MILAN — A lower tax rate and a positive financial gain helped Safilo Group SpA report a jump in net profits despite a slowdown in revenues in the first half.
At the end of trading on Wednesday, the Italian eyewear company said adjusted net profits, which do not include nonrecurring costs, rose 130.6 percent to 22.9 million euros, or $25.6 million, compared with adjusted earnings of 9.9 million euros, or $11.5 million, in the same period last year.
In the six months ended June 30, total net financial charges were positive at 800,000 euros, or $896,000, compared to a negative impact of 22.7 million euros, or $26.5 million, in the first half last year.
In the first half of 2016, sales decreased 3.5 percent to 651.1 million euros, or $729.2 million, compared with 674.9 million euros, or $789.6 million, in the same period last year.
Chief executive officer Luisa Delgado said that in the second quarter, Safilo “achieved sales acceleration, recovering a considerable part of the first-quarter performance driven by the service shortfalls that had prevented us to fully leverage the sales opportunities of our order book.”
In the first half, sales in Europe rose 5.3 percent to 291.4 million euros, or $326.3 million. The company cited a strong performance in all key markets, in particular Italy, Germany, France and the U.K., but also to improving trends in Russia after a difficult 2015.
Revenues in North America were down 3.9 percent to 259.8 million euros, or $291 million. Sales in the 118 Solstice stores in the U.S. declined 17.7 percent at constant exchange rates. During a conference call with analysts, chief financial officer Gerd Graehsler pointed to the closure of a number of Solstice stores, low traffic and the promotional environment at the chain. Graehsler said the company is suffering in the sports channel there, hence seeing a soft quarter at Smith, although it is growing its market share.
Revenues in Asia dropped 29.2 percent to 58.8 million euros, or $65.8 million, indicating difficult business particularly in China, Hong Kong, Japan and South Korea while southeast Asia and Australia continued to perform positively. Responding to an analyst, Graehsler said the company was “relatively confident the second half should start improving quite markedly.”
In the rest of the world, sales decreased 7.9 percent to 41 million euros, or $ 46 million.
Dollar figures were converted from the euro at average exchange rates for the periods they refer to.
“In the first six months, our going-forward brands portfolio made good progress, growing by 5.3 percent at constant exchange rates, thanks to the broad-based positive trends across the different market segments in which we are active,” Delgado said. “Our gross margin was in line with last year while we progressed our supply network modernization focused on in-sourcing production into our own worldwide plant network and reshoring back to Italy, and simplifying our manufacturing and logistic flows. At the operating level, we progressed with the implementation of our cost savings program to improve our overheads productivity.”
In the first half, free cash flow was negative at 9.3 million euros, or $10.4 million, compared with a positive flow of 51.6 million euros, or $60.3 million, in the first half last year, which benefited from the first of three compensation payments of 30 million euros, or $35.1 million, received in January 2015 from Kering. Safilo, which produces prescription and sunglass frames for licensed brands including Banana Republic, Dior and Marc Jacobs, as well as for own brands including Carrera and Polaroid, has been affected this year by its Gucci license agreement, now in its final year. Once the license expires, Gucci eyewear will be made by parent group Kering, which created a new eyewear division to manufacture and distribute the collections of its stable of brands.
During the call, Delgado said the impact of Gucci’s license was “more than offset” in the second half by the “going-forward” brands and the new initiatives set in motion by Safilo as part of the company’s “2020 Strategic Plan” launched last year and aimed at boosting the number of brands it owns, as well as those it manufactures under license. Graehsler said it was “difficult to predict,” but “the headwinds of Gucci will be more significant,” and Safilo is fully focused on growing the brands that will stay on. Gucci accounts for between 16 and 17 percent of total sales, he said.
Graehsler characterized the licensed business as “very strong,” with a “very good” performance of “foundation” label Dior and “rocket” brands Céline, Jimmy Choo and Fendi. He was also pleased with new brands such as Givenchy, with a new broader collection to be launched in August. “We are also very happy with Swatch, which had a very meaningful impact in the first half.”
Delgado said Polaroid is “gaining momentum,” compared with the first part of the year, and emphasized its new optical collection. She noted that Carrera’s Maverick collection fronted by actor Jared Leto is also gaining exposure and growing.