Salvatore Ferragamo managed to maintain its growth rate in Europe during the second quarter at the similar rate as in the first three months of the year in spite of a decline in tourist spending and stagnant economic growth on the continent. In the first half of the year, the group's European sales rose by 9.0 percent to €181.7 million. At constant currency rates, they were up by 8.7 percent, rising by 9.0 percent in the first quarter and by 8.3 percent in the second one.
The group pointed out that these results were achieved despite a fall in the number of Russian and Ukrainian tourists shopping at its European store, due to the conflict in Ukraine. Russians and Ukrainians represent about a fifth of its sales in Europe's main cities and resorts. During a conference call with analysts, Michele Norsa, chief executive of Ferragamo, said that spending by Russian clients fell by about 20-30 percent, significantly impacting the group's business on the French Riviera.
Furthermore, the recent strength of the euro has generally penalized tourist flows to Europe, prompting some travellers, such as the Chinese, to choose other destinations. Norsa estimated that the number of China tourists going to Korea almost doubled in the first half.
Ferragamo posted worldwide revenues of €659.0 million during the six-month period, roughly in line with market expectations of €660.0 million, up by 5.5 percent at current exchange rates and by 7.6 percent at constant rates.
Northern American sales rose by 5.0 percent, or by 7.4 percent at constant rates, reaching €141.7 million. At the beginning of the year, U.S. sales were affected by the polar weather that hit the northeastern part of the country, but the top line grew by 12.1 percent in dollars during the second quarter, and Norsa felt that this positive trend should continue in the coming months.
Ferragamo's sales in Latin America went up by 16.7 percent to €29.0 million, rising by 23.1 percent on a currency-neutral basis. Sales in the region were driven by strong growth in Mexico and expansion in Brazil.
Japanese sales fell by 0.4 percent to €57.8 million, but rose by 6.4 percent in yen. First-quarter sales were lifted by local consumers buying ahead of the increase in the value added tax, which was raised on April 1 to 8.0 percent from 5.0 percent. In the second quarter, Japanese revenues were down by 4.0 percent in the local currency. In July and August, Japanese sales trends were positive again and the group expects overall growth for the full year, albeit possibly at a low single-digit rate, thanks to domestic demand and tourists.
In the rest of Asia-Pacific, Ferragamo's sales went up by 3.6 percent, or by 5.6 percent in local currencies, reaching €248.9 million, driven by retail sales in Greater China, especially in second- and third-tier cities situated in mainland China. The group expects that the double-digit increase in retail sales enjoyed in mainland China during the first half will be further boosted by new store openings in the second part of the year.
Meanwhile, sales growth slowed down in Hong Kong due to a drop in spending by Chinese tourists. There has been some tension between China and Hong Kong regarding the high level of Chinese tourists entering the former British colony from the mainland. In 2013, Hong Kong had more than 54 million visitors, and three-quarters of them came from mainland China. Hong Kong authorities estimate that annual arrivals could exceed 100 million by 2023. Norsa said that he remains upbeat about the medium to long-term outlook of Hong Kong as a leading destination in Asia.
Shoes and leathergoods increased their combined share of group sales to 78.4 percent during the first half from 76.8 percent a year earlier, but handbags and other leathergoods grew faster than footwear, whose total sales increased by 3.5 percent to €281.9 million during the period. On a currency-neutral basis, shoe sales were up by 5.7 percent in the first half. Shoes remain Ferragamo's largest product category but slipped to 42.8 percent of overall revenues from 43.6 percent a year earlier. Sales of leathergoods and handbags, the group's second largest product line, rose by 13.3 percent, or by 15.5 percent at constant currencies, to €234.6 million.
By channel, retail sales rose by 2.8 percent to €393.4 million, with growth of 5.2 percent in constant currencies and about 3 percent on a same-store basis. At the end of June, Ferragamo had 357 directly-operated stores (DOS). The group said that it is not taking over Chinese franchisees this year but intends to do so in 2015 as some contracts expire.
Wholesale and travel retail revenues rose by 10.5 percent to €256.0 million. At constant currency rates, they rose by 12.1 percent, lifted by the strong performance of the travel retail business, which represents about 10 percent of the group's top line. Ferragamo's management was upbeat about the outlook of the wholesale business, noting that it is enjoying strong growth with U.S. department stores and plans to increase its presence in that channel next year. The division's sales include 269 mono-brand stores managed by third parties at the end of June.
The gross margin slipped to 62.8 percent in the first half from 63.1 percent a year earlier due to adverse fluctuations in currency rates and the channel mix. But in the second quarter, the gross margin rose to 64.0 percent from 63.8 percent as the group delayed the sales season in some markets. The company is constantly seeking to reduce discounting and is still working on its evergreen collection to limit markdowns. For the full year, Ferragamo expects its gross margin to be in line with 2013.
Gross operating income before amortization, or Ebitda, rose by 8.8 percent to €143.0 million and Ebit increased by 8.0 percent to €120.6 million. The Ebitda margin widened to 21.7 percent from 21.0 percent and the Ebit margin to 18.3 percent from 17.9 percent as operating costs grew more slowly than sales. Net profit fell by 3.5 percent to €78.1 million from €80.9 million in the previous year, when the bottom line had been lifted by the disposal of a 50 percent stake in the Zefer joint venture with Ermenegildo Zegna. On a normalized basis, the net profit rose by 14 percent.
Investments totaled €34 million, up by 35 percent compared with the first half of 2013, mainly due to the expansion and refurbishing of the DOS network as well as spending in logistics and e-commerce.
The company said that it expects to meet market expectations for 2014 of an Ebitda margin above 21 percent and sales in excess of €1.3 billion, but warned that is has little visibility about its future business due to the uncertain geopolitical situation, which is affecting travel and consumer confidence.
Meanwhile, Ferruccio Ferragamo, chairman of Salvatore Ferragamo, denied speculation that the group had been approached by LVMH. He also ruled out the possibility of selling his family's stake inthe company. In an interview with the news agency Bloomberg, he said that his family is united in its intention to keep control of the company. The broker Exane BNP Paribas sees Ferragamo as the most likely takeover candidate among Italy's mid-sized listed luxury goods companies. The shoemaker may be on LVMH's radar, though, according to Berenberg Bank.