MILAN — Confidence in China is not waning at Salvatore Ferragamo SpA.
“We are not fortune-tellers and cannot say what the trends will be in the next months, we look at the moment and keep our projects running, carefully planning the opening of new stores in the second part of the year,” said Michele Norsa, chief executive officer of the Florence-based firm, in conference call with analysts Thursday. “We are confident business can improve in Mainland China, with a boost in domestic consumption.”
The executive spoke at the end of trading in Milan, where the firm is publicly listed, after reporting a growth in profits and revenues in the first six months of the year, lifted by gains in the Asia-Pacific region, Ferragamo’s largest market, and its retail channel in China, despite deteriorating trends in Hong Kong and Macao in the second quarter.
In the six months ended June 30, net profits rose 13 percent to 88 million euros, or $103 million, compared with 78 million euros, or $106.8 million, in the same period last year. Including a minority interest of 2 million euros, or $2.3 million, earnings were up 10 percent to 90 million euros, or $105.3 million, compared with 82 million euros, or $112.3 million, in the same period last year.
Revenues climbed 10 percent to 722 million euros, or $844.7 million, compared with 659 million euros, or $902.8 million. This included a negative hedging effect of 23 million euros, or $27 million. At constant exchange rates, sales would have risen 2 percent.
Sales in Asia-Pacific grew 7 percent, but would have dropped 4 percent at constant exchange rates. In particular, the retail channel in China was up 17 percent.
“Domestic business in China is evolving in a way similar to previous semesters,” said Norsa, citing “reduced traffic” as the Chinese are looking for “better buying conditions” in Europe, Australia or the U.S., for example. Second- and third-tier cities are “more consistent.”
Norsa said he expected an improvement in domestic business in Mainland China. Hong Kong and Macao were impacted by fewer visitors and reduced spending, he said, adding that trends are related to the new traveling destinations of the Chinese. The executive defined performance in Asia-Pacific as “mixed” with Mainland China showing growth in retail and Hong Kong and Macao “performing a little worse in the second quarter.” Norsa noted that weakness in Hong Kong and Macao was balanced by new markets in Mexico, Australia, Japan, Europe and Canada.
He underscored that the performance in China varies from area to area, depending on infrastructures, for example, and also cited a “very significant increase” in e-commerce in the region. An event is planned in Shanghai in the second half of the year.
In the first six months, sales in Europe rose 8 percent, accelerating in the second quarter of the year when they were up 13 percent. During the call, Norsa said geopolitical tensions in Eastern Europe, including Russia and Ukraine, and in Greece over the past six months impacted business, in particular at wholesale.
Revenues in North America climbed 16 percent (3 percent at constant exchange rates). Norsa said the U.S. is seeing a “positive economic trend,” although some cities are penalized by the strong dollar as tourism is diverted to Mexico, Canada and Australia, while Americans are traveling more to Europe. “We are going to push in the U.S. in the second half,” said Norsa, citing a “major event” on Sept. 9 to mark the reopening of the brand’s boutique on Rodeo Drive in Beverly Hills with a new concept created by Bill Sofield, and another “big event” in December in New York. The wholesale and e-commerce channels were also positive in the period, with growth of the latter “exceeding 35 percent.”
Japan was up 8 percent, accelerating in the second quarter when it was up 12 percent. Norsa touted very strong “local consumer confidence” and a 30 to 40 percent increase in visitors to the country, prompting him to expect a “good outlook for the rest of the year with double-digit growth.”
Sales in Central and South America gained 18 percent.
Handbags and leather accessories were up 16 percent, while fragrances decreased 5 percent, penalized by the unstable situation in Eastern Europe and by a different delivery calendar in the period. Norsa cited a strong performance of small leathergoods, belts in particular, adding that for men, “we cannot satisfy market requests.”
As of June 30, the company counted 380 directly operated stores, while the wholesale and travel retail channel included 267 third-party operated stores. The retail channel was up 11 percent, while the wholesale channel was up 6 percent.
Capital expenditures totaled 30 million euros, or $35.1 million, compared with 34 million euros, or $46.6 million, last year, as the majority of the investments will take place in the second part of the year.
As of June 30, net debt stood at 98 million euros, or $114.6 million, compared with 114 million euros, or $156.2 million.
Dollar amounts are converted at average exchange for the periods to which they refer.
Responding to an analyst, chief financial officer Ernesto Greco said the company is close to seeing an end to the negative impact caused by hedging and that he expected this figure to amount to between 45 and 50 million euros, or $52.6 and $58.5 million, in 2015.
Asked about rental expenses, they were defined “most relevant” and that in the period they were up 22 percent at reported exchange and 8 percent at constant. “We are trying to renegotiate rental contracts, and in some cases we have been successful. We will push in the future in more aggressive ways,” Greco said.
Greco said “the turbulent environment does not allow projections,” but that he believed “a high single-digit at reported top line is feasible. EBITDA consensus of 320 million euros [$374.4 million] can be achieved.”
As for pricing, Norsa said it was “reasonable to wait modifying prices for the next couple of months,” surely not before November, with the delivery of the spring collection.