Geox continues to improve gross margins

Geox posted a strong increase in its gross margin in the second half of 2011 and expects the trend to continue this year. Nevertheless, a recovery in the higher gross margin will not necessarily boost operating margins, as the company will have higher overheads due to investments in marketing and development as well as expansion in the Far East and retail.

Analysts expect the firm to post sales of €890 million this year and an Ebitda approaching €125 million, or nearly 13.8 percent of sales.

Geox finished 2011 with a 4.4 percent increase in sales to €887.3 million, beating its previous forecast of €880 million. On a currency-neutral basis, sales rose by 4.6 percent. Footwear revenues grew by 3.1 percent to €754.8 million and apparel sales increased by 12.1 percent to €132.5 million. At constant foreign exchange rates, revenues were up by 3.3 percent for footwear and by 12.1 percent for apparel.

By region, sales went up by 2.4 percent to €337.4 million in Italy and by 4.4 percent to €371.6 million in the rest of Western Europe. Revenues fell by 1.1 percent to €53.6 million in North America and surged by 12.8 percent to €124.7 million in the rest of the world, led by China and Hong Kong, jointly up by 25 percent; Eastern Europe, up by 32 percent; and Russia, up by 66 percent.

On a constant currency basis, sales were up by 3.9 percent in Europe, excluding Italy, by 1.5 percent in North America and by 14.7 percent in the rest of the world.

By channel, 2011 revenues fell by 2.0 percent to €486.9 million at wholesale. They surged by 24.3 percent to €187.6 million for sales to franchisees and jumped by 5.2 percent to €212.8 million for directly operated stores (DOS). On a currency-neutral basis, turnover was down by 1.9 percent in wholesale, up by 24.3 percent for franchising and up by 5.5 percent for DOS. Same-store sales were up by 2.0 percent for DOS, with flagship stores outperforming the others with a 6.0 percent growth.

Geox indicated that the order backlog for the 2012 spring/summer collection is in line with the previous year. The company has already shipped about 60 percent of the collection.

In a conference call, the company's corporate managing director, Massimo Stefanello, expressed satisfaction about the reception by customers of the spring/summer line available in its DOS. He explained that the company has developed more fashionable items, especially products for women, which represent 40 percent of sales. The response indicates that the group's policy of a fashion-oriented approach is valid and will lead it to be more selective about wholesale accounts and its focus on mono-brand stores. He also noted that working with mono-brand stores is more convenient because on average their orders are seven to 10 times higher than wholesale clients.

In 2012, Geox plans 100 net openings, in line with the 101 additional stores registered last year. At the end of 2011, the group had 1,140 mono-brand stores, of which 262 were directly operated by the company. Nearly 40 percent of the new store openings will be in Italy, 20 stores are scheduled in the rest of Western Europe, especially in France, Spain, the Benelux countries, Portugal and the U.K.; 20 in Eastern Europe, with a focus on Russia, Ukraine, Hungary and Poland; 10 in Asia, with the first opening of flagship stores in China; and 10 in the Middle East and Africa.

The company will open five stores in the Far East this year and the pace will accelerate over the years to reach 100 doors in five years' time. In Italy, the new mono-brand stores are going to be mainly multi-brand stores adopting the Geox banner because the group is offering a wider product range with continuous deliveries of new items.

The cost of converting a store is about €150,000-200,000, of which €50,000 is represented by the bank guarantee required by Geox. The rest of the expense is to cover fittings. The group helps the franchisee in financing the purchase of furniture, offering on average financing of €30,000-50,000. The group noted that the banks' reluctance to offer loans because of the difficult business environment is putting a brake on conversions.

The company said that the spring/summer order backlog to wholesale clients and franchisees was in line with the previous year. The ordering campaign for the fall/winter collection is under way but Geox does not expect growth on a year-on-year basis. Retail sales are expected to find support from the opening of new stores and a low- to mid-single-digit growth in comparable store sales at company-run stores.

Geox finished 2011 with a gross margin of 46.1 percent compared with 48.8 percent a year earlier. The decrease took place in the first half, when the margin narrowed by 4.8 percent points. In the second half, the margin was in line with the same period of last year thanks to a better product and channel mix, selective price increases and cost savings. In the fourth quarter the gross margin was even 1.0 points higher year on year. The gross margin is expected to rise by 2.0 points on sales generated by the spring/summer collection and by 1.0-1.5 points for the fall/winter line.

But the improvement of the gross margin will not benefit the Ebitda margin due to higher overheads and the cost of launching the group's e-commerce platform scheduled in the second half of 2012. Geox ended 2011 with an Ebitda margin of 13.7 percent, a 1.9 percentage point decline from 15.6 percent in 2010. The decrease was lower than expected by the group, which had forecast a 2.0- to 2.5-point drop.

Geox booked a net profit of €50.2 million for 2011, down from €58.0 million a year earlier. It will distribute 83.0 percent of the bottom line to shareholders, representing a dividend of €0.16 per share.