Alpargatas reported that rapid growth of its Havaianas flip-flop brand in the United States and Europe as well as strong results at its Argentine subsidiary enabled it to more than double net income despite continuing economic problems in its native Brazil.
The footwear company, which distributes Mizuno and Timberland in Brazil and Argentina, reported consolidated net revenues reached $996.9 million ($337 mm) in the quarter ended June 30, up 14.0 percent from the second quarter of 2014. Gross margin was 41.3 percent, up 70 basis points, while SG&A expenses reached 33.8 percent of net sales, up 30 basis points. EBITDA rose 29.4 percent to R102.7 million ($35 mm), or 10.3 percent of net sales, up 190 basis points from a year earlier. Net income jumped to R46.0 million ($15 mm), up 101.8 percent compared with the second quarter of 2014.
Earnings from Alpargatas International Sandals Business and Alpargatas Argentina accounted for 95 percent of the growth in EBITDA (earnings before income taxes and depreciation) in the first half ended June 30, when the Brazilian real was trading nearly 29 percent below its year earlier exchange rate with the U.S. dollar.
At the International Sandal Business, which primarily reflects sales of Havaianas flip-flops, revenues grew 22.4 percent to R218.2 million ($74 mm), during the quarter, which translated to a 21.7 percent increase in euros and a -20.5 percent decline in US dollars. The U.S. dollar decline was attributed primarily to lower export sales to other regions.
Unit sales at Alpargatas USA and Alpargatas EMEA (Europe, Middle East and North Africa) grew 15.9 percent to 5.2 million, while total International Sandals unit sales – including exports – declined 12.3 percent to 10 million units compared with the year earlier quarter.
Disney deal spurring Havaianas U.S. growth
Alpargatas attributed growth at its U.S. subsidiary primarily to the opening this spring of a Havaianas store at Disney Springs, a new retail complex inside the Disney World Resort in Orlando. The store is already the second biggest retail outlet for the brand outside its native Brazil and Alpargatas announced a strategic alliance with three Disney resort companies that will make Havaianas available for sale at 22 stores in Disney World, Disneyland and locations operated by Disney Vacation Club. The alliance also calls for Havaianas to become the official sponsor for runDisney races.
Growth at Alpargatas EMEA was due mainly to the company's decision to go direct in five European countries and open more accounts.
Gross profit at International Sandals increased 26.6 percent to reached 68.6 percent of net sales, compared with 66.3 percent in the second quarter of 2014 as revenues grew faster than costs and more sales ran through more profitable channels, such as Havaianas retail stores. Higher import taxes in Europe and in the United States also offset margin growth.
EBITDA margins at International Sandals reached 27.0 percent, up 60 basis points as higher gross profits of R1.4 million and the R20.6 million ($7 mm) positive impact from exchange rates easily offset a R$ 10.2 million ($3 mm) increase in operating expenses due to increased investment in Havaianas marketing, and store openings. The company opened seven Havaianas stores in the United States and three in Europe during the year ended June 30, 2015.
In Brazil, Mizuno falters, Timberland up
In Brazil, Alpargatas units sales of branded sports footwear declined by 300,00 pair in the second quarter as declines at Mizuno and its owned Topper and Rainha brands, which make athletic and soccer shoes, easily offset a 1 percent increase at Timberland.
In addition to reduced demand, Mizuno sakes were hit by the decision to shift launches of the majority of the 2105/2016 sports footwear collection to the second half of the year. Only the Prophecy 4 and Creation 17 were brought forward to the first half of 2015.
Lower volume, discounted prices for the 2013/2014 footwear collection and higher import costs caused by the weaker Brazilian real dragged down the profitability of the Mizuno business compared with a year earlier.
To reverse the trend, Alpargatas plans to raise the average price of Mizuno products while lowering production costs of basic Mizuno models, which represent 50 percent of the brand's footwear sales, at its assembly plant in the state of Paraiba. Alpargatas will also speed up product innovation, boost spending on “It's Runderful” campaign emphasizing the advantages of running and sponsor the Mizuno Half Marathon and two Ironman events.
Alpargatas reported same-store sales at its 18 Timberland stores in Brazil grew 6.6 percent thanks primarily to the expansion of the accessories line and an increase in sales of casual footwear in company-owned stores.
Alpargatas ended the quarter with cash and cash equivalents of R420 million and inventory valued at R720.3 million, down 37.4 and up 14.8 percent respectively compared with a year earlier.