Ferragamo’s Profits Fall in the First Half

Destocking, political tensions in South Korea and lackluster business in North American department stores weighed on the bottom line of Salvatore Ferragamo SpA in the first six months of the year.

In the period ending June 30, net profit decreased 15.4 percent to 76 million euros ($89.7 million), including a negative minority interest of 2 million euros. This compares with 90.1 million euros in the same period last year. Revenues rose 1.1 percent to 718 million euros, including a hedging effect, compared with 710 million euros in the first six months of 2016.

“The year 2017 is a transitional one, we are setting up an organization for the future,” said CEO Eraldo Poletto during a conference call with analysts.

In the first half, revenues in the Florence-based group’s retail channel were up 4.7 percent to 450 million euros, while the wholesale division, penalized by exterior factors, decreased 4.7 percent to 256.3 million euros.

Poletto said he created the new role of global chief retail officer — appointing Donald Kohler, who also was named CEO of North America, who will take over at the end of August or early September to help realize “a consistent customer experience.” Poletto touted the steps taken to create “a new streamlined organization” with key executive roles reporting directly to the CEO that ensures a faster structure. “We are creating stronger efficiency,” he added.

As of June 30, the company counted 679 points of sales, including 401 directly operated stores and 278 third-party operated stores.

The Asia-Pacific area was confirmed as the group’s top market in terms of revenues, increasing by 6.1 percent to 271.3 million euros, representing 37.8 percent of the total. This was achieved despite the soft trend in South Korea, mostly due to the significant decrease of Chinese tourists, and the still negative performance in particular in Hong Kong. Poletto pointed to the reopening of the brand’s Canton Road store. “It will give us some good results in the future.”

The retail channel in mainland China was up 12.2 percent.

Europe posted a decrease of 2.4 percent to 184.3 million euros, with solid growth in the retail channel and a negative trend for the wholesale business, negatively impacted by the destocking activity. The conclusion of the latter should help improve the trend in the second half, said chief financial officer Ugo Giorcelli, who joined the company in March.

North America was down 2.2 percent to 163.8 million euros, negatively impacted by the performance of department stores. “We have a good retail network and locations are where they should be in prestigious malls, but the execution can be done better and with the new leader we are confident it will be done,” said Giorcelli.

The Japanese market registered a 3.4 percent decrease to 61.4 million euros, due to the strategic rationalization of the wholesale channel, while the retail stores recorded a positive performance.

Revenues in Central and South America in the period continued their solid growth, registering a 7.2 percent increase to 37 million euros.

The footwear category was up 1.3 percent to 312.7 million euros, representing 43.6 percent of the total. Giorcelli said the feedback to Paul Andrew’s first collection was “positive, definitely off to a good start, but did not yet materially impact the first-half performance.” Andrew’s women’s shoes debuted with the pre-fall 2018 season in January in New York and were then presented in Seoul in March.

“The penetration is still low, but higher than the rest of the collections and the velocity is gaining traction,” said Poletto. He said that, “not only with women’s shoes, by the first quarter of 2018 we will be in the place where we want to be.”

As reported, last year Andrew was named design director of women’s footwear and Fulvio Rigoni women’s ready-to-wear design director. Guillaume Meilland was appointed men’s ready-to-wear design director.

In the first six months of the year, sales of leather goods rose 0.7 percent to 265.2 million euros, accounting for 36.9 percent of the total. Apparel was up 0.9 percent to 41.6 million euros, while accessories were down 3.2 percent to 42.8 million euros. Fragrances gained 6.7 percent to 43.5 million euros, lifted by the launch of the brand’s new scents “Uomo” and “Signorina in Fiore.”

Poletto said the company is focused on stronger presentations and assortment, as well as “evergreens that will never become boring components but will keep customers buying.” He once again emphasized the drive to present a “more playful, happy and colorful collection.”

In the first half, operating costs grew 6.9 percent to 363 million euros, mainly due to the strengthening of the store network and of the organization. This includes some one-off expenses in the region of 2 million euros, said Giorcelli, in support of rationalization activities.

Asked about the decline in the value of the U.S. dollar, Poletto said it “is for sure creating headwinds and we are working diligently to overcome this. We are working on a number of different activities to improve the situation. We are not standing still.”

Capital expenditure reached 29 million euros compared with 26 million euros, mainly related to a new distribution center and work on the store network.

Responding to a question on pricing architecture, Giorcelli said he did not see significant changes going forward. “We want to expand the offer on the upper end and strengthen the small leather goods and entry price products, which have not been fully exploited. We are working on both ends in a more coordinated way.”

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