By  on August 7, 2014

MILAN — The luxury world continues to wobble.

Tod’s Group SpA on Thursday joined the list of luxury groups registering declining or slowing growth as the Italian firm reported a 26 percent drop in net profits in the first half to 56.1 million euros, or $76.9 million, as sales slowed due to a challenging environment in China, the continued rationalization of its Italian distribution network and the temporary closure in the U.S. of two key stores. The performance of its core Tod’s brand suffered across the board, with sales falling at both its own stores and at wholesale.

In a statement released after the close of trading in Milan, where the company is listed, Tod’s said total turnover in the six months to the end of June dropped 2.7 percent, to 477.7 million euros, or $654.4 million. At constant exchange rates, the decline would have been a slimmer 0.5 percent, to 488.6 million euros, or $669.4 million, the company said.

Tod’s joins the likes of LVMH Moët Hennessy, Kering and Compagnie Financière Richemont in being hit by the tougher market in China, which stems from the crackdown on corruption being taken by Chinese President Xi Jinping. LVMH reported a 4.3 percent profits decline in the first half while Kering registered a net profit fall of 4.7 percent.

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Major luxury and fashion brands also are struggling against currency headwinds, which are unlikely to calm in the near future.

Nonetheless, Tod’s chairman and chief executive officer Diego Della Valle sounded an optimistic note, commenting on how the group’s decision “to give priority to the midterm development of our group is correct and will bear fruits in the nearest future.”

Della Valle added that “the first feedback of clients to the fall-winter collections is very encouraging and, if this trend will continue, we can look at the yearly performance with a positive stance.”

Discussing the group’s performance during a conference call with analysts after the results were released, chief financial officer Emilio Macellari said the group faced a “weak consumer environment” in China, where it is present mostly with the Tod’s and Roger Vivier brands. In the U.S., Macellari said the company had temporarily closed two key boutiques, including its Madison Avenue flagship in New York, for refurbishment. The Madison Avenue store is due to reopen by the end of this month, Macellari said.

Italy remained a drag on group sales, falling 7.8 percent compared with the year-earlier period, as Tod’s is continuing its distribution rationalization, started in 2012, which seeks to “preserve the brands’ exclusivity and positioning,” Macellari said. This strategy particularly hit the Hogan and Fay brands, which are more exposed to Italy than other countries. However, Macellari said Hogan was growing “double digits” in foreign markets, the focus of its development.

The wholesale channel was particularly hit in Italy, Macellari explained, due to the rationalization strategy, while the company recorded “positive performance in directly operated stores.” Italy, where revenues shrank to 148.5 million euros, or $203.4 million, represents about 30 percent of group sales.

Macellari commented that all other major markets in Europe were positive, with Germany being the best performer and smaller markets like Spain and Russia also growing.

Despite the slowdown in the Americas’ sales in the first half, with a 2.7 percent decline due mostly to the store refurbishments, Macellari said the U.S. was “confirming to be in good shape for luxury.”

Macellari added that in Greater China, where revenues dropped 7.6 percent to 117.8 million euros, or $161.4 million, the situation was also affected by the strong comparison with the year-earlier performance. However, speaking about China specifically, the executive said the fall collection was doing well and the like-for-like performance of the past two to three weeks was “much better than previously. I think that three weeks is not a trend, just a signal, but the signal is positive for sure.”

The rest of the world saw sales rise 16 percent, driven in particular by South Korea, Singapore, Japan and the Middle East, Macellari said.

In terms of brands, the Tod’s brand remained the group’s sales engine. Although down 2 percent at current exchange rates, at 290.2 million euros, or $397.6 million, the brand represented 60 percent of group turnover. At constant currencies, the brand’s sales would have inched up 0.8 percent in the period. Hogan and Fay were down 6.1 and 4.9 percent, respectively, in the period, to 104.5 million euros and 22.8 million euros, or $143.2 million and $31.2 million. Roger Vivier revenues inched up 1.4 percent (or 5 percent, at constant currencies), to 59.8 million euros, or $81.9 million.

The company said Roger Vivier has been “visibly affected by the slowdown experienced by the luxury goods industry in the Chinese market.” However, the positive results in other markets are seen as “further confirmation of the huge potential of this prestigious maison,” the company said.

In terms of product categories, shoes remained the group’s core business, with sales of 373.7 million euros, or $512 million, down 2.5 percent at current exchange rates, or 0.4 percent at constant exchange. Leather goods fell 2.8 percent — but were up 0.7 percent at constant currencies — as a result of the weak consumer demand in Greater China.

Earnings before interest, taxes, depreciation and amortization, at 21.6 percent of sales, was 21 percent lower, at 103 million euros, or $141 million, reflecting the “strategic decision to continue the investments in the distribution network, in communication and in human resources, which are necessary to support the mid-term growth potential of the group,” Tod’s said.

At constant exchange rates, EBITDA would have been 109.5 million euros, or $150 million, the company said.

During the conference call, Macellari said current EBITDA consensus for the year, at slightly more than 23 percent, was “challenging,” though “not dramatically. If we deliver a 22.3 percent EBITDA margin, I would be more satisfied. I consider it a sort of target to be achieved, but I do not promise to provide you with that result,” he said.

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