Salvatore Ferragamo reported a 1.7 percent year-on-year increase in third-quarter sales to €303.8 million, reversing a 1.7 percent drop posted in the first half and resulting in nine-month revenues falling by only 0.7 percent to €1,014 million. But at constant currency rates, the sales decline accelerated with third-quarter revenues down by 6.2 percent, against 3.1 percent in the first half, pushing the nine-month tally down to a 4.0 percent drop. The Milan Stock Exchange reacted with a drop of 7.5 percent in the valuation of the company.
In the third quarter, the company's own retail sales rose by 0.1 percent at constant currency rates, improving from a 3.2 percent decline in the first six months, while wholesale sales fell by 18.6 percent, against a 3.0 percent slump in the first half, due to “cautious” shipments to U.S. department stores.
The company, which since Aug. 3 has a new chief executive, Eraldo Poletto, has increased the focus on the sell-out of products to consumers rather than the sell-in to wholesale accounts. During a conference call, the management said it is useless to load wholesale clients with excess stock as it could result in very aggressive markdowns if the market sours, thus damaging the brand's image.
Poletto said that the U.S. is the group's main wholesale market and noted that U.S. department stores are going through a lot of pressure in terms of inventory markdowns, “so our strategy is really to keep the inventory as lean as possible” to avoid further discounts and to create room for the new collections. “It's a long-term strategy,” he added.
In the process, Ferragamo's own inventories went up by 15.6 percent year-on-year to €393.1 million at the end of September. Admitting that stock levels are high, the management said that it would use its secondary channel, such as outlets, to lower them.
The group announced plans to streamline its product range, reducing the number of stock-keeping units, or SKUs. Ferragamo has about 10,000 SKUs and claims that it can reduce that number by about 10-15 percent and still satisfy its clients' requirements.
The company also highlighted the need to reinforce its retailing skills and continue building up its management team in that area. It said that it is working to develop an enhanced “retail mindset” by improving visual merchandising, product assortment, the supply chain and customer relationship management. Ferragamo has launched a pilot program involving 12 stores worldwide to achieve those goals.
At the end of September, the group had a network of 673 mono-brand stores, up from 662 three months earlier. The number of directly operated stores (DOS) rose to 396 from 388, while a further 277 points of sale were run by third parties, three more than three months earlier.
Poletto said that the future extension of the retail network will be limited and confined to some emerging markets. He stressed that the focus will be on improving same-store sales.
In the first nine months of this year, Ferragamo's same-store sales fell by about 6 percent but improved sharply in the third quarter, falling only by some 3 percent during the latest period. Comparable store sales were boosted by a positive trend in the U.S. and by a positive swing of about 10 percentage points in the performance in mainland China, where same-store sales grew by 5 percent in the quarter.
Despite this dramatic change, an analyst noted that LVMH's and Burberry's performance in China improved significantly more than Ferragamo's. The group anticipates reporting further improvements in same-store sales for the coming weeks as new products hit the shelves, without waiting for the spring/summer collections.
Evidently, the positive trend in China is partly due to more Chinese shopping at home rather in foreign countries. In the first nine months of 2016, Ferragamo's revenues in Europe fell by 5.0 percent to €267.7 million, due to lower tourist flows. The trend worsened in the third quarter, with sales down by 8.6 percent, driven by a 12 percent drop in the wholesale business. Retail sales decreased about 6 percent in the quarter, which represented an improvement from the 11 percent decline seen in the first half. At constant currency rates, the overall revenues were down in Europe by 4.8 percent over the nine months.
In North America, the nine-month revenues rose by 3.2 percent to €242.2 million, driven by an increase in own retail revenues of about 11 percent, thanks to the secondary channel, while the wholesale business dropped by about 8 percent. In local currencies, sales in the region were down by 3.9 percent overall, but with a surge in retail sales of 24 percent for the latest quarter.
Asia-Pacific, excluding Japan, saw the turnover decrease by 0.3 percent in the nine months to €360.0 million, with third-quarter sales up by about 10 percent. In local currencies, revenues declined by 4.1 percent in the nine months and by about 3 percent in the quarter. Hong Kong continued to weigh down sales, by 15 percent at constant currency rates in the third quarter after falling by 24 percent in the six months. The company's own stores in China increased sales in yuan by 3 percent in the nine months and by 11 percent in the quarter.
In Japan, Ferragamo's sales were down by 1.6 percent to €92.8 million in the nine months as the number of Chinese tourists dwindled in the wake of the yen's appreciation. In yen, revenues fell by 9.1 percent. In the third quarter, sales were down by 8 percent at actual currency rates and by 17 percent at constant rates.
In Latin America, nine-month sales rose by 3.6 percent to €51.1 million despite adverse foreign exchange variations. In local currencies, they were up by 12.8 percent. In the third quarter, the top line rose by 10 percent in reported euros and by 15 percent at constant rates.
Globally, the company's sales of footwear products increased by 1.0 percent to €437.8 million in the first nine months of the year, but they were off by 2.7 percent at constant currency rates. Handbags and other leathergoods dropped by 1.2 percent in euros and by 4.7 percent in local currencies, reaching €369.7 million. The two categories outperformed other products and represented, on aggregate, 79.7 percent of total sales against 79.1 percent a year earlier.
The group's gross margin rose to 67.0 percent from 65.8 percent a year earlier, thanks partly to a lesser impact from foreign exchange rates.
Poletto is expected to say something more about his strategy going forward in January.
The Ebitda margin was unchanged at 21.3 percent, while the Ebit margin narrowed to 16.8 percent from 17.0 percent. The group's net profit after minority interests fell by 3.0 percent to €110.1 million.
The results were affected by a 2.2 percent rise in operating costs to €509.5 million in the nine months, combined with a 31.3 percent increase in financial expenses to €12.1 million. Operating costs rose by 7 percent in the quarter due to expenses related to the CEO change and new management hires.
The group said that it was often successful, especially in mainland China, in renegotiating its store rents, but the results have been poor in Hong Kong. In the nine months, rental costs increased by 1.8 percent to €151.9 million across the world.
The group was coy about projections for the rest of the year and for 2017 because of the volatile business environment. It acknowledged that financial analysts were expecting 2016 sales of €1,420-1,435 million and an Ebitda of €320-335 million. Ferragamo said that the final outcome will depend on the forthcoming holiday season. It stressed, however, that the bottom line could be positively impacted by an Italian tax break on intangible assets such as patents, trademarks and design. The company still has to reach an agreement with the tax authorities on the so-called Patent Box benefit.
For next year, analysts expect Ferragamo to post slow growth, with sales of around €1,480 million and Ebitda of some €345 million.