Ferragamo faces challenges amidst rebranding efforts and hopes for a China recovery

Analysts surveyed by MFF, including JP Morgan, Barclays, Morgan Stanley and Goldman Sachs, express caution for Ferragamo as the company prepares for new challenges amidst rebranding and expectations of a chinese consumer recovery. Mediobanca research revealed that the restyling strategy planned nearly two years ago has not yet produced clear signs of improved growth. Citi notes with MFF that «the Maison has immense potential, but sales will only be impacted by the Group’s initiatives with time». The Florentine company boasts a strong brand with a rich history of success, set to celebrate its centennial anniversary in 2027. However, it has been underperforming compared to its leading luxury competitors for some time. Despite strategic initiatives launched by ceo Marco Gobbetti almost two years ago, it appears that the company still needs to work on convincing the market that a turnaround is underway.

In 2022, sales rose by 10.2% to reach 1.25 billion, but the net income declined. In the first nine months of 2023, the company’s consolidated revenues decreased by 8.3%, totaling 844 million euros. «Beyond the weak fourth quarter, we maintain a cautious outlook for the Salvatore Ferragamo group in 2024 due to ongoing macro environment and brand transition, resulting in predicted slightly negative organic growth (-2%)», Barclays analysts reported. «However, the brand’s rejuvenation is showing positive results with the strong performance of new products. However, although the growing presence of the new designer’s products in stores may assist, we do not believe it will significantly impact sales in the near future». Professionals at the British investment bank have recently decreased sales expectations for fiscal year 2023 by 2% and ebit forecasts by 10%. For 2024, they reduced sales forecasts by 10% and EBIT forecasts by 30%, predicting that earnings before financial charges will decrease from 2023.

Although the ongoing rebranding may have visible benefits in 2024, analysts at Mediobanca Research suggest «caution due to execution risk». They say that the rationalization of the distribution network continues to weigh on the group’s results. «The Salvatore Ferragamo group is currently going through a transition. These operations are inherently complex and results cannot be immediately seen when making changes after such a long time», an anonymous analyst noted. «Furthermore, Maximilian Davis’s vision and creativity are just beginning to surface, and it will take time for the new fashion house image to become clear and strong in the eyes of consumers».

JP Morgan experts have noted that the normalization of luxury sector spending has negatively impacted all entities in the segment. This situation is particularly «challenging for brands undergoing transformation», such as Ferragamo. «Although there are initial signs of success for new collections and business in key stores, we have reason to believe that it will take some time before they have a significant impact on the overall market. Therefore, it is premature to take a more optimistic view at this point, especially given the volatile and uncertain demand environment», they stated.

According to analysts, what is the recipe for restoring the Ferragamo brand to its former glory? «There are numerous challenges to consider when attempting to revive a sleeping beauty, especially for smaller brands navigating a more competitive environment», Thomas Chauvet, head of luxury goods equity research at Citi, noted when speaking with MFF. «The potential of this iconic Italian fashion brand is massive, but it will take time for Maximilian Davis’ fresh creative vision, innovative store concept, and intensified communication strategy to significantly impact sales». Citi’s experts forecast revenues of 1.13 billion euros for fiscal year 2023, implying a 4% year-on-year sales decline in constant currency during the fourth quarter, but this is due to an easy comparative basis. Future estimates are more optimistic. Chauvet added that «we anticipate a 5% revenue growth in constant currency, which will reach 1.19 billion euros by 2024».

To achieve these results, strategic work must be performed in the Asian region, notably in China, which has been one of the firm’s primary markets. Rumors suggest that there are ongoing issues with consumer recognition of the revamped logo in this market. As a result, some boutiques in the country still display old signs, instead of the new brand name, as per MFF. «Since the pandemic, the Chinese luxury market has become more divided between top brands and lower-tier brands. Despite Ferragamo’s established reputation in China, recent updates to the brand’s appearance, logo, and messaging may not have yet connected with local buyers», Chauvet reflected. «Furthermore, in recent quarters, the company has been adversely affected by its higher-than-average presence in travel retail, particularly in airport locations. Travel remains restricted and currently Chinese spending in offshore activities is still significantly lower than pre-pandemic levels».

In recent weeks, the group has bolstered its distribution in China by acquiring the 25% minority stake in Peter Woo’s joint venture with Imaginex, the brand’s distributor in Greater China for 35 years, for 42 million dollars (equivalent to 38.5 million euros at today’s exchange rate). «This move is consistent with what competitors have done and is a logical step forward. Ferragamo now has complete control over its operations in China, although this acquisition of a majority stake will not significantly affect day-to-day operations. The priority should be to increase the brand’s desirability and visibility in this key market, which will take time», Chauvet concluded. At the moment, there are currently no plans for a price increase. Morgan Stanley reported that management expressed «satisfaction» with the current positioning of the brand and noted that there are «no plans for further price updates beyond routine seasonal product updates, given the macroeconomic environment». The company remains «confident in its strategy» and will continue to invest in communication.

Analysts are split on Salvatore Ferragamo stock on the Italian stock exchange

The analysts have a positive outlook on Salvatore Ferragamo stock despite target revisions. The group closed the session at 11.9 euros per share on the Italian stock exchange, with a current capitalization of around 2 billion euros. The average target price of 12.78 euros indicates a potential upside of about 7%. JP Morgan has an underweight view with a target of 13.5 euros, whereas Goldman Sachs lowered its target price from 14 to 13.6 euros. Barclays recently announced a «decrease in our price target from 13 to 12 euros, while maintaining our underweight rating». As the company continues to underperform compared to its industry peers, analysts suggest exercising caution due to the «lack of visible growth from the planned rebranding strategy». Mediobanca research lowered its target price per share from 13.7 to 11.9 euros, while Morgan Stanley reduced it from 16 to 11.5 euros, citing the «decrease in their estimates and the increase in the weighted average cost of capital, in line with their coverage of the luxury sector». (All rights reserved)