Salvatore Ferragamo RTW Fall 2018

MILAN “The group has to work, we still have a lot to do,” acknowledged executive chairman Ferruccio Ferragamo, reporting on the performance of Salvatore Ferragamo SpA in the first quarter of the year. “We are very focused on creating and consolidating the organization,” he said, emphasizing cost-containment, product and “a clear watch on unproductive expenses.”

Ferragamo was speaking to analysts and the press during a conference call at the end of trading on Monday, after the Florence-based firm reported that net profit was dented by a higher tax rate and that margins and sales were affected by currency fluctuations and “an unfavorable channel mix.”

In the three months ended March 31, net profit, including minority interest, decreased 18.8 percent to 9 million euros, compared with 11 million euros in the same period in 2017, attributed to a tax rate increase due to the lower deferred tax assets charge in the U.S.

Revenues decreased 1.7 percent to 304 million euros, compared with 309 million euros in 2017. At constant exchange, they gained 1.7 percent.

Analysts took the opportunity to ask Ferragamo to elaborate on the board’s choice last month to appoint Gucci veteran Micaela Le Divelec as new chief corporate officer — although in Italian her role was described as general director. Le Divelec and vice chairman James Ferragamo, who is also brand and product officer, have been designated as strategic managers of the company, together with chief financial officer Ugo Giorcelli.

Ferruccio Ferragamo observed that his role as executive president was temporary, and that he was working with Le Divelec, relying on her “great experience. I have known her for years and we are taking advantage of her experience on all aspects — finance, h.r., logistics, all the areas that are not headed by James Ferragamo, who is vice president and in charge of product.”

He reiterated that he was working on structuring a new organization. “We are still in the process and we hope, my expectation is that the future ceo should come from within the organization, not outside. It’s important that the new ceo understand the real DNA of the company.”

The Ferragamo board’s approval on March 8 of the 2017 balance sheet marked the appointment of Ferruccio Ferragamo as interim chief executive officer following the exit of Eraldo Poletto. Last month, the board also appointed him executive chairman.

Asked about Poletto — who has since been named ceo and president of Stuart Weitzman in the U.S. — Ferragamo said his “contribution to the company has been overall positive, he brought newness, specialized in retail, emphasized productivity per square meter and IT, and we will continue all that. We want to have a soft landing in the present situation, and put on hold costly [investments] that offered little return. On many projects we continue what was started.” He explained that the distribution channel was under his watch.

During the call, Giorcelli said 2 percent growth in 2018 revenues at constant exchange was “not far from reachable. It may be a little bit on the challenging side, but not difficult.”

Giorcelli said the company had been “hedging through the fourth quarter of 2017 and the first quarter [of 2018]. We have not hedged all costs but parts and we are not exposed too much.”

In the first quarter of the year, sales in the retail channel were down 3.6 percent to 191.8 million euros, accounting for 63.1 percent of total revenues. At constant exchange, the channel inched up 0.2 percent. The wholesale channel grew 2.6 percent to 107 million euros, with the travel retail channel reporting double-digit growth, said Giorcelli.

As of March 31, the group counted 678 points of sales, including 406 directly operated stores and 272 third-party operated units. The company has increased its presence in outlets, improving their quality, said Giorcelli. Asked if there was a risk of cannibalization, he said “on the contrary, outlets are making clearer what is primary and what is secondary. It’s not nice to see too many end-of-season sales in primary stores. It’s making order in the positioning. It was unhealthy in some markets.”

During the call, Giorcelli said “volumes were driven by performance and not by discounting or price increases. We are still fine-tuning and streamlining the collections, we are not at the level we want, we centralized merchandising functions, and we have come a long way, but there is still room for improvement.”

In the quarter, earnings before interest, taxes, depreciation and amortization were down 1.9 percent to 32 million euros.

Operating profit was stable, up 0.3 percent to 17 million euros.

The Asia-Pacific area was confirmed as the group’s largest market in terms of revenues, increasing by 1.2 percent to 114.5 million euros, accounting for 37.7 percent of the total. At constant exchange, sales in the region grew 4.6 percent. The retail channel in China was stable, while the trend in Hong Kong showed significant acceleration, up 34.1 percent at constant exchange, said Giorcelli. Asked about this performance, he said it was “a matter of good organization. The new Canton Road store has shown extremely good results, we repositioned the brand in Hong Kong, made it more visible. We had a major event last year for the opening of the store and we are seeing a very healthy growth. We are benefiting from the new positioning and higher visibility.”

South Korea remained weak, mostly due to the significant decrease of Chinese tourists and the rationalization of the store network.

Europe posted a 1.4 percent increase in revenues to 78.2 million euros, representing 25.7 percent of the total, because of the positive performance of the wholesale channel.

North America was penalized by the currency trend, showing a 6.1 percent decrease in the first quarter to 65.4 million euros, accounting for 21.5 percent of the total. At constant exchange, the region showed 2.4 percent growth, lifted by the retail channel, while the wholesale channel continued to show a negative trend as a result of the impact of the struggling department store sector.

The Japanese market registered a 6.3 percent decrease to 29.7 million euros, representing 9.8 percent of the total, mainly due to the strategic rationalization of the wholesale channel. “We are down to 70 stores from 78 and that is more than adequate to cover the country in a productive way and without a proliferation beyond the needs,” said Giorcelli.

Revenues in Central and South America were down 8.3 percent to 16 million euros, accounting for 5.3 percent of the total, penalized by currency trends and by a tough comparison from last year.

Giorcelli admitted the footwear category was “weak,” showing a 5.3 percent decrease to 123.5 million euros and accounting for 40.7 percent of the total, while he touted the performance of handbags and leather accessories, which showed a 3.7 percent gain to 116.1 million euros, representing 38.2 percent of the total. Giorcelli defined the category as “very strong, also in this quarter. It’s performing extremely well, it’s comforting that bags are going in the right direction and we are starting to see the fruits.”

There was an “element of country mix in the performance of the categories, speed in channels and by geography. We are seeing the take-off of bags, while shoes are still lagging, but we are moving in the right direction,” the cfo said. “Shoes are a bigger machine, it’s not that all [divisions] come to fruition at the same time. There are good signs, but we made some mistakes and we were too aggressive in bringing some newness.”

Fragrances grew 8.6 percent to 22.5 million euros, accounting for 7.4 percent of the total, lifted by the launch of new products. Apparel dropped 9.6 percent to 18.6 million euros, accounting for 6.1 percent of the total.

In February, during Milan Fashion Week, Ferragamo held a coed runway show to unveil its men’s and women’s fall 2018 collections, designed by Guillaume Meilland and Paul Andrew, respectively. The show marked the ready-to-wear debut of Andrew, who was previously women’s footwear creative director and was appointed creative director of the women’s line in October. He succeeded Fulvio Rigoni.

Capital expenditures totaled 9 million euros compared with 13 million euros in the first quarter of 2017, channeled mainly in the distribution center, the IT projects and strengthening the brand’s store network. “We are not stopping, we need to invest in communication and increase the quality of distribution,” remarked Giorcelli. “We are more analytical on what gives a return immediately.”

The net financial position stood at a positive 141 million euros, compared with 47 million euros at the end of March last year, mainly due to a reduction in net operating working capital.

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