MILAN — The end of the Gucci license and complications following the implementation of a new information technology system at Safilo Group SpA's distribution hub in its home base of Padua heavily impacted the eyewear group's net sales and profitability in the first quarter.Following the license termination and the IT complications — which led to a delivery backlog of as many as one million units of eyewear by the end of March — Safilo's net sales in the first three months of the year fell 21.3 percent to 237.3 million euros, or $251.5 million.The company — which produces eyewear under license for brands including Dior, Céline and Fendi as well as brands Carrera, Polaroid and Safilo — had warned in March that its first-quarter results would be affected by problems with its new warehouse IT system. At the time, Safilo said it expected first-quarter sales to drop by between 15 and 20 percent compared with the first quarter of 2016.The decline in the top line heavily impacted profitability at the group, with gross profits down 36.6 percent on the year-ago period, to 116.8 million euros, or $123.81 million. The company reported a 6.2 million euro, or $6.57 million, loss in terms of adjusted earnings before interest, taxes, depreciation and amortization, compared to positive EBITDA of 25.2 million euros, or $27.72 million, in the first quarter of last year. The adjusted earnings exclude 3.3 million euros, or $3.5 million, mainly related to the restructuring of a plant in Slovenia but include 10.8 million euros, or $11.45 million, as a pro-rata accounting compensation for the early termination of the Gucci license, according to a presentation on the company's web site.Dollar amounts have been converted at average exchange for the periods to which they refer.Overall, excluding the impact of the Gucci license, first-quarter performance of the so-called "going-forward portfolio" was in line with the forecast issued by the company in March, Luisa Delgado, Safilo chief executive officer, said on a conference call Tuesday evening. Excluding Gucci, first-quarter going-forward portfolio sales were down 14.9 percent, "therefore at the better end of our March budget forecast," she said. Delgado pointed out that, based on orders received and excluding the warehouse IT system disruption, sales in the first quarter would have increased by single digits compared to the year-ago period, "in line with our budget."As part of Kering's anticipated withdrawal of the Gucci license, revealed in September 2014, the company signed a strategic product partnership agreement with Safilo, lasting through 2020. On the conference call, Gerd Graehsler, Safilo chief financial officer, said that the SPPA — which came into effect at the end of 2016 — together with the Kering compensation payout nearly offset the impact of the loss of the license at an operating level in the first quarter. Graehsler said the SPPA accounted for the equivalent of about one-third of total Gucci license sales in the comparable year-earlier period. Over the full year, compensation for the early termination by Kering will amount to 43 million euros, or $45.58 million, according to Safilo's presentation.In the first quarter all major geographic markets — bar North America, which was not significantly impacted by the warehouse disruptions — saw sales drop significantly, with revenues in Asia falling 59.5 percent over the year-earlier period. Answering an analyst's question about the Asian performance, Delgado said part of the drop was due to the loss of Gucci — "Asia is all about Gucci," she said — and the company was addressing the "Asia portfolio challenge."North America was one big bright spot in the quarter, with sales down a more modest 10 percent in the period, weighed down by the group's Solstice retail network, which is being restructured. The figure would have been down 0.7 percent, at constant exchange rates and excluding the impact of the Gucci license termination; wholesale revenues, however, increased 2.5 percent in the period.Delgado pointed out that she is hearing from customers and media in North America that "Carrera is hot." She called the latest winter collection "a great winner" as it was very well received by consumers and the media. "We are on trend with design, with detail and technical content and the structure of the collection," Delgado said, adding that the campaign featuring actor Jared Leto was a big driver. Smith also performed very well in the first quarter, thanks to a winter with lots of snow, which drove consumers to buy lots of helmets and goggles. While pleased with the performance of the U.S. sporting goods brand, Delgado said the challenge now was to integrate it into Safilo's eyewear core business in part by expanding its presence in the optical and sun channel. Kate Spade, Hugo Boss, Max Mara and Fendi were the "best performers in their market segments," according to the presentation.Looking ahead, executives were clear about the main challenge: keeping up with new orders and making sure customers who haven't yet received backlogged orders don't bolt. "The situation of deliveries is putting a strain on our reputation in terms of service," Delgado admitted, saying she was "very grateful" to all those customers who are remaining loyal to Safilo. She said the company had hired additional staff and was working with new logistics suppliers to speed up backlog deliveries and that the company was "preparing very special loyalty support to our customers" for the second half. She added that in April, Safilo's order book softened "slightly," but she emphasized the company did not see "meaningful" order cancellations.Answering an analyst's question on prospects for the coming months, Graehsler said if the company could fully recover its order backlog — "which we are working to do" — then it would be a "positive building block" for the second quarter. Although not giving much in terms of guidance, the finance chief said he expected "a better picture" in regard to profit in the second quarter, which he defined "traditionally always the best quarter of the year" because of the boost in sunglass sales in May and June.
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