U.S. Markets close in 5 hrs 43 mins

Edited Transcript of SFER.MI earnings conference call or presentation 12-May-20 4:00pm GMT

Q1 2020 Salvatore Ferragamo SpA Earnings Call

Florence May 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Salvatore Ferragamo SpA earnings conference call or presentation Tuesday, May 12, 2020 at 4:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Paola Pecciarini

Salvatore Ferragamo S.p.A. - Group IR

* Micaela Le Divelec Lemmi

Salvatore Ferragamo S.p.A. - CEO

* Alessandro Corsi

Salvatore Ferragamo S.p.A. - CFO

================================================================================

Conference Call Participants

================================================================================

* Erwan Rambourg

HSBC - Analyst

* Elena Mariani

Morgan Stanley - Analyst

* Melanie Flouquet

JPMorgan - Analyst

* Andrea Randone

Intermonte SIM - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Paola Pecciarini, Salvatore Ferragamo S.p.A. - Group IR [1]

--------------------------------------------------------------------------------

Thank you. Good evening, everybody, and thank you for joining the Salvadore Ferragamo first-quarter 2020 financial results conference call. I am here with our CEO Micaela Le Divelec Lemmi and our CFO Alessandro Corsi. During the call, we will go through the Group financial results and then open to a Q&A session.

I will now read the usual disclaimer, which says that this presentation contains forward-looking statements regarding future events and results of the Company that are based on the current expectations, projections, and assumptions of the management of the Company. The actual results may differ materially from those expressed in any forward-looking statement and the Company does not assume any liability with respect thereto.

This document has been prepared solely for this presentation and does not constitute any offer or invitation to sell or any solicitation to purchase any share in the Company. The manager in charge of preparing the Company financial reports hereby certifies that the accounting disclosures of this document are consistent with the accounting documents, ledgers, and entries.

I now hand over to our CEO, Micaela Le Divelec Lemmi.

--------------------------------------------------------------------------------

Micaela Le Divelec Lemmi, Salvatore Ferragamo S.p.A. - CEO [2]

--------------------------------------------------------------------------------

Good afternoon to everybody, and I will start with some insights about the market scenario. The personal luxury goods market is currently affected by the COVID-19 and is expected as per Bain & Co. to contract between 15% and 35% in full-year 2020, with profitability decreasing more than proportionally. The recovery expected in 2021 to take different patterns by region from dip and stabilization to rapid rebound, while touristic shopping likely to take longer to resume.

Companies called in the short term to protect the top line and take operational contingency actions to adjusting operating costs and capital expenditure, but still committed to staying relevant to customers and to long-term goals of becoming more customer-centric, digital, agile, and sustainable.

With the pandemic still developing, it is difficult currently to predict accurately its full impact, although some positive signs are coming currently from China, where the luxury shopping is restarting with domestic demand increased by restrictions on travel. Online continue to represent the highest growth channel, with digital shopping habits built during the COVID outbreak to remain as brands improve online assortment, user experience, and digital marketing. Digital to increase the influence on luxury purchases; nonetheless, consumers is expected to return to the physical stores once safe with a renewed passion for real-life experiences.

Ethics and sustainability is expected to increase importance with customers prioritizing purposeful brands, consolidating the importance of environmental and social governance. Brands potentially rethinking product lifecycle, supply chain management, and disposal of unsold stock.

March year-to-date air passenger traffic is down 22%, with the month of March at minus 53%, which is the largest decline experienced by the market in the recent history, with global passenger volume back to 2006 levels. IATA is expecting air passenger volume down 48% in the full-year 2020 with international traffic more penalized, impacted by recession, but mostly by travel restrictions and loss of travelers' confidence.

I would like just to spend a few words now to explain how Salvatore Ferragamo approach the turbulence of COVID-19. The first priority has been given from us at the first sign of the virus spread to ensure the health and safety of people, our employees, and our customers. In some cases, like in north of Italy and USA, we have been anticipating government restrictions, taking the decision to close stores when we realized the spread of the virus and in order to protect our colleagues and our customers.

The production and distribution sites of Florence and Secaucus have been closed at the instruction of the government authorities for a few weeks starting in the latest day of the quarter. We have been implementing measures like smart working for all the office team. And we gave particular attention to the health and safety protocols organization and implementation before moving back people in their working places. Training on this and communication through the uses of technology has been rapidly implemented to avoid disruption of the urgent business activities.

The Group has been even in these difficult times shown it's responsible [saul] implementing actions aimed at support of the communities in the containment of the pandemic, like donations to a Chinese organization active for women affected by COVID, reconversion of the supply chain to the production of face masks for the hospitals, and donations for the restoration of a [hospital post incentive] care in Florence, as much as participation in the donation sponsored by the Italian chamber of [patients].

Our second priority has been given to protect the business, containing the effects of the pandemic spread. And in this regard, teams have been actively working to redefine priorities, cost of negotiations, postponement or cancellation of non-necessary activities, redefinition of timetable for collection and project, investment reevaluation in light of the market sentiment. Full potential of these initiatives in place will be visible in the coming quarters.

In the meantime, the [mark on] strategy and the use of all media has been redesigned in few hours in order to give to our followers and customers the content link to our strong and unique [edge] and try to keep the conversation alive also in such a difficult moment.

The third priority is now the focus and attention of the entire management on the restart phase, in light of a review of the strategy to take advantage in terms of brand positioning and business management of the new era in front of us and considering any area which may require an acceleration. Production team has been recovered their working place in the past 10 days now in respect of all the government rules. And three core functions across regional task forces has been created to focus on the new paradigm for luxury with the aim at aligning prophecies and new objectives as soon as possible, leveraging on the strength and on the brand and its core values and looking at all the opportunities of growth.

I will now hand over to Alessandro Corsi in order to comment on data of the first quarter.

--------------------------------------------------------------------------------

Alessandro Corsi, Salvatore Ferragamo S.p.A. - CFO [3]

--------------------------------------------------------------------------------

Thank you, Micaela and Paola. Good evening to everybody. Welcome back to our first-quarter 2020 conference call. Let's move to page 5 to comment our financial results.

At the end of March 2020, the Company reported EUR222 million in net revenues. They are down by 30% versus last year at current FX and down by 31.5% at constant FX. We have hedging impact close to zero in first quarter 2020 versus the negative EUR3 million that we had reported in first quarter 2019.

After the solid performance registered in January in normal market, demand increasingly deteriorated in February and March. As you know, first in China and Asia and progressively then also in Europe, in America, and the rest of the world, following the rapid diffusion of the pandemic caused by the COVID-19 that brought the national government to decide on the provisions and lockdowns of the commercial activities and with a big impact on international traffic.

These, as I just mentioned, brought to the closure of the majority of the Group's store network and to a very significant reduction in traffic in the remaining stores. Just to give you an idea, in March, around 50% of the directly operated store network was closed. And this percentage was even worse in April, where the majority of the global stores were closed with few exceptions in China, in Korea, and in other Asian countries, bringing to just 20%, 25% of the stores regularly open in April. Of course, also third-parties operated stores have been locked down, respecting their government's regulations and thus resulting in a significant negative impact also in the channel.

Looking at the channel mix in first quarter 2020, retail was down by 29.4% versus last year at constant FX. January, as already mentioned, was overall positive single digits with double-digit performances in Europe and in Korea and a solid performance also in Mainland China, despite the lockdown that started on January 23. We had also a flattish performance in US and Japan, while performance in Hong Kong was still similar to the one of the last two quarters of last year.

February clearly was an overall completely different scenario, where at the end of the month only America was positive despite an encouraging start that we had in Europe. In particular, sales in Greater China in February were down 80% to 90% because basically all of the stores were closed. March overall was even worse, with the massive store closures in Europe and also in America turning negative. Only Mainland China started to show in March an improving trend versus February, which week on week became constantly better and better up to nowadays, where in the first days of May, we observed a strong double-digit growth.

Similarly, also Korea is showing a very encouraging trend at the moment, growing double-digits in the second quarter. The like-for-like growth trend was similar to the overall regional trend figure since, as you know, we have not a material impact from perimeter.

Talking about wholesale, wholesale was down 34.8% at constant FX in first quarter 2020. And it was suffering from the cancellation of orders, especially in the travel retail channel. And it was further disadvantaged by the comparison with the first quarter 2019 that, as you may recall, has benefited from the recouped shipments coming from fourth quarter 2018.

Once again, it's also important to note that the negative impact that we had in this first quarter in terms of rental income line, which is down over 60% in first quarter 2020, due to the nonrenewal of an important lease in the US that we remind also partially negatively impacts the overall gross margin versus last year. We remind that this income line, the rental income line [earning], will not suffer any longer from an unfavorable comparison with the first year starting from the second quarter on.

Let's go now to the next page to comment the revenues by region. Looking at constant FX, you see that Asia-Pacific is still the first region of the Group, but it was down 43.8% in first quarter as it was the first market to be impacted by the pandemic. The Asia-Pacific is also the region with the highest gross margin and its weight on total sales was down 6.5 percentage points in the quarter. And this has negatively impacted the gross margin, as we will see later.

The retail channel in Mainland China reported revenues down 39% at constant FX, where we had a January that had started out very positive. Then, of course, from the announcement of the Chinese government on the COVID-19 on January 22, things began to change very rapidly. And in February, as I already mentioned, sales were down minus 90% versus last year and we had about two-thirds of the network completely closed. The rest, the ones still open, was just operating on shorter hours but with no traffic.

In March, the numbers were still negative versus last year, but the decline in March was around one-half of the one reported in February. Fortunately, let's say this force majeure situation has been recognized by the Chinese authorities and this has favored our negotiations with the landlords to obtain rent relief.

In Hong Kong, always talking about Greater China, retail sales trend in the first quarter was, as already mentioned, unfortunately in line with last two quarters of 2019. And at the moment, traffic and sales are still quite weak. The positive lend note is that lenders have been -- become more flexible than in the last part of last year in terms of rent negotiations.

EMEA was down 26.3%, with retail up double-digit positive in January, then turned negative in February, driven by progressively decreasing traffic of Asian customers. And of course, drop in March, with the network almost entirely closed. Unfortunately, this situation is still critical in EMEA, with stores open just in Germany and Austria.

North America saw sales down in the first quarter at constant FX by minus 24.7%, with US retail positive at the end of February but then experiencing a strong dip in sales in March due to the country lockdown and with also a channel underperforming the region. Latin America showed sales down by minus 13.8% in first quarter at constant FX, with trends in retail positive in January and February, but that turned negative in March. Finally, let's talk about Japan. Japan was down 21% at constant FX with the retail trend flattish in January and then turning progressively negative in February and March.

I will go now to the revenues by product page. Looking at the product, the negative performance is evenly spread across categories. Our leather core business recorded a minus 32.4% growth decrease -- sorry, in shoes and minus 29.4% decrease in leather goods and handbags at constant FX. And retail was down 28.5% in January.

In general, what we can say is that in the first part of the year before the COVID-19 outbreak hit the single market, we have seen the new products overperforming, especially for women's business. As far as fragrances business is concerned, in first quarter, the performance was down 43.4% versus last year, mainly due to the mix shipment in Asia and China and to travel retail operators.

Let's now move to the next page, which is P&L. As a general note, a general reminder for everybody, from now on our figures are reported and commented according to the IFRS 16 accounting principle. Let's keep revenues just commented, then let's talk about gross margin.

Gross margin was 58.7% of revenues and it was down 4.6 percentage points versus last year, mainly due to three factors. First factor was the unfavorable geographical mix. So since the COVID-19 effects first impacted the Chinese and Asia-Pacific region, which is the region, as I already mentioned, with the highest gross profitability and that, as you have seen, lost 6.5 points in terms of weight on total sales versus last year, of course this component plays a negative role within our gross margin performance.

Secondly, the way the COVID-19 has developed across geographies penalized, let's say overproportionally, the full price season in most countries since the stores were locked down during the second part of the quarter, which is our typical full price season. And this happened especially in China during the new year's holiday. In other words, the dealers brought to a sort of overweight, let's say, of off-price season in the total calendar of the first quarter.

The first two negative factors have been positively compensated by a favorable FX rate, by a positive channel mix -- retail to wholesale -- and marginality within this channel. But the third factor, which is the one most impacted the gross margin, is the higher provision for obsolescence that we accrued not only for summer-spring 2020 collection but also for the previous one since stores have been closed for many weeks and we cannot expect to have a fully regular sell-through season in the coming months. Therefore, all in all, let's say that the extraordinary provisions are responsible for around two-thirds of the total percentage loss.

Total OpEx, down 7.1% at current FX. They are down 8% at constant. And this is due mainly thanks to the pure success of the cost containment action and to, of course, a lower variable cost. The total incidence of operating cost is of course increasing versus last year due to the strong, sudden, and unexpected contraction of the top line and to the fact that the cost containment actions are showing their first effects just in the month of March.

In terms of cost control, as Micaela already mentioned, we are extensively working on every single line, renegotiating rents, contingencies, and all other costs. But we also keep investing in digital, for example, and in everything we need to support the brand.

Also, please take into account that in this first quarter we don't see yet any positive effects on cost of the government subsidies to labor, like, for example (spoken in Italian) in Italy or similar measures in other European countries, or what is a furlough in the US, which will be positively hitting the number of the Company from second quarter on.

EBITDA was for EUR12 million versus the EUR65 million of last year and EBIT was EUR36 million negative versus EUR21 million positive last year. Below the EBIT line, just for your reference, we have segregated the financial line between what is pure, let's call it, pure financial income and expenses and financial accounts related to the [total] IFRS 16 right of usage, which related to the interest portion connected with rent.

Focusing on pure financial line, the cost is EUR5.7 million above last year. This is due to the revaluation of some intercompany accounts that may neutralize in next quarter. So for full year 2020, if this component, the [facts] component, will neutralize, we can expect on this line a pure financial cost increase of EUR1 million above last year due to higher cost of financing that we will commence in the next slide.

Regarding taxes, you perfectly know that in this interim quarter, the taxes calculation is an estimation that cannot be as accurate as it is for the year end. In first quarter, what you see is a positive number. And this positive number is connected to the first [docsis], which reflects the differences between the book value and deductible amount. All in all, the net income lands at minus EUR41 million versus plus EUR11 million of last year.

Let's move to the balance sheet. Looking at the balance sheet, the net working capital was quite stable versus December 2019 and it is up 11% versus first quarter 2019, with inventory up plus 2.3% at current FX and plus 5.4% at constant FX. Of course, this is in consequence also of the provision for obsolescence that we have seen in the P&L.

The trend of trade receivables and payables reflects the incredible disruption created by this crisis. And in particular, the drop in trade receivables is due to the big decrease in the order of shipments and the collection, of course, of the cash related to the previous one that we had already commented. And the [added] increase in trade payables vice versa is driven by, of course, having paid the previous payables and having then purchased lower purchases of raw materials, less labor cost in sight of the net quarter.

CapEx, EUR5 million in first quarter 2020 versus EUR9 million last year as we have revised for the projects and we have brought forward only the ones that we consider essential and strategic. So let's say that this 49% decrease in CapEx that you see in first quarter could be considered a good proxy for the full-year 2020 number, given the visibility that we have today. Then, of course, we will accelerate or we could accelerate if the situation improves.

Let's talk about net financial position at March 31. In this case, we are talking net of IFRS 16 impact, which you can see restated at the bottom of the page. Net financial position was positive for EUR123 million versus a positive EUR179 million at March 2019. And it was strongly affected, of course, by this sudden lack of revenues due to the stores lockdown. So including then the IFRS 16 effect, the net financial position at December 31, 2019, is a negative EUR531 million.

As a consequence of this extraordinary market situation where we experience lack of cash inflows for every day which stores are closed and of course a lack of shipments for all things, we are now finalizing an important work to further strengthen and secure the financial structure and solidity of the Company. In other words, we have further reinforced and we are still reinforcing our credit line in order to be able to face market situations even worse than the one that we have been experiencing in the last month. As we already mentioned, talking about the financial lines on the previous slide, this new line of financing will generate an increase of about EUR1 million versus last year in terms of financial cost at P&L level.

Finally, let's move to the last slide on the store network. As you see, the store network is quite stable. We count 652 monobrand doors at the end of the March 2020, which is just a net minus 2 versus the end of 2019. And it's related to the closure of two the (inaudible) within department stores.

I think that this is all on my side for the moment and we can now open the Q&A session.

--------------------------------------------------------------------------------

Paola Pecciarini, Salvatore Ferragamo S.p.A. - Group IR [4]

--------------------------------------------------------------------------------

Yes, thank you, Alessandro. We can now open the Q&A session. Operator, please.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Erwan Rambourg, HSBC.

--------------------------------------------------------------------------------

Erwan Rambourg, HSBC - Analyst [2]

--------------------------------------------------------------------------------

Yes, hi, good evening. And thanks to all three of you for your time and the presentation. Three things, please. First, if you look at inventory issues, when eventually you will be reopening the West, how do you think about dealing with inventory issues? Are you going to keep collections longer in the stores? Are you going to discount more in the stores? Are you going to ship more to outlets? What are the options there?

Secondly, I was wondering when you reopen stores -- so for example, in Mainland China or maybe today in Texas or tomorrow in Chicago in the US or later in Europe -- what do you see selling best? I.e., is there a difference in terms of either price points or categories? What do consumers come back to buy first?

And then thirdly, given the possible structural nature of repatriation within Mainland China, does this make you rethink potentially your footprint in terms of stores in Europe or in travel retail? Or is it too early for you to think about this? Thank you.

--------------------------------------------------------------------------------

Micaela Le Divelec Lemmi, Salvatore Ferragamo S.p.A. - CEO [3]

--------------------------------------------------------------------------------

Okay. So as much as your first question, to be honest, the actions that we are going to put in place is a blend between different kind of initiatives. From one side, we are planning to be much more focused on the next collection so that the new collections coming in the store, which usually will be landing in stores at this moment, the prefall collection has been extended in terms of deliveries and will join the store later on in the season. So these will give on one side more time to the spring-summer collection in order to sell it at full price.

Then we are planning for a markdown initiative in store as much as we all received in the past. So in terms of approach, this does not change in terms of strategy. What is changing could be the date of the products that could be available from time to time.

And third, there is an initiative of moving some of the items to the outlet. But this, in terms of inventory level protection, it will require a little bit more time in order to give to these items the full-fledged [period] in the outlet. So it is a blend and it is very much depend on market by market. Also depending on the real-time in which we will be able to reopen the stores.

You also probably saw that in Italy, for instance, at the time of the starting of the markdown season has been postponed. So in that respect, even governments are giving an opening to the possibility of giving more time to the regular collection life.

In terms of mood and tendency from the customer when we reopen, what we observe is that after a stress moment in which there was in Mainland China a skeptical attitude because of all the measures that were put in order to monitor the presence in store. In general, in terms of habits and of purchase, they are coming back more or less to the regular habits before the COVID.

So we cannot anticipate if this kind of trend and tendencies will be the same in Europe and in the US. Also, because we had to take into consideration that the attitude of the rebound spending that I think all the luxury brands and the luxury market is experiencing in Mainland China is something that we need to probe if in more mature market is facing the same speed and the same [fledge].

Also, considering that when it comes to Europe, Europe has been for years a market very much depending on touristic customer on tourists. And we know for sure that these tourists will lag in the coming months. So we need to see what will be the mood and the attitude of the local customers. And what we are doing is to focus very much on the local customer in order to cultivate local customer and local engagement, which will be something that in a way could be a bit new in the market.

As much as the repatriation of China -- sorry, but I don't remember exactly the question.

--------------------------------------------------------------------------------

Erwan Rambourg, HSBC - Analyst [4]

--------------------------------------------------------------------------------

So what I meant is that repatriation of growth in China started way before COVID, right? Started probably two years ago. And I am just -- and COVID is accelerating this trend. And so I am just wondering, does it make you rethink your footprint in Europe? Because you just answered that Europe is not much about the Europeans and travel retail as well. Would you look to slightly shrink your footprint eventually?

--------------------------------------------------------------------------------

Micaela Le Divelec Lemmi, Salvatore Ferragamo S.p.A. - CEO [5]

--------------------------------------------------------------------------------

This is something that we had to consider really carefully. It's too early now to take any decision because we need also to understand what the movement will be and how long it will take to go back to a regular path.

Of course, this kind of fine-tuning and optimization is something that we also started to consider before the COVID. So even prior to now, we had to be even more logical and considering each and any location in function of the customer base. So it is one of the actions that we are carefully consider, but there is no conclusion that we can take at this stage, which is a bit too early. Also, considering the fact that most of the Western markets didn't reopen yet.

--------------------------------------------------------------------------------

Erwan Rambourg, HSBC - Analyst [6]

--------------------------------------------------------------------------------

Okay, very clear. Best of luck. Thank you for your answers.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Elena Mariani, Morgan Stanley.

--------------------------------------------------------------------------------

Elena Mariani, Morgan Stanley - Analyst [8]

--------------------------------------------------------------------------------

Hi, good evening, everybody. A few questions from me as well. Could you perhaps clarify a little bit more these provisions for obsolescence that you have taken in the first quarter? So how much do you think they will cover for the rest of the year? How much do you think there will be similar provisions in the second quarter? And how should we think about the gross margin through the rest of the year as we take into account the initiatives you have mentioned to reduce your inventory?

And still related to these questions, I was surprised to see inventory up only 5% at constant FX. So again, could you help us understand the moving parts, including these provisions for obsolescence?

Second question is about your exposure to tourists. Is it fair to say that overall globally, you are one of the brands with the highest exposure to tourist spending? Both in terms of travel retail point of sales, which I understand are the highest if I compare it to all your peers, but also in terms of percentage of sales that are exposed to travelers. And is it fair to say that this is the reason why you have underperformed peers in the first quarter? Because your Q1 sales decline has been one of the worst reported in the industry?

And then my final question is more like a generic one about how you could try to win and reemerge as a brand after the crisis. You have mentioned, as many others, that you will have to focus a little bit more on the locals and the Europeans perhaps than the Americans. How do you plan to do this, strategically speaking?

And do you feel confident on the fact that even the smaller brands will potentially re-emerge reemerge strongly after the crisis? Or do you see a scenario where you could potentially lose further ground versus the largest brands that have more spending power, more marketing power, and so on and so forth? Thank you.

--------------------------------------------------------------------------------

Alessandro Corsi, Salvatore Ferragamo S.p.A. - CFO [9]

--------------------------------------------------------------------------------

Okay, I can start replying to your question about the provision for obsolescence. Of course, it is not easy for anybody today to forecast the evolution of the COVID-19 crisis. Our numbers and our performances are strictly related to what happens in the pandemic -- in the way the pandemic is managed.

So of course today, with the visibility that we have, we expect -- I expect that the provision for obsolescence that we have accrued in this first quarter are prudent enough to manage, of course, the next coming months. Then of course, if the stores keep being closed for many, many months and beyond what today is reasonable to think of, of course, as we have already mentioned, the time on the shelf of the collection will be reduced and reduced even more of what happens. And in that case, we could find ourselves to, let's say, devaluate additional stock. As of today, I'll say I feel confident with what we have done, absolutely confident.

Then, of course, it very much depends on the evolution of the pandemic and of the consequences that it has on the business. Of course, as you may imagine, we don't look at the stock on a quarterly basis, but we look at the stock at the moment on a daily basis. And every month, we recalculate. Everything we work today on continuously work on a rolling forecast to capture any positive, or in this case let's say potential negative trends and when we capture it. If we captured any additional negative trends and we need it of additional devaluation, we will make it. As of today, I cannot give you more than this.

--------------------------------------------------------------------------------

Elena Mariani, Morgan Stanley - Analyst [10]

--------------------------------------------------------------------------------

Understood. Thank you.

--------------------------------------------------------------------------------

Micaela Le Divelec Lemmi, Salvatore Ferragamo S.p.A. - CEO [11]

--------------------------------------------------------------------------------

As far as the second point on the exposure to tourist spending, I think that your analysis is absolutely appropriate. So in terms of tourist spending from on-site but also in terms of channel mix, considering the weight of the travel retail for Ferragamo, we are probably one of the most exposed in that respect channel-wise and also in terms of business contribution by the different geographies to the touristic flows.

How can we win after the crisis? I think that we have some ground to work on. For sure, one of our first priorities will be to push on digital. And not just the e-commerce, but in general to shift some of the initiative on the digital world as much as to reinforce our sustainability and ethical messages in terms of core values for the brand, together with all the core attributes and values that we do believe that, particularly after the situation of crisis, could be a relevant message to engage with the customer in a personalized way.

So we are working on programs of customer engagement even further compared to what we were doing before the pandemic. Of course, we had to shift some of the initiative also towards the digital. So our approach will be a strategical approach. Just to make an example, we just launched our program of MPS before the starting of the crisis and we immediately switched the questionnaire on the digital world and the digital customer.

So we need as much as possible to play with a flexible approach. I do believe that there will be some space and some ground for each brand which will be able to deliver clear and readable messages in terms of values, in terms of definition of the strategy, and in terms of initiatives. The five that I mentioned on the plan. Then as a matter of fact, it will be a matter of focusing in order to make each and any initiative more relevant.

--------------------------------------------------------------------------------

Elena Mariani, Morgan Stanley - Analyst [12]

--------------------------------------------------------------------------------

Thank you. Very clear. Maybe just two small follow-ups. Alessandro, on the gross margin point, could you help us understand how to think about the gross margin evolution in the coming quarters? And then the second small follow-up, Micaela, could you quantify for us the exposure in terms of percentage over sales to travel retail directly and separately to tourist flows? Thank you.

--------------------------------------------------------------------------------

Alessandro Corsi, Salvatore Ferragamo S.p.A. - CFO [13]

--------------------------------------------------------------------------------

Okay, as I mentioned, Elena, it's really not easy to give you an idea of the evolution of the gross margin in the next quarter because it's very much dependent on the fact that we can have at least the stores open. Because at the moment that we are talking about, if you think what we were just mentioning, when the stores are closed, there is no gross margin, there is no basically almost no shipments. So of course, that is impactful.

It will depend very much on the return to normality. So my point is if things are, let's say, improving, I don't expect or I wouldn't expect to find ourselves in the condition of create additional valuation -- devaluation like we did in this first quarter. But all of this happened really almost overnight for all of the markets. So it is not possible basically to give you an overview of the gross margin.

Of course, we have budgeted and we are forecasting, let's say, to some point a return to, let's say, a gradual normality, which is a normality differently in the different markets. So what we are observing in China -- maybe it was not clear, but I can state again during my presentation. In China, in the first 12 days of May, we are incredibly growing double-digit. It's really a strong, strong performance. And China is showing to have a very fast reaction and the path to normality seems to be -- okay, let's cross fingers -- already there.

So if I could assume that all of the markets had the same speed in return to normality like China, of course, I could make a better forecast or estimation. But I think that it would be different reaction from different market, and nobody knows today when the different markets are reopening. And we are talking about at least 50% of the total turnover. Because today, we have Europe, which is basically closed apart from Germany and Austria. We have North America, which is totally closed. We have Latin America, which is closed. We have Japan, which is closed. So basically, today it's impossible to make any forecast.

--------------------------------------------------------------------------------

Elena Mariani, Morgan Stanley - Analyst [14]

--------------------------------------------------------------------------------

Understood. Fair enough.

--------------------------------------------------------------------------------

Alessandro Corsi, Salvatore Ferragamo S.p.A. - CFO [15]

--------------------------------------------------------------------------------

And the other question was, sorry?

--------------------------------------------------------------------------------

Elena Mariani, Morgan Stanley - Analyst [16]

--------------------------------------------------------------------------------

If you could quantify the exposure to travel retail and to --

--------------------------------------------------------------------------------

Alessandro Corsi, Salvatore Ferragamo S.p.A. - CFO [17]

--------------------------------------------------------------------------------

Sorry. Yes, it's around 10%.

--------------------------------------------------------------------------------

Elena Mariani, Morgan Stanley - Analyst [18]

--------------------------------------------------------------------------------

That is for the travel retail part. And then what do you think is the percentage exposure to tourist spending? Is it 50% of your sales globally?

--------------------------------------------------------------------------------

Alessandro Corsi, Salvatore Ferragamo S.p.A. - CFO [19]

--------------------------------------------------------------------------------

It's lower than that. [Prudently].

--------------------------------------------------------------------------------

Elena Mariani, Morgan Stanley - Analyst [20]

--------------------------------------------------------------------------------

Okay. Thank you very much.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Melanie Flouquet, JPMorgan.

--------------------------------------------------------------------------------

Melanie Flouquet, JPMorgan - Analyst [22]

--------------------------------------------------------------------------------

Yes, good evening. Thank you for taking my questions (inaudible). I have several. But the first one is a clarification, really. I was wondering whether I could clarify your comment that two-thirds of the loss in gross margin was coming from these provisions, these obsolescence provisions. This means two-thirds of the 460 bps contraction, correct?

And also, you mentioned when you were talking about provision spring-summer and fall-winter obsolescence provision, I just wanted to clarify you are talking about spring-summer 2020 that you have taken provisions against fall-winter of the year prior, because you didn't sell everything by the end of February, is what we are talking about?

And then my second question is you were very kind to actually give us a guidance and an update on what you expected [to spend] year on year into Q1. I was wondering whether you could do this for Q2, given we are quite advanced in Q2 already and have quite good visibility on quite a few reopening initiatives in Europe already for Q2. So would sales down 50% be a good assumption, you think, at this juncture?

And if that is the case, you mentioned that you [recognized] cost in the market you reported to, you were going to get the subsidies on personnel costs. There should be less provisions obsolescence. But I imagine the incidence of rents is going to be tougher, given renegotiations in Europe and US (inaudible) further in Asia in this quarter two. So could actually quarter two be profitable even if sales are down this much or can it be similar more so to Q1? Actually, I will stop there. That is a lot already. Thank you.

--------------------------------------------------------------------------------

Alessandro Corsi, Salvatore Ferragamo S.p.A. - CFO [23]

--------------------------------------------------------------------------------

Okay, let's start the program, then maybe we will ask you to repeat again. Sorry. Okay, so talking about the provision for obsolescence. Okay, first of all, when I was talking about this, let's say, strong provision for obsolescence that we accrued, it has been done on the current collection, okay, so this summer-spring. Because this is a collection that when the COVID outbreak started was already in the stores and so we had no possibility at the time to cancel, let's say, our purchasing order, our production order.

So that collection, as I mentioned, is a collection which is not going to live, unfortunately, the typical shelf life that a collection is living. So we started, of course, devaluating stock. But of course, at the same time, you also have to devaluate in the current environment. Our thought was in the current environment, since we have no visibility on the length, the duration, and the intensity of the COVID effect, commercial effect, we cannot pretend not to make the same thinking also for the collection, for example, that we currently have in our secondary channel. You know we also have the collection in the secondary channel.

Of course, you have your primary stores, which are closed, and you devaluate that merchandise. But also you have to devaluate the merchandise that you currently have in your secondary channel, of course. Because at the same time, they will not have the time on shelf like the previous one.

Then, also forecasting the length or the duration of the crisis in, let's say, in August, usually you have the other collection, it is in the stores. For the fall-winter, the next fall-winter we were able as soon as we perceived the first sign of the outbreak to substantially reduce our orders, our manufacturing orders so we have less stock hitting the stores for the fall-winter 2021.

But at the same time for the collection that we have -- that we will have, sorry, we will have in the secondary stores, which is the previous-year fall-winter, of course, we also made a devaluation. Because it's not going to make probably the same type of sell-through it was expected to do in a, let's say, standard situation. So I hope I was clear about what we devaluated. Basically, we devaluated everything which is from current summer-spring behind. Okay? Was I clear?

--------------------------------------------------------------------------------

Melanie Flouquet, JPMorgan - Analyst [24]

--------------------------------------------------------------------------------

Yes, clear. Thank you.

--------------------------------------------------------------------------------

Alessandro Corsi, Salvatore Ferragamo S.p.A. - CFO [25]

--------------------------------------------------------------------------------

You're welcome. And then when I was talking about the loss, what I think is that two-thirds of the total PBT loss in terms of gross margin are due to the extraordinary provision that I was just commenting. So let's say that one-third is all of the rest, which, as I mentioned, is mixing together favorable effects, like retail, like channel mix, several effects from pure marginality in our wholesale business and so on. We have given, for example, the best performance of fragrances that unfortunately were offset by the other factors.

Then you were asking also for in Q2 what I can expect in terms of gross margin. Of course, I replied already to Elena: very difficult to say. Hopefully we already accrued enough in terms of at least of stock devaluation. But when we talk about operating expenses, for sure we will have a second quarter that will be from a revenues perspective -- at the moment, it is very clear. April was the month with the most important portion of the calendar month closed. So that is going to have a huge impact, of course, in terms of revenues.

But on the other side, April is the month where, much more than March already, we start seeing positive effects at EBIT level, on our EBIT, of the renegotiation of the rents. Because something that you have to take into account is that since the crisis, keep the values market at different stages in different times.

For example, when we look at China, we have already renegotiated a huge number of contracts and they are already reflecting some positive effects in the first-quarter numbers. So they are part of that minus 8% OpEx that you see in the P&L. But they will reflect even more in next month.

Of course, if you think of the United States or Europe, where the outbreak has hit the market later than in China, also the renegotiation and also the reaction, let's say, from the landlords happened later. So you don't see basically any effect or really little effect in the first quarter, but you will start seeing those effects in the second quarter. Because everything is kind of translated now by some weeks, which are -- which is different among the market. And this is something that we will be coping with with the business and the representation of the numbers from now on.

--------------------------------------------------------------------------------

Melanie Flouquet, JPMorgan - Analyst [26]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Alessandro Corsi, Salvatore Ferragamo S.p.A. - CFO [27]

--------------------------------------------------------------------------------

I don't remember if you had asked any other questions, Melanie.

--------------------------------------------------------------------------------

Melanie Flouquet, JPMorgan - Analyst [28]

--------------------------------------------------------------------------------

Yes, I asked whether down 50% in sales was a reasonable assumption for quarter two.

--------------------------------------------------------------------------------

Alessandro Corsi, Salvatore Ferragamo S.p.A. - CFO [29]

--------------------------------------------------------------------------------

Please don't ask me this kind of question at the moment. It's really difficult because we have just said as we are half of the quarter we will have really for sure -- we have seen, as I told you, a very positive impact from China retail and Korea, for example, at the moment. Then, of course, we cannot expect that when the United States or Europe are opening, all of a sudden the traffic and the sales will be exactly the same that we were used to, of course.

But we are also talking about the second quarter, which is including June. May and June are months where you usually ship wholesale business and so that will be another big driver for the performance of the quarter. So we have to see. It's really -- the visibility is really, really scarce, poor.

--------------------------------------------------------------------------------

Melanie Flouquet, JPMorgan - Analyst [30]

--------------------------------------------------------------------------------

Okay, thank you.

--------------------------------------------------------------------------------

Paola Pecciarini, Salvatore Ferragamo S.p.A. - Group IR [31]

--------------------------------------------------------------------------------

Excuse me, operator. We will now take the last question.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Andrea Randone, Intermonte.

--------------------------------------------------------------------------------

Andrea Randone, Intermonte SIM - Analyst [33]

--------------------------------------------------------------------------------

Thank you and good evening. I have two questions. The first one is about your digital strategy and also if you can give us some more details about digital performance in the first quarter. And the second question is more about sort of sales activity.

And the last on top line. So in this quarter, you lost about EUR100 million year on year in terms of revenues and something more than EUR50 million in terms of EBITDA. I ask you if you can indicate this as a sort of rule of thumb for the remaining part of the year or if you can extract some additional cost savings? Thank you.

--------------------------------------------------------------------------------

Micaela Le Divelec Lemmi, Salvatore Ferragamo S.p.A. - CEO [34]

--------------------------------------------------------------------------------

So in terms of digital strategy, as you probably already saw, we have been launching the first digital showroom in connection with the sales campaign of the fashion show in February immediately at the starting of the COVID. And this is something that we will continue to pursue in terms of way of managing the B2B relationship on top of allowing us now to plan for the upcoming sales campaign in a way that we are not forced out to push that too much forward.

Then just a few weeks ago, we have been relaunching our e-commerce site, which is currently active in Europe, in the US, and in Latin America. We are going to launch the new e-commerce site in China in the coming -- in the month of June as much as in Japan. And then we are planning also to strengthen our relationship with e-tailers.

So considering that when it comes to the digital world, what we would like to do is to have as much as possible, first of all, the two channels joined. So also to use and to leverage on the omnichannel capability in order to drive services to our customers through the physical store even without the presence of the customers. But on top of that, we are currently starting and developing new initiatives that will be announced in the coming weeks in order to make this connection and this bridge between the physical world and the digital world more proximal, more close.

We never disclose the performance of the digital channel standalone, so I don't think that I can give you any data. Just for you to know that some of the logistic platforms in some of the regions has experienced during the first quarter the same closure, the same turbulence because of the closure than the logistic platform serving the B2B. So in that respect, we experienced some delays in terms of the deliveries.

But all in all, what we would like to do is to make -- to continue to invest in the digital order. Also embracing new ways of working, which is something that with the launch of the smart working has been in a way phased for all the internal communications as much as the external as well the training activities. So we would like really to explore digitally all the initiatives that in the previous phase we were experiencing in person.

--------------------------------------------------------------------------------

Alessandro Corsi, Salvatore Ferragamo S.p.A. - CFO [35]

--------------------------------------------------------------------------------

Okay, I will take the last question, your question about the sensitivity on the top line. And you were asking if we can consider or if we consider what we consider as a rule of thumb or if what we consider what happened in first quarter, let's say, is representative.

Of course, it's a very complicated matter, but for sure what I can tell you, as I already mentioned to Melanie. First of all, we cannot say what is the rule of thumb because, first of all, the first quarter is a quarter which I would consider hybrid in the sense that you have a January, which is the first month of the year, which is basically a normal, a standard month from a business perspective for most of the world, excluding the last week in China, where the COVID started. But in the rest of the world so totally is a good month, is a standard month.

Then you have February and March, which are increasingly atypical as business months because you don't see a deceleration. You have a shutdown overnight of some markets or some countries or some regions. So basically what I'm saying is all of a sudden in the first quarter, you found yourself with no revenues at all from retail or from wholesale and costs, which of course keep on going because you still keep on paying rent and so on.

So the first quarter is a quarter then also the actions that you have made have not brought their full potential result. Because of course, you go there to the lender, you renegotiate, it doesn't happen overnight. You take some time to make it happen and real. So from this perspective, second quarter for sure will be, let's say, more meaningful than in first quarter.

But it's impossible in my opinion to find a rule of thumb when the situation is so extraordinary with a total shutdown of the top line and a [unmitigated] reaction. But it cannot be considered like, let's say, as immediate as a shutdown on the cost line. It is not a variable [word] where you have 50% of revenues so you cut 50% of cost. Unfortunately, the real life in our business is not like this. And so at the moment, it is not possible to give you any rule of thumb. Okay?

--------------------------------------------------------------------------------

Andrea Randone, Intermonte SIM - Analyst [36]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Paola Pecciarini, Salvatore Ferragamo S.p.A. - Group IR [37]

--------------------------------------------------------------------------------

So thank you, everybody, for your interest. The next conference call will be on July 28 for the first-half result. Have a good evening. Thank you.

--------------------------------------------------------------------------------

Alessandro Corsi, Salvatore Ferragamo S.p.A. - CFO [38]

--------------------------------------------------------------------------------

Thank you very much.