After a strong improvement in the stores that it directly operates during the first half of this year, Geox is now enjoying a pickup in wholesale orders that should confirm the group's return to growth. Between 2008-2013, Geox' revenues declined by 3 percent on average every year, as the economic recession and other issues put an end to a dizzy annual growth rate of 29 percent in the previous eight years.

For the next three years, Geox is predicting an annual average growth rate of 9 percent, with sales rising by 6 percent this year and accelerating to 10 percent in 2015 and 11 percent in 2016.

In the first six months of this year, the group's wholesale revenues dropped by 9.3 percent at actual currency rates, and by 8.4 percent at constant rates, down to €161.8 million. The wholesale division was hit by weak sales in Italy, Spain and Portugal, the cancellation by the company of orders made by customers in financial difficulty and a general decline in orders as clients sought to eliminate a stock overhang.

Geox Consolidated Income Statement

(Million Euros, Six Months Ended June 30)

 

2014

2013

%
Change

Footwear

352.7

342.9

2.9

Apparel

47.5

43.8

8.4

NET SALES

400.2

386.8

3.5

Cost of Goods

203.5

200.7

1.4

Selling & Distribution

23.6

23.9

-1.3

General & Administrative

153.1

136.7

12.0

Advertising & Promotion

20.0

18.7

7.0

Net Interest Income

3.2

2.1

52.4

Pre-Tax Loss

3.1

1.9

63.2

Tax Benefit

0.8

1.7

-52.9

NET LOSS

3.9

3.6

8.3

Euro/Share

(0.01)

(0.01)

0.0

The fall in wholesale revenues is in line with the spring/summer order backlog, but the company pointed out that re-orders were up by a double-digit rate and delivered additional sales at full price.

Meanwhile, orders for the autumn/winter collection are up by a low-teen rate, driven by key accounts, whose orders reached growth of more than 20 percent, and by web accounts, up at a double-digit rate. The increase in orders for the autumn/winter collection is the first rebound for the wholesale business after five years of decline.

Orders were up by mid-single digits in Italy, the rest of Western Europe and North America. Germany, France and the U.K. led the pack in Europe, while Iberia returned to a positive trend. North American orders were lifted by Canada. In the rest of the world, orders were up by more than 25 percent.

Overall wholesale orders were up by a high-teen figure for footwear and down at a low-teen rate for apparel. Stressing that apparel orders are down because of its decision to streamline the range to jackets, the company said that apparel orders were up by a high single digit on a comparable basis.

Geox expects that the order backlog will lead to sufficient growth in wholesale revenues in the second half and practically offset the decline booked in the first six months of the year. For the full year, the company forecasts a 1 percent decline in wholesale revenues, with Europe, North America, Middle East and Africa combined falling 4 percent and sales in Asia-Pacific up by 27 percent.

The group's total sales rose by 3.5 percent in the first half, or by 4.1 percent at constant currencies, rising to €400.2 million. It confirmed its expectations of breakeven operating results (Ebit) for the full year on revenues of €800-805 million, up from €754.2 million a year earlier. The consensus of financial analysts' estimates is in line with the group's guidance.

In the first half, Geox' sales of footwear rose by 2.8 percent to €352.7 million, or by 3.5 percent at constant currencies, while apparel increased by 8.3 percent to €47.5 million, or by 8.7 percent at constant foreign exchange rates. The better performance of the apparel line, which has been narrowed down to jackets using the company's breathable technology, is largely due to the fact that the collection is sold in the group's mono-brand stores, which enjoyed a strong performance during the semester.

The company's overall sales rose by 9.2 percent in Italy to €133.7 million, lifted by a strong performance by the group's directly-operated stores (DOS) in the country. The company noted that Geox' sales in the Italian market are increasing again after five years of decline, but warned that the situation in southern Italy remains difficult despite some improvement. The company's chief executive, Giorgio Presca, told analysts that so far the group had just “reduced” the magnitude of the sales decline in southern Italy and that it will take time to see a shift in trend in the region.

Apparently, Geox is winning back market shares in its home market. According to a research institute, ACNielsen Sita, Italian shoe consumption has been declining continuously since 2008 and the first quarter of 2014 registered a sharp decline of 5.2 percent.

Sales in the rest of Europe were up by 2.4 percent in actual and constant rates, reaching €176.8 million. The group registered “very solid performance” in Iberia, France and the U.K., but sales were weak in the Netherlands.

Revenues in North America fell by 7.4 percent to €24.2 million, but the decline narrowed to 4.7 percent on a currency-neutral basis. The group suffered from a negative performance in the U.S. while Canadian sales were flattish. The group will unveil a business plan for North America with the release of its 2014 results early next year.

In the rest of the world, sales totaled €65.4 million, down by 0.1 percent in euros and up by 2.7 percent in local currencies. Sales in Ukraine were under pressure due to the political and military tensions in the country. Revenues in Russia were down at a low single-digit rate in euros but were up by a low-teen rate in rubles. Asia-Pacific, which represented 7 percent of the group's first-half sales, was up by 5.5 percent in euros and by 8.1 percent in local currencies. Geox noted a slowdown in China, where it directly operates 66 stores, plus another 17 in Hong Kong and three in Macau. It added that its local distributor, Ri Quiq, has a further 135 points of sale in the country.

Sales by franchisees declined by 3.6 percent worldwide, or by 2.0 percent in local currencies, down to €74.5 million, affected by the closure of non-performing locations and the conversion of some shops to DOS in 2013. In the first half, the channel's comparable store sales were flat compared with the same period a year earlier.

Sales generated by DOS totaled €163.8 million, up by 24.9 percent at actual currency rates and by 24.4 percent at constant rates thanks to the addition of more stores formerly owned by franchisees, and an 8.2 percent increase in same-store sales, in contrast with a decline of 7.6 percent a year earlier. Comparable store sales for the spring/summer collection were up by 6.3 percent in the period running from Feb. 24 to July 27, exceeding the group's expectations.

The management added that it reduced price markdown, in line with its strategy of eliminating discounts outside of sales periods, which led to higher average prices. The DOS also benefited from a high single-digit increase in client traffic. Geox added that DOS sales were up by a mid-single growth rate in Italy and Europe, a low single digit in the U.S. and in Asia-Pacific and a double digit in the rest of the world.

Presca reiterated that the discrepancy in the level of same-store sales between franchisees and DOS clearly indicates that directly-operated stores are benefiting from the group's superior know-how. He added that franchises converted into DOS have enjoyed double-digit same-store sales increases. He explained the over-performance of converted stores through the introduction of automatic replenishment and the improvement of space management to ensure than the shops receive more of the best-selling items, while products with little client appeal see their deliveries reduced or are removed from the shelves.

As part of its reviewed commercial strategy, Geox has also brought forward the delivery of collections and withdrawn after-sale returns. After a trial during the second half of 2013, this policy is being rolled out at both the DOS and franchises. Presca noted that same-store sales at franchises have already shown signs of improvement, rising by nearly 4 percent for the current spring/summer collection. Geox estimates that, for the full year, comparable store sales growth will reach 3 percent for the franchises and 4 percent for the DOS.

At the end of June, the group had a global network of 1,270 mono-brand stores, of which 471 were DOS. The overall number of mono-brand stores was down from 1,299 at the end of 2013 due to 72 closures, only partially offset by 43 openings. Geox anticipates an additional 15 DOS by the end of the year.

Geox' decision to bring forward the autumn/winter collection and the expansion of its DOS network has bloated its working capital to €235.8 million in the first half from €212.8 million a year earlier as inventories surged to €284.3 million from €205.2 million.

The company added that July deliveries to clients were up by 30 percent compared with the previous year.  It reiterated that the spring/summer collection could generate about €15 million in excess inventory. It said that it would devote the second half to fine-tuning the supply chain to reduce the level of future inventories.

In the first half, Geox's gross margin widened to 49.2 percent from 48.1 percent a year earlier thanks to higher profitability at the DOS. The management expects the improvement in the gross margin to be confirmed in the second half of the year, noting that an increase in margins was already registered in the order intake thanks to the group's pricing policy, fewer discounts and reduced operational complexity. For the full year, the gross margin should end up 1.9 percentage points higher than in 2013.

The Ebitda margin dropped to 5.2 percent in the first half from 5.7 percent a year earlier while the Ebit margin was flat.  The net loss grew to €3.9 million from €3.6 million. Results were affected by higher operating costs due to the expansion of the DOS network and an increase in financial costs.

The negative free cash flow was cut to €20.3 million from €31.4 million a year earlier, as investments were trimmed to €9.8 million from €18.0 million. Geox' net debt surged to €43.2million at the end of June from €28.2 million at the end of 2013.