MILAN — Increased brand-building investments in line with its 2020 plan weighed on earnings at Safilo Group SpA in the first half even as revenues grew.
In the six months ended June 30, Safilo’s adjusted net profit declined 68.5 percent to 9.9 million euros, or $11.6 million, compared with 31.5 million euros, or $43.1 million, in the same period last year, “impacted by financial charges behind the net negative exchange rate differences recorded in the first quarter and the effects of the fair value valuation of the equity-linked bonds,” said the Italian eyewear group after the close of the Milan Bourse, where it is traded. The adjusted figures do not include non-recurring items related to commercial restructuring costs in the Europe, Middle East and Africa region of 1.2 million euros, or $1.4 million, and other non-recurring costs of 1.2 million euros, or $1.4 million, mainly related to the consolidation of the group’s North American distribution network into its Denver facility.
Revenues were up 11.3 percent to 674.9 million euros, or $789.6 million, compared with 606.3 million euros, or $830.6 million, last year. At constant exchange rates, sales rose 1 percent. Business accelerated in the second quarter, as sales gained 12 percent. Business was solid in core markets such as North America and Western Europe although there was weakness in Asia and Russia.
“We continue on our path of investment as we reinvent ourselves to deliver sustainable growth and higher margins,” said chief executive officer Luisa Delgado. “The lower gross margin result achieved in the first half, impacted by cost inflation, is a key focus area for our cost savings and efficiency interventions going forward. On balance, we are satisfied with the progress of the strategic initiatives that we are implementing in line with our 2020 strategic plan.”
In addition to its own brands Carrera, Polaroid, Smith and Safilo, the company produces and distributes eyewear for brands ranging from Dior, Marc Jacobs and Max Mara to Tommy Hilfiger, Céline and Givenchy. As reported, Kering is adjusting its 20-year partnership with Safilo, terminating the current license for the cash-cow Gucci brand at the end of 2016 — two years earlier than planned — in exchange for compensation of 90 million euros, or $99 million at current exchange, to be paid in three installments. Kering will initiate a product partnership with Safilo for four years starting in 2017, with options to renew.
“Our licensed brand portfolio is developing positively following the brand rebalancing roadmap of 2020. Our marketing and product interventions on Carrera, Polaroid and Smith including its further integration into Safilo, are showing early results in countries where we have executed with excellence such as Carrera in North America and Polaroid in Spain, and our focus is on now accelerating the roll out,” Delgado said. She also said Carrera is being repositioned “step by step” to recapture “its authentic origins — bold, a bit naughty and courageous.”
Adjusted earnings before interest, taxes, depreciation and amortization decreased 12.6 percent to 62.7 million euros, or $73.3 million, reflecting the group’s investments in the new global advertising, product campaigns and strengthening of management. Adjusted operating profit was down 21 percent to 43.1 million euros, or $50.4 million.
Dollar figures are converted from the euro at average exchange for the period to which they refer.
During a conference call with analysts, Delgado touted progress on operations and focus on cost savings, inventory reduction and consolidation of Safilo’s logistics network. The company has started consolidating its logistics network in the U.S., noted the executive.
Sales in Europe were up 4.4 percent to 276.7 million euros, or $323.7 million, led by Italy, Iberian countries, Germany and France, accelerating in the second quarter, but were dented by Russia, which remained weak. During the call, chief financial officer Gerd Graehsler said the rate of the decline in Asia and Russia slowed in the second quarter.
Revenues in Asia dropped 3.2 percent to 86.7 million euros, or $101.4 million. At constant exchange, they decreased 18 percent. “The second quarter presented a deceleration of the decline as the group continued its interventions to create sustainable business models in every Asian market,” said the company, also pointing to the continued subdued trading environment in Greater China, Hong Kong and Korea. On the other hand, growth momentum continued in Australia and South East Asia.
Sales in North America grew 25.1 percent to 270.5 million euros, or $316.5 million. At constant exchange, sales grew 2.9 percent. Revenues in Latin America grew 8.2 percent to 25.6 million euros, or $30 million, and were up 28.9 percent in the Rest of the World, reaching 15.4 million euros, or $18 million, led by Safilo’s strengthened presence in the Middle East, where a fully owned subsidiary opened in Dubai last year.
In the period, Safilo generated free cash flow of 51.6 million euros, or $60.3 million, compared to a negative flow of 6.4 million euros, or $8.7 million, in the first half last year, lifted by the first of three compensation payments of 30 million euros, or $35.1 million, received in January from Kering, and by an improvement of net working capital management.
As of June 30, net debt further declined to 110.1 million euros, or $128.8 million, down 33.7 percent compared to 166.1 million euros, or $227.5 million, at the end of June last year.