Salvatore Ferragamo is confident that it can pursue the 6 percent currency-neutral increase in sales achieved in the first nine months of the year during the fourth quarter, despite mounting problems in the Asia-Pacific region, its largest market.
The group admitted that the pro-democracy protests that started at the end of September in Kong Kong have impacted sales in the city. The former British colony represents 6-7 percent of the group overall revenues. In a conference call, Michele Norsa, chief executive of Ferragamo, said that his contacts in China and Hong Kong believe that the protest could soon come to an end. He presumes that sales will pick up in the city once it ends.
Meanwhile, Japan, which represents about 9 percent of the group's total sales, has officially gone into recession after two quarters of negative economic growth. Japan's gross domestic product (GDP) fell by 0.4 percent in the third quarter as compared to the second quarter, when GDP retreated 1.9 percent on a quarterly basis. To complicate matters, the poor economic data may trigger a snap election in the country.
For the first nine months of 2014, Ferragamo posted worldwide revenues of €956.6 million, in line with market expectations, up by 4.6 percent at current exchange rates and by 6.0 percent at constant rates.
European sales rose by 7.0 percent to €264.0 million, rising by 6.9 percent at on a currency-neutral basis. They grew by only 3 percent in the third quarter, as they were also affected by the Ukrainian crisis and a decline in the number of Chinese tourists, on top of persistently weak domestic consumption trends in the major countries.
During the first nine months, Ferragamo's sales rose by 4.4 percent to €213.5 million in North America, while Latin America was up by 7.8 percent to €42.5 million. In local currencies, the two regions showed a little higher sales increases of 6.7 percent and 11.9 percent, respectively. Also on a currency-neutral basis, revenues went up by 5.0 percent in North America but fell by 7.0 percent in Latin America.
The group said that U.S. consumption was affected by fears of terrorist attacks and the Ebola pandemic, but there were increases in spending on the West Coast, particularly by Asian tourists, and even more so in Canada. In Latin America, the group's development continues to be driven by Mexico, which has become the brand's seventh-largest market, and Brazil.
Japanese sales fell by 3.6 percent in the nine months to €83.5 million, but rose by 3.0 percent in yen. In the third quarter, they were down by 4.0 percent in yen, partly due to the closure of three points of sales in department stores. Norsa said that sales in the country are finding support from a 35-40 percent increase in Chinese tourists, who are taking advantage of the weaker yen. He estimates that more than two million Chinese could visit Japan this year.
In the rest of Asia-Pacific, revenues were up by 4.6 percent to €353.0 million in the nine months, increasing by 5.0 percent in local currencies. They were driven by double-digit growth in retail sales in China's second and third-tier cities. Overall retail sales were up by 16.0 percent in China in the nine months and by 13.0 percent in the quarter.
Worldwide, Ferragamo booked a 3.0 percent rise in overall footwear sales to €411.3 million in the first nine months. On a currency-neutral basis, they were up by 4.6 percent. While remaining Ferragamo's largest product category, shoes slipped to 43.0 percent of overall revenues from 43.6 percent a year earlier, as sales of leathergoods and handbags grew at faster rates of 11.8 percent in euros and 13.3 percent in local currencies, up to €335.8 million. Together, shoes and leathergoods represented 78.1 percent of group revenues, up from 76.4 percent a year earlier.
By sales channel, retail turnover rose by 2.5 percent to €590.4 million, with increases in local currencies of 4.1 percent in the nine months and about 2.0 percent in the third quarter. Same-store sales grew by some 2 percent in the first nine months. The group said that comparable store sales were dampened by store renovations at some important sites such as San Francisco, the Italian island of Capri and other locations in South Korea. Norsa stressed that the group will have to improve efficiency in store renovation next year to reduce the closure period during refurbishment.
At the end of September, Ferragamo had 362 directly-operated stores (DOS), or two more than at the end of last year. It expects a further six to seven openings by the end of the year. A similar rate of expansion is anticipated for next year.
Revenues from wholesale and travel retail went up by 8.7 percent to €351.1 million in the nine-month period. At constant currency rates, they rose by 9.8 percent, with a lower gain of about 4.0 percent in the third quarter. The group had 275 mono-brand stores run by third parties. It anticipates further store openings in the future by third parties, especially in airports. The company expects travel retail to continue growing in importance, noting that international airport traffic rose by more than 5 percent in September, led by the U.S. and Asia.
The gross margin slipped slightly to 63.1 percent in the nine months from 63.2 percent a year earlier but was up to 63.7 percent from 63.6 percent in the quarter. Gross operating profits, or Ebitda, rose by 5.9 percent to €203.2 million in the nine-month period, while Ebit increased by 4.1 percent to €168.8 million. The Ebitda margin widened to 21.2 percent from 21.0 percent but the Ebit margin narrowed to 17.6 percent from 17.7 percent due to higher operating costs.
Net profit fell by 2.5 percent to €109.5 million from €112.4 million in the previous year, when the bottom line was lifted by the disposal of a 50 percent stake in the Zefer joint venture with the Italian fashion group Ermenegildo Zegna. On a normalized basis, the net profit rose by 10 percent.
Investments totaled €51 million and were 7 percent higher than in the first nine months of 2013, mainly due to the expansion and refurbishing of the DOS network as well as spending on logistics and e-commerce.
The company said it believes that it can finish the year with an Ebitda margin of 21 percent even if the task is “challenging.” Net debt is expected to decline at the end of the year from the Sept. 30 level of €58 million.