. These would be more visible in 2017 than in 2016, for the company still has to account for both designer fees and cost and expenses of fashion shows.
In the first quarter, Tod’s Group reported total revenues of 249.6 million euros, or $274.6 million, down 3.1 percent at current exchange rates or 4 percent at constant currencies.
Sales declined in all product categories, with the steepest drop in leather goods and accessories (down 11.1 percent at current exchange, to 32.9 million euros, or $36.2 million; down 2.4 percent at constant currencies), the second largest product category after footwear, where sales dropped 2 percent (at current exchange and 2.8 percent at constant currencies), to 200.4 million euros, or $220.4 million. Revenues from apparel remained essentially stable at 16 million euros, or $17.6 million.
The Tod’s brand, the largest in terms of group revenues, reported a 7.3 percent drop in sales (down or 8.3 percent at constant exchange) to 131.8 million euros, or $144.98 million. The best performing group brand, Roger Vivier, saw sales jump 8.7 percent (up 6.2 percent at constant currencies) to 35.7 million euros, or $39.27 million.
In a sign of the challenges facing the company, same-stores sales growth in the first quarter decreased 12.4 percent on the year-earlier period, on the back of weak consumption in key luxury goods markets such as China and Italy, Tod’s said.
“The performance of Hong Kong stores remains weakest, performances of China stores are slightly negative, performances of other markets — like the U.S. — are negative as well,” Macellari said.
Italy, the company’s single largest market by revenues, remains “substantially flattish,” and in Europe, some countries were “slightly negative and some slightly positive. All in all in Europe, trend is substantially stable,” Macellari said.
Part of the weakness was due to tourist flows, the executive explained, but part was also due to problems generated by the company, including delays in deliveries of products into stores at the beginning of the season and the drive into more fashion-oriented accessories. “Basically, the market clearly stated that it expects from Tod’s: quality, luxury, iconic product — for sure Italian lifestyle — but not fashion. As far as fashion, the market looks to different brands than Tod’s,” Macellari said.
Despite weakness in the retail network, Macellari said the company was looking to open about 10-15 new stores for the full year — although the net number, after closing underperforming stores, could be a bit lower, with four net new openings already in the first quarter.
On a wholesale level, things were better. “We don’t see particular reasons to be concerned, the order backlog as far as fall/winter season is concerned is positive, and this is a particularly good signal,” Macellari said.
He pointed out that better performance from wholesale customers is not surprising; they get to pick and choose the parts of the collection they want, while directly operated stores have to carry the entire collection. And wholesalers are “choosing what is more in tune with Tod’s DNA, image and lifestyle.”
Weakness in the first quarter and in the first weeks of the second quarter means that reaching consensus full-year topline growth of 4 percent and an EBITDA margin in the region of 25 percent “now appears a bit challenging,” Macellari said. ” I don’t want to say it’s impossible, but when we last said consensus was achievable, we had in front of us a more comfortable situation than we do today. So basically it is a bit challenging, because the first half of the year is tougher than expected, but we have good expectations for the second half.”
There were significant bright spots in the first quarter. For example, Macellari said that some products — such as the Wave and Double-T bags — were doing very well in stores, and that the main problem was having enough in shops to meet demand. He pointed out the weakness of the more fashion-oriented products, such as “trendy” variations of some bags, which “make the product fresher and more fashion, but these — it’s really evident — disoriented clients, who didn’t pick them up.” What’s selling, he added, “is what is most iconic, high quality, more discreet, less speaking-out-loud kind of product.”
Regarding bag prices, Macelllari said the company was thinking about introducing a more entry-level collection, priced around 850-950 euros, or $962-$1,075, although he said he wanted to keep the collections focused on the 1,200-1,400 euro/$1,357-$1,584 range. “This is the average price where the collection has to be focused even if we are considering a real need to add some items that can be priced immediately below 1,000 euros.”