Morningstar | Ferragamo Shows Improvement in Sales, as Expected; Shares Remain Expensive
We retain our fair value estimate of EUR 15.8 and no-moat rating for Ferragamo shares as the company reported solid improvement in the first-quarter results. Revenue improved by 4.3% at constant and current exchange rates versus our expectations for 5%-6% revenue growth in the full year. We continue to expect business performance to improve with 4% annual forecast revenue growth over the midterm versus the declines in the two prior years and margin improvement to over 16% from 11% in 2018, through operating leverage and lower discounting. Nonetheless, we believe the current share price already well incorporates this recovery but doesn’t incorporate the risk to it, hence, we view shares as overvalued at current levels.Wholesale business outperformed retail in the quarter with 7% growth at constant exchange rates, boosted by strong performance in travel retail channels, while like-for-like sales in retail channels were 2.2% (3.2% total constant exchange rate growth of retail channels). Licenses, which include eyewear and watches, also saw a strong increase of 28% in the quarter.
Geographically, all regions developed positively (except marginal decline in North America) with strong growth in Asia-Pacific (7.9% at constant exchange rates with 17.7% constant exchange rate growth in China) and Central and South America (12% growth at constant currencies). The two biggest business categories--footwear and leather goods, accounting for around 80% of sales--grew by high single digits. Gross margins developed positively in the quarter with a 100-basis-point increase, helped by lower discounting and positive mix effect. Adjusted operating profit (not including IFRS 16 effect) declined slightly, weighed down by operating costs needed to support the brand turnaround.
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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