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Salvatore Ferragamo Profits Leap 81% in Half

Lifted by growth in all markets, driven by the retail channel in China, the luxury brand posted a stellar performance in the first six months of the year.

Backstage at Salvatore Ferragamo RTW Fall 2013

MILAN — Salvatore Ferragamo SpA isn’t seeing any luxury slowdown.

The Italian fashion house on Thursday reported an 81 percent jump in first-half net profits to 81 million euros, or $106.1 million, compared to 45 million euros, or $58 million, in the same period last year.

Sales, lifted by growth in all markets, especially the retail channel in China, rose 11 percent to 625 million euros, or $818.7 million, from 565 million euros, or $729 million.

“This is quite an interesting time looking at the scenario of the luxury goods market, which is showing solid growth and a performance better than most other sectors,” said chief executive officer Michele Norsa during a conference call with analysts.

 

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Norsa expressed confidence in the second part of the year. “The business trend, recorded in the first semester of the current year, justifies expectations for growth also throughout 2013 both for revenue and net profit, in the absence of severely unfavorable market conditions.”

The ceo expressed some caution, adding, “It’s a very delicate geopolitical scenario and a source of concern in the near future.”

Financial markets have been jittery over the possibility of a U.S. bombing of Syria, which could further destabilize the Middle East, as well as concerns about growth prospects at retail in the second half in the U.S.

In the first half, Ferragamo’s net profits, including a minority interest of 6 million euros, or $7.8 million, reached 87 million euros, or $114 million, up 55 percent from 56 million euros, or $72.2 million. Net profits benefited from a capital gain deriving from the sale of Ferragamo’s stake in ZeFer to Ermenegildo Zegna, and from a 47 percent reduction in the minority interest compared with the first half of 2012, as a consequence of the buyback of the company’s holdings in its distribution companies in Greater China, Korea and Southeast Asia.

Dollar amounts have been converted at average exchange for the periods to which they refer.

In a breakdown by region, Ferragamo said Asia-Pacific continued to be group’s main market, growing 13 percent in the first half to sales of 240 million euros, or $314.4 million, and accounting for about 38 percent of total sales. The retail channel in China climbed 30 percent in the second quarter.

“Asia-Pacific is very complex and articulated, a booster of luxury goods growth, at different speeds,” Norsa explained. China is still growing at a “strong double-digit pace,” Hong Kong is “even stronger,” Macau is performing well, while South Korea and Taiwan are “slower and have a more complicated evolution.”

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Norsa expressed some concerns about luxury spending in Beijing and Shanghai. “There are psychological reasons, difficult to understand, more controlled spending. There are more shopping areas, with an increased presence of many new brands, diluting traffic. There is growth, but a slowdown in growth. However, there is still potential to capitalize on the awareness of the brand in China,” he said, adding that second-tier cities are growing significantly.

Japan showed a 2 percent growth at constant exchange, but a 13 percent decrease at current exchange, due to the unfavorable exchange rate of the Japanese yen versus the euro. Despite the weakness of the yen, “Japan keeps improving, and travel retail is still positive,” said Norsa, noting that he generally keeps seeing “investments from major airlines, with projections of passengers growing globally.”

Europe, which Norse described as “a double-speed market,” showed a 14 percent rise in sales, “impacted by travelers, but not only tourists, also investors, business people and Chinese in groups and individuals. They are even growing compared to Russians.” Sales to Europeans are weak, especially in Spain and Portugal, outside cities that attract a lot of tourists.

Sales in North America were up 15 percent. Underscoring strong organic growth in the U.S. and Canada, Norsa pointed to the latter for “very good opportunities” for the brand, which has “not yet developed a large network” there.

Revenues in Central and South America increased more than 7 percent, lifted by a 17 percent growth in Ferragamo’s retail channel. The wholesale performance was affected by the conversion of the points of sale in Brazil to directly operated stores.

The weakness of currencies in some emerging countries such as Brazil and India is an “element for determining pricing factors and changes.” Citing previous, “usual” 4 percent increases in prices, Norsa said the company will “need to increase prices where there is a currency devolution in some emerging countries such as Brazil, Australia, India and Japan in a selected way.”

By product category, footwear grew 11 percent, and handbags and leather accessories were up 15 percent. Altogether, they accounted for over 76 percent of revenues. Fragrances grew 13 percent. “[Fragrance] Signorina was by far the most successful launch. In China, in Asia and where we are less penetrated, we are using fragrances to build the brand and shop-in-shop presence.”

Norsa pointed to the potential of leather goods, and to how the company has developed a large offering in different types of materials and colors, redesigning stores to better merchandise this category. “Shoes and leather goods are most important for the market in general, not only for Salvatore Ferragamo, and traveling consumers are showing bigger interest in this category. We see more potential in women’s bags.”

Eyewear and watches are growing strongly, offering additional opportunities, he said.

In the first half, retail sales grew 8 percent to 383 million euros, or $501.7 million, accelerating the trend delivered in the first quarter. The wholesale and travel retail channels were up 14 percent to 232 million euros, or $304 million.

At the end of June, Ferragamo’s directly operated stores totaled 353.

Operating costs grew 4 percent, reaching 282 million euros, or $370 million, with part of the communication costs shifting to the second half of the year.

Investments reached 25 million euros, or $32.7 million, in line with the first half last year,  aimed at new stores, the refurbishment of existing key locations and logistics and digital projects. Norsa said that the company is investing in the renovation of several stores, citing the newly completed Chicago unit on Michigan Avenue, which almost doubled in size; San Francisco; Milan, which will reopen in September; Hong Kong, and Shanghai.

Ferragamo, he said, is sponsoring performing arts events in Los Angeles on Oct. 16 and 17, and investing in digital with a series of movies for the Internet next month.

As of June 30, net debt stood at 78 million euros, or $102.8 million, compared with 58 million euros, or $75.4 million, at the end of December, after a dividend distribution of 56 million euros, or $73.3 million.