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Holmes Osborne, CFA
Holmes Osborne, CFA
Articles (231)  | Author's Website |

Italian Sunglass Maker Safilo Down With Loss of Gucci Contract

Safilo's stock is trading at less than half of revenues, very cheap compared to other luxury goods manufacturers

December 27, 2016 | About:

Safilo (SAFLY)(SAFLF) is an Italian manufacturer of sunglasses and optical wear. The stock is down with the loss of its Gucci contract. Compared to other luxury goods manufacturers, the stock is at rock bottom.

There are 62.66 million shares, the stock trades for 7.83 euros ($8.19) and the market cap is 490 million euros. There is no dividend. Earnings per share were at loss last year of 0.843 euros. The previous year, EPS were 0.625 euros.

Sales grew from 1.08 billion euros in 2010 to 1.26 billion euros for the trailing 12-months. Operating and net income can be choppy. Operating income was as high as 86 million euros and as low as break even over that time frame. Net income has ranged from negative 52 million euros to 59 million euros.

Profit margins and profitability are much lower than I would have thought. All three are in the low single digits and have been for years. You would think a maker of sunglasses would have higher margins. Free cash flow was 74.8 million euros in 2015. The stock would trade at a free cash flow yield of 15.2%, though free cash flow will be lower this year.

The list of products is very impressive: Hugo Boss, Tommy Hilfiger, Dior, Banana Republic, Saks, Marc Jacobs, Givenchy and Fossil to name just a few. As a matter of fact, I believe I bought a pair of $20 sunglasses a few weeks ago at Banana Republic. Europe represents 42.5% of sales, North America 41.1%, Asia 9.1% and the rest of the world 6.8%. Of that, 93.9% is wholesale and 6.1% retail. There are seven production plants, five in Italy and Europe, one in Salt Lake City and one in China. Suglasses account for 59% of sales, 35% optical frames and 6% sports glasses.

Sales were 939.1 million euros for the first nine months of 2016. This was down 2.2% from 959.7 million euros in 2015. At the end of the first half, the asset side of the balance sheet showed 72 million euros in cash and 266.7 million euros in accounts receivables. The liability side showed 39.9 million euros in short-term debt, 230.2 million euros in accounts payables and 134.9 million euros in long-term debt. Pretty solid. Net debt has greatly decreased over the last few years.

If you are interested in Safilo, I suggest you read the company's second half profile. The company is trying to cut costs and expand into more markets. Safilo lost Gucci's license, which has hurt sales. A few years ago, it lost Armani's. The Christian Dior license was just renewed. You can see the risk here--losing key licenses. When the company lost the Gucci license, shares got suspended. One analyst estimated that Gucci accounted for 20% of Safilo's net income.

I got the idea from reading FPA International Fund's quarterly comments. A Dutch holding company named HAL owns 42.7% of shares, 3T owns 9.2% and 48.6% is free float.

Safilo has recently come out with a set of "smart glasses." The glasses look like sunglasses and do not make the wearer "look like a cyborg" to quote this article. The company has partnered with Interaxon.

Let's briefly look at Luxotica (LUX), Safilo's major competitor and number one maker of sunglasses in the world. The company has a market cap of $59.9 billion, trades at a price-earnings ratio of 26, has a dividend yield of 1.87% and trades at a price-sales ratio of 2.77, according to Morningstar. Imagine if Safilo traded at a price-sales ratio of 2.77. It currently trades at 39%.

So there you have it. Safilo trades at a big discount to Luxotica and seems to be greatly undervalued. The trick is knowing which brand is going to stay and which is going to leave. Not only is Luxotica a competitor, but the fact that sunglasses are so profitable will cause many labels to start their own operation. The stock could be a buy as it is considerably cheaper than almost all other luxury brands.

Disclosure: We do not own shares.

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About the author:

Holmes Osborne, CFA
Holmes Osborne is principal of Osborne Global Investors.

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