Salvatore Ferragamo’s Revenue Slid in the Past Nine Months

The release of Salvatore Ferragamo SpA‘s performance in the first nine months of the year provided the opportunity for new chief executive officer Eraldo Poletto to lay out his plans for the Florence-based group in the near future. These include a focus on product, especially footwear and leather goods.

During a conference call with analysts, Poletto said that Fulvio Rigoni, who showed his first collection in September for the brand, will be in charge as the new women’s designer, flanking Paul Andrew, who was tapped as the brand’s first-ever design director for women’s shoes in September, as reported. Poletto takes on as the company reported a slowdown in the nine months, affected by geopolitical uncertainty, currency fluctuations, and a soft business climate in the Asia Pacific region, a region traditionally strong for the company.

In the nine months ended Sept. 30, net profit edged up 0.2 percent to 112.5 million euros, or $124.8 million, compared with 112.3 million euros, or $124.6 million, in the same period last year.

Revenues slid down 0.7 percent to 1.01 billion euros, or $1.12 billion, compared with 1.02 billion euros, or $1.13 billion. At constant exchange rates, sales dropped 4 percent.

Poletto was introduced during the call by chairman Ferruccio Ferragamo, who pointed to the new executive, who hails from Furla, as representing “innovation, not a revolution,” at the company.

To be sure, Poletto enthused about the Salvatore Ferragamo brand, defining it “amazing. This is a new chapter in continuity of a great job done.” He said his goal was to make the label “more contemporary and  modern. The founder was known for his creativity.” He spoke of prioritizing retail operations so that they would be more customer-centric, improving the performance of existing stores, making them more efficient. “We have an amazing retail network. Like-for-like is key; you will hear me talk about this a lot, and work on that.” Chief financial officer Ernesto Greco concurred, saying that openings going forward will be “limited to emerging countries and regions. The bulk of additional revenues will come from like-for-like.”

Poletto emphasized a “more retail mindset,” highlighting “visual merchandising, assortments, the supply chain, all components, with very strong changes.”

As of Sept. 30, the group’s network totaled 673 points of sale, including 396 directly operated stores, while the wholesale and travel retail channel included 277 third-party-operated stores, as well as the presence in department stores and high-level multibrand specialty stores.

In the nine months, the retail distribution channel was up 1.3 percent to 640 million euros, or $710.4 million, with an acceleration in the third quarter. The wholesale channel was down 4 percent to 356.4 million euros, or $395.6 million. In the third quarter, the division decreased 12 percent, hurt mainly impacted by lower tourists’ flows and a cautious policy toward department stores. Poletto said the company “tried to avoid excess inventory because it’s useless, and, as we saw in 2008, when there is an overload, department stores are tempted to do markdowns, and we don’t want to see that.”

Earnings before interest, taxes, depreciation and amortization decreased 0.7 percent to 216 million euros, or $240 million, with an incidence of 21.3 percent.

Operating profit was down 2 percent to 170 million euros, or $188.7 million.

In the nine months, sales in Europe were down 5 percent to 267.6 million euros, or $297 million, dented by lower tourist flows, negatively impacted by the terrorist attacks. The third quarter saw an improvement of the retail business, down 6 percent, compared with down 11 percent in the first half, while wholesale decreased 12 percent compared with a 3 percent gain in the first half of the year.

Revenues in North America were up 3.2 percent to 242.2 million euros, or $268.8 million, accounting for 23.9 percent of total sales. The retail business, despite the strong American dollar, which negatively impacted tourist flows in the U.S., was  up 11 percent in the nine months, while the wholesale channel was down 8 percent, also due to the challenging comparison base (up 17 percent  in the nine months last year).

The Asia Pacific inched up 0.3 percent to 360 million euros, or $399.6 million, representing 35.5 percent of total sales. The area saw an improvement in the third quarter, which was up 10 percent. The business in Hong Kong remained negative, even if less negative than in the past.

The retail channel in China was up 3 percent at constant exchange rates in the nine months, with an acceleration in the third quarter, growing 11 percent.

The Japanese market was down 1.6 percent to 93 million euros, or $103.2 million, dented by the lower Chinese tourist flows, impacted by the significant appreciation of the yen.

Sales in Central and South America were up 3.6 percent to 51.1 million euros, or $56.7 million.

In terms of product categories, shoes in the nine months were up 1 percent to 438 million euros, or $486.2 million, representing 43.2 percent of total sales. Handbags and leather accessories were down by 1.2 percent to 370 million euros, or $410.7 million, accounting for 36.7 percent of total sales. (This was compared with an 11 percent growth in the first nine months last year versus the first nine months of 2014.) Fragrances were down 3.1 percent in the nine months, but showed a 3 percent gain in the third quarter. Apparel was down 3.3 percent to 62.4 million euros, or $69.2 million. Responding to analysts, Poletto conceded that shoes were “flat” and that they remained “a key priority. It’s what we do better with leather goods.” He said that a new “more desirable and exciting collection” was already in the showroom. Without revealing names, the executive said there was a new designer for leather goods, as well as for men’s ready to wear.

The company offered “a prudent projection for the year-end results,” in light of the current market situation. Responding about hedging, Greco said the company was “already covered,” and did not expect any impact “currently,” nor that it will be penalized in 2017. In terms of pricing, Poletto said there were going to be “no changes,” as the company “is reviewing the architecture of products as a merchant, with a more proper product assortment.”

Asked about the Ferragamo family, Poletto said it was “committed” to the company. “The idea is of a great chapter now. Companies  are made of different chapters and the world is changing.”

In the nine months, operating costs were up 2 percent to 509 million euros, or $565 million. In the third quarter, operating costs were up 7 percent, also penalized by expenses related to managerial changes, but Greco did not reveal the exact amount paid to former CEO Michele Norsa.

Investments reached 46 million euros, or $51 million, compared with 56 million euros, or $62.1 million, at the end of September 2015, mainly attributable to the new stores, the enlargement and refurbishment of existing key locations, in addition to continuing logistics enhancements and digital projects.

As of Sept. 30, 2016, net debt stood at 18 million euros, or $20 million, compared with 38 million euros, or $42.2 million, at the end of Sept. 2015, after a payment of 78 million euros, or $86.6 million, in dividends in the period.

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