Company Reports

We are maintaining our fair value estimate for no-moat Ferragamo as the company reported weak first-quarter revenue, on the lower end of peers. Continuing weakness suggests that as a smaller player, Ferragamo is harder hit by the industry slowdown, and the appointment of Maximilian Davis’ collections have so far failed to improve brand appeal two years into his appointment.

We are reducing our fair value estimate for no-moat Salvatore Ferragamo to EUR 10.60 per share from EUR 13.60 as we incorporate weak 2023 results and a more cautious stance on future sales and earnings development into our models. We now believe it will be increasingly expensive and difficult to put the brand back on a growth path, given its lack of scale, only minor market share in the highly competitive leather goods and footwear segment, and modest resources compared with the big luxury groups. A succession of management and creative talent over the past five years has not been able to improve the brand’s fortunes; revenue and margins are lower than 2019 levels, despite the industry’s strong post-covid recovery. Hence, we are seeing a substantial turnaround as increasingly unlikely. We now model long-term revenue growth of just under 4% (a bit below the industry’s mid-single-digit growth) and operating margin in the low to mid-teens (it was increasing to high teens in our prior forecast). We believe the cost base should still benefit from store base rationalization and some leverage on modestly growing revenue. We believe the shares are fairly valued.

Salvatore Ferragamo is an Italian monobrand company mainly known for its footwear and accessories. We believe the firm benefits from relatively strong control over distribution (over 70% of revenue is retail), 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.

We are reducing our fair value estimate for no-moat Ferragamo 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.

Salvatore Ferragamo is an Italian monobrand company mainly known for its footwear and accessories. We believe the firm benefits from relatively strong control over distribution (73% of revenue is retail), 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.

We are currently maintaining our fair value estimate of EUR 16 for no-moat Ferragamo as we update our model following the release of first-quarter earnings. After a solid recovery seen in the first quarter of 2022 following two years of heavily COVID-19-affected revenue, the first quarter of 2023 saw a decline in total revenue once more by 6.5%. We currently view shares as fairly valued.

We are currently maintaining our fair value estimate of EUR 16.00 for no-moat Ferragamo after it released full-year results below our expectations. Ferragamo's revenue increased by 5.7% to EUR 1,252 million despite the negative hedging impact of EUR 26 million. This was well below our forecast of EUR 1,317 for the year and remains muted versus precoronavirus levels. We view shares as fairly valued.

Salvatore Ferragamo is an Italian monobrand company mainly known for its footwear and accessories. We believe the firm benefits from relatively strong control over distribution (73% of revenue is retail, in line with more than 70% for Burberry, Prada, and Gucci, versus the low sixties percent range for 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.

We are maintaining our fair value estimate of EUR 14.80 per share for no-moat Salvatore Ferragamo as we update our model with results through September. In both 2021 and 2022, increased operating costs in the third quarters eroded higher EBIT and net profit margins from the first half. Even with exchange rates having pushed up operating costs slightly more than they did total revenue, Ferragamo grew its EBIT margin to 12.4% in 2022 from 10.8% in the first nine months of 2021. We currently view shares as fairly valued.

We increase our fair value estimate for no-moat Salvatore Ferragamo to EUR 14.80 from EUR 14.30 per share as we roll our models and incorporate the new CEO’s strategic plans into our forecasts.

Salvatore Ferragamo is an Italian monobrand company mainly known for its footwear and accessories. We believe the firm benefits from relatively strong control over distribution (almost 70% 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 expect to increase our fair value estimate for no-moat Salvatore Ferragamo by a mid-single-digit percentage as we factor in faster-than-expected profitability improvement into our models. After recent price declines, Ferragamo trades approximately in line with our fair value estimate.

We are not making any changes to our fair value estimates for our luxury and apparel coverage list due to Russia-Ukraine armed conflict. The luxury industry’s exposure to the Russia and Ukraine is small, accounting for a low-single-digit percentage of revenue, by our estimates. We believe that the conflict is unlikely to dampen consumer confidence in China (primary long-term growth driver) or the U.S. (driver of growth in recent years). European consumer sentiment (low-20% of industry’s sales) may be affected, should energy-related inflation accelerate meaningfully as a result of conflict; however, Morningstar's view is that the likelihood of gas delivery disruption to Europe from Russia is low. That said, most luxury names in our coverage look expensive to us, and we would recommend investors await a wider margin of error for investment in the sector.

We are increasing fair value estimate for Salvatore Ferragamo to EUR 14.30 per share from EUR 13.80 to reflect the time value of money and our increased expectations for 2021 operating profit after the company reported solid improvement in revenue and profitability in the third quarter. The shares look expensive based on our assumptions for 7% average annual growth over the next 10 years and operating margin scaling up to the high teens.

Salvatore Ferragamo is an Italian monobrand company mainly known for its footwear and accessories. We believe the firm benefits from relatively strong control over distribution (almost 70% 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).

After a perfect storm in 2020, the luxury industry looks poised for a blue-sky scenario in 2021 as a strong sales rebound is driven by resilient luxury consumers' incomes, steady real estate, and strong equity markets as well as savings from previous coronavirus lockdowns, and the psychological need for people to reward themselves after a stressful time. As a result luxury share prices have rallied, leaving many industry players trading near record levels. Nonetheless, we could not identify structural changes in the industry post-COVID-19 that would justify sustainably higher growth and profitability, and hence, valuations. We believe the pickup in gross domestic product, or GDP, and luxury consumption in the U.S. is temporary. Although we expect Chinese consumers to continue driving the industry's growth, we don't expect post-COVID-19 acceleration, while the "common prosperity" drive by the Chinese government could temporarily hurt the industry through higher taxation and adverse sentiment over conspicuous consumption. Finally, although we expect online luxury sales to reach over 30% of the industry's sales over the next decade from low teens in 2019, we don’t expect this shift to meaningfully alter the industry's economics. Luxury companies are likely to preserve their pricing in the channel, thanks to growing control over distribution and the industry's inherent pricing power. While the online channel for the luxury sector looks more profitable than for mass apparel--thanks to higher average order values and lower return rates--the shift is unlikely to result in a major profit increase for companies that already have high in-store sales densities, such as LVMH's Louis Vuitton. Companies with lower sales densities, such as Hugo Boss, could benefit from the shift as long as they manage their store portfolios proactively.

We are maintaining our fair value estimate for no-moat Salvatore Ferragamo as the company reported solid revenue growth and profitability improvement in the first half of the year.

We are maintaining our fair value estimate for no-moat Salvatore Ferragamo as the company reported first-quarter revenue up 13% at constant exchange rates with retail revenue up 20.8% against 2020 levels. Wholesale channel revenue was largely flat due to underperformance of the travel retail channel (travel retail amounted to 10% of revenue precoronavirus). We still expect sales and profits to rebound strongly in 2021 from 2020 trough levels.

Salvatore Ferragamo is an Italian monobrand company mainly known for its footwear and accessories. We believe the firm benefits from relatively strong control over distribution (almost 70% 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 don’t expect to materially alter our fair value estimate of EUR 13.80 per share for no-moat Salvatore Ferragamo as we incorporate mixed 2020 results in our models. Shares are trading above our fair value estimate after a strong rally and we would recommend a better entry point into the name, since substantial uncertainty remains over the pace of the company’s recovery and more investments could be needed to improve brand traction.