Morningstar | Ferragamo Is Increasing Communications Investments to Renew the Brand Appeal
Ferragamo is an Italian monobrand company mainly known for its footwear and accessories. We believe the firm benefits from relatively strong control over distribution (65% of revenue is retail, versus more than 70% for Burberry, Prada, and Gucci, but in line with Hugo Boss), while its strong representation in airport locations (about 150 travel retail stores) positions it well to benefit from growth in global travel flows and tourist luxury spending (about half of industry spending is done while travelling). We believe that Ferragamo has not carved a moat. It is a relatively small player in the fragmented luxury footwear category (41% of revenue). The luxury footwear industry is fragmented and largely wholesale (thus prone to discounting), with fast product life cycles, exposing industry players to fashion risk. We see the leather goods category (39% of Ferragamo’s revenue) as more conspicuous, but Ferragamo is much less established there than market leaders (with 2% market share versus over 10% for Louis Vuitton and 5% to 7% for Hermes, Prada, and Gucci). Moreover, its more affordable price points (EUR 800-EUR 1,500 handbags versus EUR 800-EUR 4,000 for luxury peers) reduce the prestige value of purchases. We view Ferragamo’s pricing power as in line with or toward the lower end of our luxury coverage, and while the current growing share of discounting can be appropriate in light of a change in creative direction, its persistence must be monitored for signs of brand power deterioration.We believe the company is taking actions that could bring it back to the industry average growth after several years of underperformance (we forecast 4% average top-line growth over the next 10 years, largely in line with luxury industry growth). We like actions such as increasing the firm’s share of "newness" to engage the existing and younger consumer, reining in a subpar distribution channel, and focusing on retail efficiency and supply-chain transformation with more flexibility, less pre-committed inventory, and more capacity open to late orders. Nonetheless, with the current management transition, there is no certainty in strategic continuity or success in execution.Salvatore Ferragamo creates, produces and sales goods for men and women: footwear, leather goods, apparel, silk goods, jewels, other accessories and fragrances. as well as eyewear and watches manufactured under license by third parties. Co. sells its products through: a network of single Salvatore Ferragamo brand stores, managed both directly and by third parties; and presence in department stores and multibrand specialty stores. Co.'s fragrances product category involves the creation, development and production of fragrances and related products under the Salvatore Ferragamo brand. Co. is also active in the licensing of the Salvatore Ferragamo brand and in real estate management.
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