Geox has announced disappointing third-quarter results and an unconvincing business plan for the three years to 2021, prompting a massive stock market sell-off that has driven the company's share price to record low levels.
The top line declined by 8.2 percent to €672.4 million in the first nine months, missing market expectations by about €9.2 million. At constant currency rates, sales dropped by 7.7 percent. Overall, the performance in the third quarter was roughly in line with the first six months of the year.
The management pointed out that its sales have been affected by unusual weather conditions so far this year in its main markets, with a cold spell in March delaying the spring/summer season and warm weather lasting until mid-October delaying the start of the autumn-winter season.
It noted that Geox' stores suffered a fall in attendance due to the weather as well as increased competition from e-tailers and other brands of casual footwear and clothing. The difficult market conditions pushed retailers to offer discounts even during the full-price season to cut inventories.
The company has adopted a prudent commercial policy, cancelling orders from clients facing financial difficulties or operating in countries where the business environment suddenly worsened, and it has further trimmed its mono-brand network.
Because of the current business situation, Geox has also dropped some special programs to safeguard profit margins and the brand's image, putting further pressure on the order intake for the forthcoming spring-summer collection. Orders from wholesale clients fell by 9.1 percent compared with the previous year. The decline narrowed to 3.7 percent excluding the special programs.
In the first nine months of the year, Geox' footwear revenues reached €607.9 million, down by 7.8 percent at actual currency rates and by 7.2 percent at constant rates. Apparel fell by 11.8 percent to €64.5 million, with constant-currency sales down by 11.7 percent.
Total sales in Italy went down by 10.6 percent to €198.8 million, falling to 29.6 percent of the total turnover from 30.4 percent the previous year. Geox reduced by 20 the number of its stores in the country during the first nine months, after 48 net closings in all of 2017. Comparable sales at directly-operated stores (DOS) in the country were broadly in line with the global average.
In the rest of Western Europe and Scandinavia, the turnover dropped by 8.7 percent to €290.6 million, with currency-neutral sales down by 8.6 percent, due to store closures and bad weather. The number of Geox stores in the region fell by 24 in the nine-month period, on top of 36 net closures in 2017.
Sales decreased by 14.7 percent to €37.4 million in North America. At constant currency rates, the decline was limited at 11.1 percent. It was driven by the cleaning up of the wholesale channel and three net store closures in the first nine months, on top of the six net closures carried out in 2017. Comparable store sales were up by a mid-single digit in the DOS.
In the rest of the world, Geox' sales reached €145.6 million, down by 1.8 percent in euros, but they only slipped by 0.1 percent in local currencies as the company reduced the network of stores operating through license agreements to 139 at the end of September from 168 at the end of 2017. Wholesale revenues rose by 1.6 percent during the nine-month period and same-store sales at DOS were positive.
The wholesale channel, which represented 49.4 percent of total sales in the nine months with revenues of €332.2 million, posted decreases of 5.8 percent on a reported basis and 5.6 percent at constant currency rates.
Franchising suffered a 27.3 percent sales decline to €80.7 million, 27.2 percent down in local currencies, after the group trimmed the store network by about 20 percent through closures and conversion to DOS. There were 62 net store closures and conversions for franchises in 2017 and 48 in the first nine months of this year. Same-store sales were slightly below the performance posted by DOS.
Sales at DOS fell by 3.6 percent to €259.5 million, and they were down by 2.3 percent at constant currency rates. Comparable store sales continued to improve in this retail channel, dropping by 4.3 percent in the first nine months compared with a decline of 4.7 percent in the first half. When extended to the 45 weeks finishing on Nov. 11, same-store sales were off by 3.7 percent, thanks to a 0.3 percent rise in October.
At the end of September, Geox had 1,018 mono-brand stores worldwide, of which 439 were DOS, compared with 1,095 stores, including 439 DOS, at the end of 2017. During the nine months, the group closed 114 locations and opened 37, resulting in a net decrease of 77 units.
The group continues to roll out its X Store concept, with 150 stores forecast to be refurbished by the end of the year against 33 at the end of 2017. By 2021, all the stores will be have been converted to the X Store concept.
For the full year, Geox expects that its sales will drop by about 6-7 percent compared with 2017, when it finished the year with a top line of €884.5 million. If the guidance is confirmed, it would imply a slight increase in fourth-quarter sales.
The management cautioned investors that they should be “very prudent” about the company's performance in the fourth quarter and the full year in terms of revenues and operating profits because of the difficult business environment. Financial analysts currently expect Geox to post full-year sales of about €844 million.
The management indicated that the wholesale channel will continue to show signs of weakness, while the retail business continues to be highly volatile. The reorganization of the store network will continue in the fourth quarter.
Geox expects to post €10 million in one-off costs in the 2018. It also anticipates an improvement of the gross margin for the full year, as well as for the initial orders of the spring-summer collection, compared with the margin of 48.3 percent posted in 2017. It forecasts and adjusted Ebitda margin of about 5 percent, against 8.4 percent in the previous year. It also estimates that capital expenditure will rise to €35 million in 2018 from €31 million last year.
Consequently, an investment broker, Kepler Cheuvreux, has revised down its target for adjusted Ebitda to €41-42 million from €58 million and the market consensus was €66 million.