Tod's disappointed investors with weak second-quarter results that sent the share price reeling down by 7 percent and prompted brokers to downgrade their recommendations on the stock. In the quarter, the group's sales dropped by 6 percent to €224 million, partly due to a sharp fall in comparable store sales at directly managed locations. The decline in local currencies was half as big, but was driven by a two-percentage point decline in China.

The operating margin before amortization (Ebitda) narrowed to 21.6 percent in the first half from 26.4 percent a year earlier. The margin was weighed down by higher costs due to the expansion of the DOS network, including higher rental costs that amounted to 11.1 percent of sales against 10.0 percent the prior year, and higher labor costs, with a ratio of 16.7 percent compared with 15.6 percent. The operating margin after amortization (Ebit) dropped to 17.0 percent from 22.0 percent. The net profit fell to €56.2 million from €75.7 million a year earlier.

In a conference call with analysts, Emilio Macellari, the group's chief financial officer, predicted that the group will still be able to achieve market expectations of an increase of more than 2 percent in sales in the full year thanks to a recovery in the second half.

He reiterated that, because of the investments made to finance the group's expansion, Tod's has to increase the top line by about 5 percent a year to keep its operating margins stable. So if the group achieves growth of 2 percent this year, its Ebitda margin will automatically shrink. Macellari admitted that it will be difficult for the company to reach the 23.2 percent Ebitda margin that financial analysts are forecasting for this year, which already represents a decline of 1.2 percentage point from last year's margin.

In the first six months of 2014, Tod's total sales fell by 2.7 percent to €477.7 million, dragged down by the second-quarter performance. On a currency-neutral basis, sales were off by 0.5 percent. On top of the snag in China, revenues continued to be negatively impacted by the company's decision to downsize the wholesale network, especially in Italy, to preserve the brands' exclusivity and improve the quality of its credit portfolio. The rationalization affected all the group's brands but Hogan and Fay were worst hit because of their reliance on the wholesale channel and on the Italian market. The company pointed out again that the current spring/summer collection is the last one to suffer from the negative impact of the process.

By brand, revenues decreased in the first six months of this year by 2.0 percent to €290.2 million for Tod's. Hogan was down by 6.1 percent to €104.5 million, Fay fell by 4.9 percent to €22.8 million and Roger Vivier rose by 1.4 percent to €59.8 million. At constant currency rates, Tod's' sales were up by 0.8 percent, Hogan dropped by 5.8 percent and Roger Vivier rose by 5.0 percent.

Tod's and Roger Vivier were the two brands most affected by the drop in the China market. With regard to Tod's, Macellari said that the brand's sales were affected by the decision to put more focus in the stores on the collection of Alessandra Facchinetti, whom the company hired as creative director in February 2013. Facchinetti was previously at Gucci and Valentino and was hired as part of the group's effort to give the Tod's label a more contemporary image and turn it into a lifestyle brand.

Macellari said that the decision to reduce the assortment of evergreen products such as its Gommino loafers and ballerina shoes affected sales and was one of the reasons for the revenue decline in China. Macellari said that the group has reviewed its stance for the autumn/winter collection. While it will continue to give more visibility to the collections designed by Facchinetti, the group will bolster the availability of its evergreen products.

As for Roger Vivier, the group deliberately put a break on the label's growth to maintain its exclusivity and avoid becoming “too dependent on a single style or a single family of products,” said Macellari. The manager added, however, that Roger Vivier is expected to increase sales in the full year.

Across the group, footwear sales were down by 2.5 percent to €373.7 million, leathergoods and accessories fell by 2.8 percent to €77.1 million and apparel sales slipped by 4.9 percent to €26.5 million. At constant exchange rates, revenues for footwear were down by 0.4 percent in the first half, while leathergoods and accessories increased by 0.7 percent. 

By geography, revenues dropped by 7.8 percent to €148.5 million in Italy, but the group's directly-operated stores (DOS) in the country managed to increase sales despite a reduction in tourist flows. The country still remains the group's largest market but its share in total sales continues to shrink and represented 31.1 percent of revenues in the first half compared with 32.8 percent a year earlier. Macellari believes that the worst is over in Italy, whose economy has suffered more than five years of flat or declining gross domestic product.

Sales in the rest of Europe were up by 6.4 percent to €108.0 million, and up by 6.7 percent at constant currency rates, led by Germany, Spain and Russia. As in Italy, other Western markets suffered from a decline in tourists but purchases by locals remained unchanged.

In the Americas, revenues were down by 7.2 percent to €42.3 million, but the decline was only 2.7 percent at constant exchange rates.  Sales were impacted by the temporary closure of two stores, including the New York flagship on Madison Avenue. The flagship store is being refurbished and is due to reopen at the end of August, while a store in Honolulu will be relocated.

Greater China was down by 7.6 percent to €117.8 million, and by 3.6 percent at constant currencies, due to a tough comparison base and a drop in store traffic after the government's clampdown on extravagances. Macellari noted that the presence of shoppers in some Chinese malls is down by as much as 30-40 percent.

Sales in the rest of the world were up by 9.9 percent to €61.1 million, driven by South Korea, Japan, Singapore and the Middle East. At constant currency rates, they were up by 16.0 percent.

By channel, revenues generated by sales to wholesale clients and franchisees declined by 1.1 percent to €176.6 million, or 0.2 percent at constant currencies, while sales generated by DOS dropped by 3.7 percent to €301.1 million, off by 0.8 percent on a currency-neutral basis.

Same-store sales were down by 8.3 percent in the 31 weeks to Aug 3, indicating further deterioration after the 19-week period ended May 11, for which the company had previously reported a 6.7 percent drop. The decline was attributed to a tough comparison basis with last year and the situation in mainland China. Macellari noted that same-store sales showed signs of improvement over the past two to three weeks, also in China, with the arrival in the stores of the autumn/winter collections.

The order backlog is largely unchanged from last year, but the group's own DOS have ordered less than budgeted to have more leeway for reorders. The group believes that the same-store sales trend will significantly improve in the second half of the year. Even though it will remain negative for the full year, Macellari expects the rate will end up around a low to mid-single-digit figure. Price increases for the autumn/winter collection will be much lower than the increase of about 2.0 percent applied to the spring/summer collections.

At the end of June, the group had 229 DOS and 87 franchisees, up from 200 DOS and 79 franchisees a year earlier.

Capital expenditure rose to €34.0 million from €22.2 million in the first half due to the purchase of a new plant and the construction of a new footwear factory. The group had a cash pile of €113.9 million at the end of June.