MILAN — Safilo Group SpA fell nearly 30 percent on the Milan Bourse Monday, after Deutsche Bank and Citi downgraded the stock to “sell” from “hold,” following a profit warning and the reappointment of the Italian eyewear firm’s former chief executive officer.
Safilo’s share price sank to 0.55 euros, or 69 cents,less than a quarter of its value 12 months ago.
On Friday, the company, which has licenses with Giorgio Armani, Dior, Gucci and Valentino, among others, revised down its 2008 revenue and margin forecasts for the second straight quarter — predicting a 2 percent drop in revenues from 4 percent growth and a net income target of 1 percent of sales, from 3 to 3.5 percent — following a 63 percent decline in earnings in the first nine months of this year.
For the third quarter ending Sept. 30, Safilo reported a net loss of 6.7 million euros, or $10.1 million, compared with net profits of 5.4 million euros, or $7.4 million, during the same period last year, prompting Deutsche Bank analyst Francesca Di Pasquantonio to ask, “How bad can it get?”
Sales fell 3.1 percent to 228.7 million euros, or $314.3 million. Dollar figures were converted at average exchange rates.
Safilo said it had renegotiated its debt covenants — allowing for a net debt over earnings, before interest, taxes, depreciation and amortization ratio of 4.85 times, from 3.5, until June 2009 — although Deutsche Bank and Citi said the eyewear company risked breaching these again next year, as conditions worsened. (The average net debt/EBITDA ratio for listed luxury companies in Europe is less than 1.)
On Friday, Safilo reappointed former ceo Roberto Vedovotto — replacing Massimiliano Tabacchi — reasoning Vedovotto’s knowledge and experience would help the company achieve its strategic goals and create value in the medium term. However, Di Pasquantonio said the decision, which also saw Tabacchi move up to executive vice chairman, “further compromises the company’s credibility.”
Citi analyst Alberto Checchinato cautioned: “Despite the benefit of [Vedovotto’s] experience and detailed knowledge, we believe [as] some investors that fresh management with a strong track record in business turnaround could have been preferable to meet current challenges.”
Vedovotto reprises the role he held between 2002 and 2006, following a two-year stint at the now-defunct Lehman Brothers Holdings Inc. His priority will be to find a solution to Safilo’s net indebtedness, which Deutsche Bank forecast could reach 580 million euros, or $731.2 million, at yearend, or 4.6 times EBITDA.
Di Pasquantonio said despite the company renewing its lucrative contract with Gucci last week, “the challenging environment will continue to put more pressure on the already vulnerable balance sheet, while operating profits continue to be eaten up by interest charges.”
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