Salvatore Ferragamo Experiences Market Slowdown Amid Hong Kong Tensions

Hong Kong was a sore spot for the Salvatore Ferragamo Group in the last nine months, hurt by a 45% drop in retail sales in the region in the third quarter, but the performance in the period was lifted by other areas, including Europe.

“We were not anticipating what is happening in the market [would have] this magnitude,” said CEO Micaela Le Divelec Lemmi during a call with analysts on Tuesday. Hong Kong suffered “a big hit” at retail, due to the tensions there, but Latin America is also suffering, hurt by political unrest, and the wholesale channel went through a downward trend, she continued.

“The performance is not consistent around the world and the overall results are mixed in different channels and markets. We are fine-tuning the strategy but it will not change in essence,” the Ferragamo executive said. This will also include “not overinvesting” or new initiatives in Hong Kong, as the group considers how to increase traffic. “We see a decrease of mainland Chinese in Hong Kong, but we start to see them in other regions. They are back in European capitals. There are signals from Korea, but we cannot anticipate a destination in the mid-term.” CFO Alessandro Corsi echoed that sentiment, saying that he was “not able to predict where we can see a full compensation of the Chinese cluster we lost in Hong Kong.”

Excluding the IFRS 16 accounting principle, net profit in the nine months ended Sept. 30, including a minority interest, was stable at 65 million euros ($71.6 million), edging down 0.5% compared with the same period last year.

Revenues were up 2.3% to 994.3 million euros, compared with 972 million euros in the same period last year. In the third quarter, revenues were down 2.9%.

Earnings before interest, taxes, depreciation and amortization decreased 1.5% to 147 million euros. Operating profit was down 5.7% to 96 million euros.

As of Sept. 30. the group’s retail network counted a total of 656 points of sales, including 394 directly operated stores and 262 third party–operated stores.

In the last nine months, the retail distribution channel was up 2.6% to 643.3 million euros, accounting for 64.7% of the total. The third quarter was stable, up 0.4%.

Like-for-like sales in the nine months grew 1.4%, but they were down 0.7% in the third quarter, hit by a negative performance of the secondary channel.

The wholesale channel grew 3% in the nine months to 338.7 million euros but was down 8.4% in the third quarter, due to a different timing in the deliveries of fragrances and to a slowdown of the travel retail channel mainly linked to the geopolitical tensions in Hong Kong.

The Asia Pacific area was confirmed as the group’s top market, up 2.7% to 373 million euros, accounting for 37.5% of sales. In the nine months, the retail channel in China reported a 16.3% increase. In the third quarter, the performance in the area was significantly negatively impacted by Hong Kong, where retail sales were down 45% compared with the third quarter last year. Hong Kong represents 6% to 7% of total revenues, said Corsi. Macau also suffered, down 16%, he said, but it is “less negative now,” as is Taiwan.

In the nine months, the Europe, Middle East and Africa region posted a 3.9% increase to 258.7 million euros, representing 26% of the total, lifted by both distribution channels also in the third quarter. “There is a return of Americans and Russians” in the region, said Corsi.

North America in the nine months was down 1.3% to 219.7 million euros, representing 22.1% of total sales, and penalized by lower revenues from rentals and a negative performance of the wholesale channel in the third quarter. “The primary channel performed in a positive way,” said Le Divelec Lemmi. “The U.S. is not consistent completely across the regions and we can anticipate a potential upset following the issues with Barneys.” In the market, Ferragamo is pushing full price sales and reducing markdowns, she said.

The Japanese market edged up 0.9% to 87.1 million euros in the nine months.

Revenues in Central and South America increased 9.7% to 55.7 million euros, despite a slowdown in the third quarter due to social and political tensions.

Sales of shoes were up 3.5% to 419.9 million euros, representing 42.3% of the total. Handbags and leather accessories grew 4.7% to 392.3 million euros, accounting for 39.5% of total sales. Le Divelec Lemmi said the Studio Bag was a best-seller and that women’s shoes were benefiting from the introduction of the family of the Vara and the Viva models.

For the year 2020, the executive said the marketing strategy will focus on core categories, especially ladies’ shoes, and she ticked off the new Viva shoes, for which the company is planning “a strong push beginning next year.”

Fragrances were down 9.7% to 60 million euros, with the third quarter showing a 35.2% decrease penalized by a different timing in deliveries compared to the same period last year.

In the nine months the gross profit was up 4.2% to 64 million euros. Its incidence on revenues was up 120 basis points, moving to 64.8% mainly thanks to the increase of full-price sales and to the positive product mix.

Operating costs, net of the IFRS effect, increased by 6.2% to 548 million euros, mainly due to marketing and communication costs, to the reinforcement of the organization, the increase in rentals and other operating costs.

Given the complexities of the market, the company said the slowdown in revenues and operating margins seen in the third quarter of the year “may persist also in the last part of 2019.” Asked about the 2019 consensus, Corsi said that he could expect sales slightly above last year and that an EBITDA of 200 million euros, excluding the IFRS effect, was reasonable.

This report originally appeared on WWD.

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