F L A S H | Salvatore Ferragamo SpA (SFER.MI) | Neutral
Mixed performance in a seasonally light quarter; focus on Aug/Sep Retail slowdown and management's worries about China in Nov
CITI'S TAKE
In what is traditionally the smallest quarter of the year for Ferragamo, the marginal 3Q21 sales beat and £5m EBIT beat (£19m vs. cons. £14m and twice 3Q19 level) are unlikely to drive the same enthusiasm seen after 2Q (strong earnings beat and double-digit EPS ugprades). While Ferragamo remains focused on rejuvenating sales while maintaining costs under control, the analyst call highlighted a significant slowdown in Aug/Sep Retail LFL (2Y down double-digit estimated) vs. July (broadly flat vs. 2019), with an improvement in October but renewed concerns at the beginning of November on China/Asia's COVID resurgence. All in all, we expect low-single-digit percentage increase in cons. FY21E EBIT and unchanged FY22E. This should lead to a muted share price reaction, yet we see potential support from continued share price underperformance (+26% YTD vs. luxury sector +40%) and the imminent arrival of high-calibre CEO Marco Gobbetti. Neutral rating maintained, TP €20.0.
Key 3Q21 numbers — 1) Sales of €261m, ~2% above VA consensus (€256m), up 17% YoY in constant FX (cons. +11%). On a 2Y stacked basis, sales were down only 4% (cons. -9%) including Retail -5% (cons. -3%, 2Q21 -9%) with sequential MoM deterioration in August and early Sep (vs. July flat) and improvements at the end of the quarter; and Wholesale -2% (cons. -22%, 2Q21 -41%); 2) EBIT of €19m (consensus €14m), with an EBIT margin of 7.1% (cons. 5.5%) compared to ~4% in 3Q19. This reflects: i) gross margin of 65.4% (cons. 66.0%) or 70bp above 3Q19 (64.7%) from higher full-price sales, lower provision for obsolescence and favourable channel mix; and ii) continued cost reduction (-14% vs. 3Q19 and +13% YoY) driven by headcount reduction, rents renegotiation, and lower consulting fees; 3) Net income of €7m (consensus €4m); and 4) Net cash position (ex-IFRS 16) of €265m (vs. €75m in 3Q20 and €139m at the end of FY20) largely reflecting improved earnings, a ~20% YoY decrease in inventories (constant FX, excluding fragrances), and limited capex (€26m).
2Q21 segment reporting (2-year stack, constant FX) — By region: Europe -26% (cons. -26%, 2Q21 -39%); strong beat in North America +26% (cons. +1%, 2Q21 -3%); Asia ex-Japan -4% (cons. -10%, 2Q21 -22%) reflecting August softness in China and weak travel retail; Japan -20% (cons. -14%, 2Q21 -31%) impacted by August lockdowns and travel restrictions; and LatAm +12% (cons. -11%, 2Q21 +38%). By product: Footwear -4% (cons. -9%, 2Q21 -23%); Leather Goods flat (cons. -7%, 2Q21 -15%); Clothing -1% (cons. -12%, 2Q21 -7%); and Silk/Other Accessories -12% (cons. -20%, 2Q21 -21%).
Waiting for Mr Gobbetti — There will be legitimate ambitions for a turnaround from impending CEO Marco Gobbetti (starting Jan22) and following recent senior appointments (COO and heads of US and Europe). At 61 years old, this will likely be Mr Gobbetti’s last senior executive role and we believe he will be highly energised to wake the Ferragamo sleeping beauty, while prior attempts have produced mixed results. We see the return of a strong creative director function as very likely under Mr Gobbetti.
Implications — Latest VA consensus includes: 1) FY21E sales of €1.13bn (2Y constant FX -15%) implying 4Q21E sales of €344m (-10% constant FX vs 2019); and 2) FY21E EBIT of €111m (-26% vs 2019, 9.8% margin broadly flat vs 2019) implying 4Q21E EBIT of €27m (~40% below 4Q19) implying margin of 7.7% (-400bp vs. 2019). Given the slight 3Q21 sales and EBIT beat, cons. 4Q21E/FY21E revenue and EBIT look conservative, however management’s expressed concerns on China at the start of November which could limit earnings momentum following strong earnings upgrades post 1H21. We expect low-single-digit percentage increase in cons. FY21E EBIT and unchanged FY22E. We expect muted share price reaction yet acknowledge potential support from continued share price underperformance (+26% YTD vs. luxury sector +40%) and the arrival of high-calibre CEO Marco Gobbetti. Shares trade on a ~45x FY23E P/E close to twice sector average ex-Hermes. Neutral rating maintained, TP €20.0.
Neutral
Price (09 Nov 21 17:30)
€19.98
Expected share price return
0.1%
Target price
€20.00
Expected dividend yield
1.0%
Market Cap
€3,372M
US$3,908M
Expected total return
1.1%
Salvatore Ferragamo SpA (EUR)
Year to 31 Dec
2019A
2020A
2021E
2022E
2023E
Sales (€M)
1,377.3
915.8
1,147.9
1,270.4
1,364.8
Net Income (€M)
87.3
-31.8
13.0
50.0
73.7
Diluted EPS (€)
0.52
-0.19
0.08
0.30
0.44
Diluted EPS (Old) (€)
0.52
-0.19
0.08
0.30
0.44
PE (x)
38.7
-106.2
259.1
67.5
45.7
EV/EBITDA (x)
10.5
19.3
15.6
12.4
10.7
DPS (€)
0.00
0.00
0.06
0.20
0.25
Net Div Yield (%)
na
na
0.3
1.0
1.3
Source: Company Reports and dataCentral, Citi Research.
