Backstage at Salvatore Ferragamo RTW Fall 2020

MILAN — Salvatore Ferragamo shares shot up more than 12 percent on Thursday morning, climbing 13.24 percent to 12.66 euros in midday trading on the Italian Stock Exchange, following the unexpected news that Michele Norsa was returning to the Florence-based luxury company. At the end of trading, shares closed up 16.28 percent to 13 euros.

As reported, Norsa is joining the board today as director and executive deputy chairman. Ferruccio Ferragamo will continue to helm the company as chairman, but is passing on his executive proxies to Norsa, and Micaela le Divelec Lemmi will remain chief executive officer.

Analysts looked favorably upon the governance changes, taking place at a difficult moment for the economy shaken by the coronavirus pandemic and in particular for Salvatore Ferragamo, which is in the midst of a turnaround and has seen its shares fall 41 percent year-to-date.

The news also fueled speculation about a possible change of ownership, a rumor that has resurfaced over the past few seasons and a development the Ferragamo family has always denied.

Norsa is a partner in FSI, which in 2018 took a 41.2 percent stake in Missoni, and this link could open up new scenarios. In a report issued on Thursday, Equita observed that Maurizio Tamagnini, ceo of FSI, has in the past pointed to the fund as a possible aggregator of luxury brands, and that Ferragamo would fit with this idea of a fashion conglomerate.

“We thus do not exclude that Norsa’s return, while dictated by current business needs, could eventually pave the way to a project of this kind in the medium-term,” it said.

Citi stated that Norsa, aged 71, “brings a lot of experience in the luxury industry to the table,” and noted that “for smaller industry players having already faced challenges in the past few years, such as Ferragamo, we believe that a clear operational and strategic vision is needed to navigate the current industry downturn.”

Accordingly, Norsa’s “appointment makes sense,” but the return of a former ceo in an executive role “is quite unusual, we think, and could fuel speculation on future management structure and ownership.”

Norsa first joined Ferragamo in 2006 and helped it expand globally, publicly listing it in 2011 in his role as ceo, and exiting in 2016.

Equity analysts Flavio Cereda and Kathryn Parker at Jefferies view Norsa as a ceo “in all but name. Given his background, this has significant implications for the future shareholdership of the company. This is a very significant appointment. We think the news carries a number of implications: Norsa is a de facto plug-and-play executive head whose knowledge of the company means he can be involved very quickly in its strategic direction and his appointment has immediate effect.” As a consequence, the role of le Divelec Lemmi will require clarification.

Also, Cereda and Parker remarked on Norsa’s “long track record” in dealing with the investment banking and private equity community, so much so that his appointment in their view “implies a rethink of the strategic priorities for both the brand and the family at a time of unprecedented turmoil in the sector.”

Jefferies upgraded its rating to hold from underperform, while flagging previous reports on “the lack of brand heat and poor metrics” that meant the company “was going to lose market share and traction” post-COVID-19 and “was being set back five to six years in its relaunch attempt.” The analysts concluded by stating they expect possible M&A chatter “to resurface aggressively.”

Jefferies also noted that the syndicate pact between the Ferragamo family and Hong Kong businessman Peter Woo expires on June 29, with a three-year renewal option. “Has the Ferragamo family given up?” wondered Cereda and Parker.

The company is controlled by Ferragamo Finanziaria with a 54.3 percent stake, Woo’s MHL has a 6 percent stake and Ferragamo family members have a further 10.7 percent. “The syndicate pact covers 60.3 percent therefore, with a free float of just 29.1 percent. With Ferruccio Ferragamo taking a de facto step back by bringing back in Mr. Norsa, we think it is reasonable to say that all options are on the table now.”

Daniele Alibrandi at Mainfirst, which issued a hold rating, said: “While the step back of the family and the strengthening of management leave the doors open to all possible scenarios, we believe that the new structure may raise some doubts on the governance.”

Alibrandi touted Norsa’s “deep understanding of the company and strong track record” since after the successful IPO he led Ferragamo through a solid global expansion, but worried his “heavy presence” could “somehow dilute the specific weight” of le Divelec Lemmi “throwing up red flags for a potential governance issue risk and confusing the chain of command.”

Alibrandi also pointed to “all possible scenarios,” including that of a sale. “In this regard, we believe that despite the COVID-19 outbreak further exacerbating the polarization between winning and losing brands and eventually accelerating M&A activity in the industry, at this stage the family remains fully committed to navigating the company out of today’s uncharted waters, limiting the upside risk of a potential M&A event over the short term.”

Andrea Randone and Francesco Brilli at Intermonte concurred, wondering if Norsa’s arrival will “generate conflicts “ with the ceo. They also did not exclude a possible change of ownership, but continue to “believe a sale is not likely in the short-term.”

Analysts generally believe in the strength of the brand’s core categories, leather goods and shoes, but flagged its exposure to travel retail, which accounts for around 10 percent of revenues. Exane noted that after Norsa’s exit in 2016, Ferragamo has struggled with negative like-for-like trends and operating margin erosion, from 18 percent in 2016 to 11 percent in 2019.

“This move seems a further attempt by the family to turn around the business, after an unsuccessful experience with the previous ceo Eraldo Poletto,” stated Exane. Poletto succeeded Norsa and exited after two years, followed by le Divelec Lemmi.

“Since then, there have been some signs of improvement,” with like-for-like turning positive in the fourth quarter of 2019 and the company mentioning a positive start of 2020, before the COVID-19 outbreak, said Exane, noting that shares are trading close to IPO levels and underperformed in the luxury sector.

Marco Baccaglio, CFA equity research analyst at Kepler Cheuvreux, held a different view. “While investors might take this strengthening of the management team as good news, we are not convinced this could represent a turning point,” he said, adding that “the downside risk is now lower, given the track record of Norsa.” According to Baccaglio, “this news is a sign of how tough the turnaround of the company and the current COVID-19 crisis are.”

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