Backstage at Salvatore Ferragamo Men's RTW Spring 2016

MILAN — The impact of negative hedging dented margins and revenues at Salvatore Ferragamo SpA, despite growth in all its markets, driven by its retail network in China, and a solid gain in handbags and leather accessories.

The Florence-based firm saw net profit in the first nine months of the year edge down 0.3 percent to 113.4 million euros, or $125.4 million. This included a minority interest of 1 million euros, or $1.1 million, and compares with 113.8 million euros, or $153.6 million, in the same period last year.

In the period ended Sept. 30, revenues  totaled 1.02 billion euros, or $1.13 billion. This includes a negative hedging effect of 44 million euros, or $48.8 million, and is a 7 percent gain compared with 957 million euros, or $1.29 billion, last year. At constant exchange rate, sales were up 1 percent.

Excluding the hedging impact, adjusted revenues climbed 13 percent to 1.06 billion euros, or $1.17 billion.

Earnings before interest, taxes, depreciation and amortization grew 7 percent to 218 million euros, or $242 million, including the negative hedging.

The Asia-Pacific continued to be the group’s main market, growing 2.3 percent to 361 million euros, or $400.7 million, accounting for 35.4 percent of the total. Ferragamo’s retail channel in China climbed 10 percent while trends in Hong Kong further deteriorated in the third quarter.

While chief executive officer Michele Norsa said during a conference call with analysts that he saw “no signs of improvement” in Hong Kong, he expressed confidence in Macao and further potential in China. “China is the most important area,” he said, underscoring the relevance of outbound tourists, benefiting Japan, in particular.

As part of the company’s cost-control strategy, Norsa said 12 to 14 leases had been renegotiated in China this year, which will impact 2016, praising landlords’ “reasonable approach.” However, he added, “it may be more difficult to rediscuss leases in Hong Kong,” where no openings and no closures are expected. In China, Norsa expects to renovate existing boutiques, such as the unit in Shanghai just inaugurated, continuing to see potential in second- and third-tier cities, but “not additional ones, it’s not interesting to get to more cities.” The company has 89 stores in 37 cities in China.

Sales in Europe were up 6.7 percent and represented 27.6 percent of the total. “Europe benefited from the stronger dollar,” driving more tourists, “revitalizing Americans, and the Chinese are the number one,” he said, despite the fact that Russians are “missing from major cities, traveling to resorts.” The executive said the region showed “a strong beginning of October,” lifted by China’s “Golden Week.” The market may peak by the end of the year and is still healthy.” Around 60 percent of customers in Europe are tourists, he said.

North America was up 10 percent, representing 23 percent of total revenues. At constant exchange, sales were down 1 percent. The company reopened its Beverly Hills flagship store on Rodeo Drive with a new design concept. “The U.S. economy is improving, and we see signs of further confidence in 2016,” despite the decreased tourism in cities such as New York and Miami, the latter due also to the devaluation of currencies in Latin America, and thanks to the increasing number of Chinese tourists there, added the executive.

Sales in Japan climbed 13 percent, accounting for 9.2 percent of total revenues. In addition to the increase in visitors, Norsa underscored the development of and investments in cities such as Tokyo, Osaka and Kyoto, and increased local confidence, showing consistent double-digit growth in the country. “Japan was stronger in the third quarter than in the first six months,” he said.

Revenues in Central and South America were up 16 percent, mostly driven by Mexico, noted Norsa. “Latin America is an interesting target for the future,” he added.

As of Sept. 30, the company had 384 directly operated stores, while the wholesale and travel retail channel included 265 third-party-operated stores.

In the period, the retail channel was up 7 percent, representing 62 percent of the total. “We keep investing in retail in the long term,  said Norsa. “China and the U.S. will generate further growth in retail.”

Like-for-like sales were down 2 percent, impacted by Hong Kong and Macao, and other Asian market, as well as the U.S., “slightly negative,” due to the above mentioned lack of tourism in major cities.

The wholesale channel, despite the ongoing geopolitical tensions in Eastern Europe and in Greece, was up 6 percent also thanks to the good performance of the travel retail channel, and accounting for 36.4 percent of total sales. “Despite the risks in some areas, travel retail is still showing comfortable growth and we’ve seen an increase in numbers in September and October,” said Norsa.

Handbags and leather accessories grew 11.4 percent to 374 million euros, or $415.1 million, representing 36.7 percent of the total. Footwear gained 5.4 percent, remaining the group’s core business, accounting for 42.5 percent of sales. Norsa said shoes are the number-one category in online sales. Apparel decreased 3.6 percent to representing 6.3 percent of the total.

Chief financial officer Ernesto Greco trumpeted the company’s “very impressive” cash generation of 145 million euros, or $161 million, compared with 103 million euros, or $139 million, last year.

Responding to a question about hedging, Greco said “the negative item will disappear in the fourth quarter, assuming the currencies stay like today,” and that the company has booked “7 or 8 million euros [$7.7 million or $8.8 million] in hedging for the last quarter, which is less than the 21 million euros [$23.3 million] in the third quarter.” If in 2016 the average exchange dollar-euro rate will remain at 1.11, said Greco, the impact on the U.S. “would be zero” next year.

Asked about the consensus, Greco said it was “quite challenging, but we have it in mind,” pointing to top line sales of 1.42 billion euros, or $1.57 billion, and EBITDA of 315 million euros, or $350 million.

Dollar amounts are converted at the average exchange rate for the periods to which they refer.

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