Measures Taken in Q1 Expected to Support Salvatore Ferragamo in Q2

MILAN — Salvatore Ferragamo’s exposure to China and to tourism weighed on the company’s bottom line in the first quarter of the year, as the coronavirus pandemic spread first from the group’s main business area. However, the company’s management has set in motion a number of initiatives and cost-containment measures expected to bear fruit in the second quarter.

In the three months ended March 31, the COVID-19 pandemic and the progressive lockdown of stores globally, beginning in China, dragged the company into a loss, which totaled 41 million euros, compared with a profit of 11 million euros in the same period last year.

Confirming preliminary figures reported last month, revenues in the period dropped 30.1 percent to 222 million euros, compared with 317 million euros in the first quarter of last year.

Earnings before interest, taxes, depreciation and amortization fell 82.2 percent to 12 million euros, compared with 65 million euros at the end of March last year.

During a call with analysts on Tuesday evening, asked about possible winning strategies in a post-COVID-19 scenario, chief executive officer Micaela le Divelec Lemmi said “one of the priorities is to push digital,” not only in terms of e-commerce, but shifting initiatives and engaging customers, and reinforcing “sustainability and ethical values core to the brand. I do believe that after the crisis, these could be relevant.”

The executive believes that “clear and readable messages and strategies” will be winning. As reported, the company last month launched a new web site and online store, as part of its recent increased drive into technology and social media.

In terms of product, le Divelec Lemmi said the company has been extending the pre-fall collections with later deliveries, and plans to prolong the shelf life of the spring 2020 collection in stores to sell at full price.

Responding to a question about a possible recovery in Ferragamo’s key markets, the ceo said “after a first moment of skeptical attitude due to the measures to monitor the presence [of customers in stores], we observe a regular return in China as before the COVID, but we cannot anticipate the same attitude of revenge spending in Europe and the U.S. We need to prove if the more mature markets have the same attitude.”

Expecting a lack of tourists in Europe, the company plans to focus on local customers and engage with them, but she underscored it was too early to predict future customer movements.

“The group registered a solid performance in January in all its main markets that increasingly deteriorated in February and March, first in China and Asia and progressively also in Europe, in America and in the rest of the world, following the rapid diffusion of the pandemic,” said chief financial officer Alessandro Corsi during the call.

In light of the lockdowns, he defined the first quarter as “hybrid,” and highlighted how business “did not see a deceleration but a shutdown, all of a sudden with no revenues, but costs to keep going.”

He said a number of actions, such as the renegotiation of rents, “have not brought full potential results, these will take some time. The second quarter will be more meaningful than the first quarter, and it is impossible to find a rule of thumb when the situation is so extraordinary. The disruption has been incredible.”

In March, 50 percent of Ferragamo’s directly operated stores were closed, he said, and it was “even worse in April when the majority was closed with the exceptions of China and Korea, bringing the stores regularly open to 20, 25 percent.”

As of March 31, the group’s retail network counted 652 points of sales, including 391 directly operated stores and 261 third-party operated units.

In the first quarter, the lockdown in different markets dragged revenues in the retail channel down 28.6 percent to 142.2 million euros, accounting for 64.1 percent of the total.

The wholesale channel decreased 32.3 percent, also penalized by the cancellation of orders, mainly in the travel-retail channel, totaling 76.4 million euros. The travel-retail channel accounts for 10 percent of sales, said Corsi, and tourists represent more than 50 percent of the company’s business.

The Asia Pacific area was confirmed as the group’s largest market in revenue terms, decreasing by 43.4 percent to 69.4 million euros, and accounting for 31.3 percent of the total. “The first to be impacted in the period, the retail channel in China reported a drop of 39.9 percent in sales,” said Corsi. “January started very positively then of course since the 22nd, things changed very rapidly and February was down 90 percent.”

He noted that two-thirds of the network was completely closed, and the rest operated with shorter hours and limited traffic. However, the period helped in rent negotiations. For example, in Hong Kong, which continued to post weak traffic, the landlords were “more flexible” in discussing rents. The performance of Hong Kong was similar to the last two quarters of last year, added the cfo, when the region was disrupted by political protests.

The performance in mainland China improved in March and was “better and better each week. We have seen a very, very strong double-digit growth in the first 12 days of May in China and also in Korea. There was a very fast reaction. If I could assume that all market were the same as China, but nobody knows what the reaction will be in different markets.” For this reason, he refrained from providing any projection for the rest of the year.

In the first quarter, the Europe, Middle East and Africa region posted a 26 percent decrease in revenues to 59.5 million euros, accounting for 26.8 percent of the total, and the area saw a “progressive slowdown of Asian customers,” said Corsi. The region is “still critical,” with stores only open in Germany and Austria.

Sales in North America dropped 18.5 percent to 53.2 million euros, representing 24 percent of the total, and Corsi noted that the wholesale channel was “underperforming.”

Japan was down 19.7 percent to 24.3 million euros, and revenues in Central and South America dropped 16.3 percent to 15.2 million euros.

By product category, footwear posted a decrease of 30.5 percent to 91.8 million euros, representing 41.4 percent of the total. Handbags and leather accessories were down 28.2 percent to 90.3 million euros, and fragrances registered a 43 percent decrease to 10 million euros. Apparel decreased 26.8 percent to 13 million euros.

Operating costs decreased by 7.1 percent to 167 million euros. The cost-containment measures showed their first signs in March, said Corsi.

Capital expenditures totaled 5 million euros, compared with 9 million euros in the first quarter last year, due to the revision of the investment plan to maintain only the projects considered essential.