Ferragamo Earnings: Persistent Weakness Across Most Regions and Margin Pressure

We are reducing our fair value estimate for no-moat Ferragamo SFER to EUR 13.60 as we lower our expectations for 2023 sales and margins. First-half results were rather weak, with revenue declines across most geographies with the exception of the Europe, Middle East, and Africa region, in contrast to generally solid revenue trends and resilient margins reported by most luxury peers. Sales in North America were particularly weak (in line with industry trends, but on the weaker side of peers) with an 18.6% constant-currency decline in the first half, which was partly company-driven with wholesale network rationalization. This compares with a 23.4% decline in this market in the first quarter. EMEA recorded positive growth at 10.9% in the first half. However, it decelerated significantly versus the first quarter (25% growth). Surprisingly, and in contrast to peers, sales in the Asia-Pacific were in negative territory too, down 10.4% in the first half, despite a recovery in China. Most luxury peers recorded strong double-digit growth in this market. Management attributed the weakness to sluggish performance in South Korea (also noted by some peers) and the travel retail channel, even as sales in greater China were in positive territory (albeit slowing down in the past few weeks). Travel retail channel weakness came as a surprise given the 168.3% growth in the Asia-Pacific region in the first half for Dufry, a travel retail operator, and a generally low comparison basis.

The company’s retail channel performed better (negative 4.5% in the first half at constant-exchange rates versus a 14.3% drop in wholesale) and a positive mix contributed to gross margin expansion (up by 40 basis points), but worse sales densities, operating deleverage of fixed costs, and increased marketing spending (which essentially doubled from last year) weighed on the margin and led to an approximate 50% operating profit decline.