China Holds Back Ferragamo’s Fiscal 2022 Recovery

We are currently maintaining our fair value estimate of EUR 16.00 for no-moat Ferragamo SFER 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.

With COVID-19 restrictions in China pulling the Asia-Pacific region’s net sales down by 10.6% in constant currency year over year, Ferragamo finished the year with net sales growing 5.1%. Other than the Asia-Pacific region, Ferragamo saw a strong continued recovery in other regions with approximately 9% net sales growth over fiscal 2021 in North America and almost 25% in Europe.

Despite gross margins improving between fiscal 2021 and 2022 thanks to currency moves and less discounting, operating expenses remained high enough to pressure operating margins back toward the single digits (the company recorded the lowest operating margins in the last decade outside of 2020 at 10.2%). Notably, marketing expenses increased by 160 basis points as a percentage of sales, in line with the new management’s plan to reinvest to boost brand appeal, but earlier than we expected. We expect marketing expenses at 10% in the coming few years will continue to affect profitability.