Salvatore Ferragamo

MILAN “Execution is key.” Micaela Le Divelec Lemmi, chief executive officer of Salvatore Ferragamo, is banking on carrying through “a clear and definite action plan” to turn around the company, which in 2018 saw an erosion in profits and sales.

Le Divelec Lemmi was speaking with analysts during a conference call on Tuesday at the end of trading, after the Florence-based company revealed a 21.1 percent drop in net profits last year. In the 12 months ended Dec. 31, earnings, including a minority interest of 2 million euros, totaled 90 million euros, compared with 114.3 million euros in 2017.

“We are very vigilant, the strategy is alive and not completed in one year,” said Le Divelec Lemmi, who took on the ceo role at the end of July last year. “We are fine-tuning our communication, our digital organization, our cultural strategy and the real key driver is the ability to execute in due time in a precise and specified manner.”

Asked by one analyst if she was bringing to Salvatore Ferragamo elements from her previous experience at Gucci and parent company Kering, Le Divelec Lemmi said “the brands are completely different and we cannot mutualize Gucci, we must be respectful of the DNA of the brand and its values. Strategy and execution are tied to the values and to create value for the brand, and to enhance it.”

During the call, it was revealed that Paul Andrew, who was promoted to creative director of the brand last month, has decided to put his own namesake footwear label on hold. “The expectation is that this will help bring further consistency to the [Salvatore Ferragamo] brand and strategy,” said Le Divelec Lemmi, expecting “a smoother design process and a structured focus on the design team as a whole — a plus in the industry. It will bring additional positive consistency to the implementation of the brand.”

As reported, Guillaume Meilland maintains his role as men’s ready-to-wear design director, taking on the additional responsibility of studio director, coordinating the development of all product categories under Andrew’s leadership. Andrew joined Ferragamo in September 2016 as women’s footwear director and was promoted a year later to women’s creative director.

In 2018, the group reported sales of 1.34 billion euros, down 3.3 percent, compared with 1.39 billion euros in 2017. At constant exchange, sales decreased 1.7 percent.

Revenues in the last quarter of 2018 registered a 3.5 percent drop, penalized by the impact of currencies, by the lower incidence of promotional sales in the primary channel, by lower revenues in the secondary channel and by the negative trends of the wholesale business.

Last year, earnings before interest, taxes, depreciation and amortization decreased 13.8 percent to 214 million euros compared with 249 million euros a year earlier.

Operating profit decreased 19.5 percent to 150 million euros, from 186 million euros in 2017.

The company noted that net profit in the last quarter last year showed a negative impact of around 9 million euros due to provisions and payment of income taxes for previous years, following tax audits in some group companies, while in the last quarter of 2017 it was negatively impacted by the U.S. fiscal reform, by around 13 million euros.

Ferragamo’s core business, footwear, registered a 5.9 percent decrease in sales to 554.7 million euros, accounting for 41.2 percent of the total. The category picked up in the last quarter, however, said chief financial officer Alessandro Corsi. He also pointed to a positive trend with the spring shoe collection.

Handbags and leather accessories were up 1 percent to 521.4 million euros, representing 38.7 percent of the total; fragrances were up 5.6 percent to 94.1 million euros, representing 7 percent of the total, and sales of apparel fell 15 percent to 76.4 million euros, accounting for 5.6 percent of the total.

Asked about pricing, Le Divelec Lemmi said the overall positioning was “satisfying.” She admitted that the customer base was “not aligned to the Millennial generation,” but that steps were being made to reach out to a younger demographic while rewarding customers “that have been loyal in time.”

Case in point, the recent Gancini collection and communication campaign succeeded in drawing in younger customers, she said.

As of Dec. 31, the company counted 672 stores, of which 409 were directly operated and the retail distribution channel was down 3 percent to 878.2 million euros, accounting for 65.2 percent of total sales. Le Divelec Lemmi pointed to an “optimization” of the existing network, rather than an investment in growing the number of doors.

Like-for-like sales were down 1.3 percent, mainly due to lower revenues in the secondary channel, but year-to-date showed an “overall positive trend,” said Corsi.

The wholesale channel, penalized during 2018 by the destocking activity and a strategic rationalization, was down 3.8 percent to 447.5 million euros, representing 33.2 percent of the total.

Le Divelec Lemmi said that the company is fine-tuning the wholesale network and “had not defined a cut in doors, putting the focus on the ability to deliver key and consistent messages to wholesalers.” Asked about venturing into concessions, she said it would depend case-by-case and that it was necessary to “ensure consistency in implementation.”

In the last quarter, wholesale revenues were down 5.4 percent at constant exchange, mainly due to the unfavorable performances in the Europe, Middle East and Africa region and in the U.S., while the Asia-Pacific area and the travel-retail channels registered positive trends. The latter comprised 142 doors and accounted for one-fourth of wholesale revenues, said Corsi.

The digital business accounted for between 4 and 5 percent of sales, he said.

In 2018, the Asia-Pacific area was confirmed as the group’s main market in terms of revenues, representing 37.6 percent of sales. Revenues in the region decreased by 1 percent to 505.5 million euros, with a positive performance in Greater China, partially penalized by the negative performance in Southeast Asia. In the last quarter, the retail channel in China recorded solid growth of 7.6 percent compared to the same period in the previous year.

The Europe, Middle East and Africa region saw a 6.1 percent decrease to 329.7 million euros, accounting for 24.5 percent of sales, mainly impacted by the wholesale business in the last part of the year due to the delayed deliveries following the change of a commercial partner in a strategic market in the Middle East.

Le Divelec Lemmi said the European consumer’s mind-set was “not clear or transparent between the end of 2018 and the beginning of 2019,” and cited “turbulence” in France and political issues in Italy. Also, she noted that the repatriation of Chinese purchases in China in the fourth quarter was affecting shopping not only in Europe, but also in Japan and Korea. That said, “Chinese buying in China is reducing tensions in price differentials — even if the price is not an obstacle to buying locally.”

In 2018, sales in North America were down 5.4 percent to 315.6 million euros, representing 23.4 percent of total sales. At constant exchange, sales in the region decreased 2.4 percent. The performance was mainly impacted by the negative trend of department store sales.

Japan inched down 0.4 percent to 119 million euros, accounting for 8.6 percent of total, lifted by the company’s retail network, but impacted by a strategic rationalization of the wholesale channel.

Revenues in Central and South America were down 1.9 percent to 76.8 million euros. At constant exchange, sales were up 4.2 percent, mainly because of the performance of the retail network.

Corsi also pointed to a one-off expense of 8 million euros in the last quarter connected to exit fees of the prior ceo, Eraldo Poletto, who left in March last year and is now helming Stuart Weitzman.

Operating expenses going forward would be mainly channeled into “communication to create value for the brand and strengthen the organization and company processes,” said Le Divelec Lemmi.

Capital expenditures totaled 71 million euros compared with 88 million euros in the previous year, mainly directed into the renovation of the store network, the distribution center and IT projects. Capex will be “similar in 2019,” said Corsi, with a lower impact of logistics offset by renovations and relocations. “Hedging in 2019 will be almost neutral,” he added.

Corsi said 5 to 6 percent of sales would be aimed at ads and promotion going forward in the future.

As of Dec. 31, the net financial position was positive, standing at 169 million euros, compared with 127 million euros at the end of December the previous year.

Corsi said he saw a gradual improvement in margins through the channel mix in the year. He said the consensus of 1.39 billion revenues for the year was “reasonable.”

Given the low visibility of the scenario, the company is aiming “at creating the foundations for a sustainable growth in the medium-term.”

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