17 March 2017 Europe/Italy Equity Research Luxury Goods

Safilo Group Spa (SFLG.MI) Rating NEUTRAL Price (14 Mar 17, €) 6.58 INITIATION Target price (€) 6.00 Market Cap (€ m) 412.3 Lack of brand visibility leaves us cautious Enterprise value (€ m) 439.6 Target price is for 12 months. ■ Potential for a strong self-help story but earnings still at risk from Research Analysts licence overhang; initiate with Neutral and target price of €6. We like the Catherine Tillson name because of the 2020 Strategic Plan laid out by current CEO Luisa 44 20 7888 6052 Delgado. We believe this has scope to become a strong turnaround story as [email protected] the company removes some of the more basic operational limitations with Guillaume Gauvillé, CFA SAP implementation, improved manufacturing capabilities and insourcing of 44 207 888 0321 [email protected] volumes (70% of global volumes outsourced). Safilo is reducing lead times, rationalising stock keeping units (SKUs) and plans to cut costs by c€25/30m. ■ We remain cautious given licence exposure. The turnaround story looks to be at risk from Safilo’s legacy problem around licences. The first major investment plan in 2011 was derailed by the loss of the Gucci licence and the CEO to Kering. It is likely that the Dior licence and the accompanying LVMH licences will also leave. We estimate Dior is c.€200m of revenues (just under 25% of annual sales) and we include part of its loss into our FY21e sales. ■ Lack of strength in Safilo's own brands. Safilo has been targeting a reversal of its licence to proprietary brand weighting. It currently sits at 75% licences, and targets 60% by 2020. However, outperformance of own brands is yet to materialise. We forecast -11% constant currency (cc) growth in FY17 as the Gucci licence ends and the company guides towards -15%/-20% growth of its 'going forward brand portfolio' in 1Q17. We forecast 5%/6% cc growth thereafter and c160bps of EBITDA margin expansion over FY16- FY20, giving total shareholder return of low single digit over the next 3 years. ■ Risks include i) Dior terminating its contract earlier than expected/or not at all, ii) own brands do not regain momentum, iii) further issues with execution of 2020 Strategic Plan or iv) the company buys in another strong brand. ■ Valuation in line with history. Safilo trades on a normalised EV/EBIT of 20x over the next 5 years, ahead of its 10-year average at c10x, but looks undervalued on EV/Sales of 0.4x vs. history of 0.7x. Our TP of €6 is based on an average of our Credit Suisse HOLT® Linker™ valuation and DCF using a weighted average cost of capital of 8% and terminal growth of c2%.

Share price performance Financial and valuation metrics

1 6 Year 12/16A 12/17E 12/18E 12/19E 1 4 Revenue (€ m) 1,252.9 1,130.1 1,202.2 1,264.6 1 2 EBITDA (€ m) 86.7 28.6 60.8 86.9 1 0 Adjusted net income (€ m) 13.68 -16.00 1.10 14.97 8 CS EPS (adj.) (€) 0.22 -0.26 0.02 0.24 6 ROIC (%) 5.0 -1.2 0.7 2.2 Ju l- 1 5 Jan - 1 6 Ju l- 1 6 Jan - 1 7 P/E (adj.) (x) 30.2 -25.8 376.6 27.6 P/E rel. (%) 119.4 -211.7 3664.2 300.7 SFLG.M I FT SEURO FIRST 3 0 0 IN D EX EV/EBITDA (x) 5.3 15.4 6.8 4.5

The price relative chart measures performance against the Dividend (12/17E, €) 0.00 Net debt/equity (12/17E,%) 3.1 FTSEUROFIRST 300 INDEX which closed at 1472.5 on Dividend yield (12/17E,%) 0.0 Net debt (12/17E, € m) 27.3 14/03/17 BV/share (12/17E, €) 13.9 IC (12/17E, € m) 903.9 On 14/03/17 the spot exchange rate was €1/Eu 1.- Free float (%) 48.6 EV/IC (12/17E, (x) 0.5 Eu.94/US$1 Source: Company data, Thomson Reuters, Credit Suisse estimates Performance 1M 3M 12M Absolute (%) 0.1 -17.5 -17.4 Relative (%) -2.0 -22.1 -28.4

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 17 March 2017

Safilo Group Spa (SFLG.MI) Price (14 Mar 2017): €6.58; Rating: NEUTRAL; Target Price: €6.00; Analyst: Catherine Tillson Income statement (€ m) 12/16A 12/17E 12/18E 12/19E Company Background Revenue 1,253 1,130 1,202 1,265 Safilo Group Spa manufactures sunglass and prescription glass EBITDA 87 29 61 87 frames under license and own proprietary brands. Licenses include Depr. & amort. (47) (46) (50) (54) Dior, Hugo Boss and Celine. Own brands include Carrera and EBIT 40 (18) 10 33 Polaroid. The company largely operates under a wholesale model Net interest exp. (6) (9) (8) (7) with only a small retail presence in the US with just over 100 sun Associates 0 0 0 0 retail stores. PBT (123) 6 41 25 Income taxes (19) (3) (17) (10) Blue/Grey Sky Scenario Profit after tax (142) 4 25 15 Minorities -0 (0) (0) (0) Preferred dividends - - - - Associates & other 156 (20) (23) (0) Net profit 14 (16) 1 15 Other NPAT adjustments (156) 20 23 0 Reported net income (142) 4 24 15 Cash flow (€ m) 12/16A 12/17E 12/18E 12/19E EBIT 40 (18) 10 33 Net interest 7 9 8 7 Cash taxes paid (28) (3) (17) (10) Change in working capital 20 24 5 8 Other cash and non-cash items 50 61 73 39 Cash flow from operations 89 74 81 77 CAPEX (52) (53) (55) (57) Free cashflow to the firm 52 42 47 37 Acquisitions 0 0 0 0 Divestments 10 0 0 0 Other investment/(outflows) (2) 0 0 0 Cash flow from investments (44) (53) (55) (57) Net share issue/(repurchase) 0 0 0 0 Dividends paid 0 0 0 0 Issuance (retirement) of debt 5 (17) (5) (7) Cashflow from financing 5 (17) (5) (7) Changes in net cash/debt 42 21 25 20 Our Blue Sky Scenario (€) 10.00 Assuming the company is able to meet the 2020 targets, accelerate Net debt at start 90 48 27 2 the turnaround of the own brand portfolio and executive cleanly on Change in net debt (42) (21) (25) (20) EyeWay transformation, we see scope for a 10% increase in Net debt at end 48 27 2 (18) earnings. Applying at least a 1 standard deviation multiple gives a Balance sheet (€ m) 12/16A 12/17E 12/18E 12/19E blue sky scenario of €10. Assets Total current assets 682 654 680 697 Our Grey Sky Scenario (€) 3.00 Total assets 1,527 1,506 1,538 1,557 Conversely if the company suffers further deterioration of own Liabilities brands and EyeWay does not go as planned, introducing new Total current liabilities 408 399 410 420 disruption, we see the potential for a 25% decrease in operating Total liabilities 654 630 636 641 profit. Applying trough multiples of 6.9x EV/EBIT of 1 standard Total equity and liabilities 1,527 1,506 1,538 1,557 deviation away from the average, gives a grey sky target price of €3. Per share 12/16A 12/17E 12/18E 12/19E No. of shares (wtd avg.) (mn) 63 63 63 63 Share price performance CS EPS (adj.) (€) 0.22 (0.26) 0.02 0.24 Dividend (€) 0.00 0.00 0.00 0.00 16 Free cash flow per share (€) 0.84 0.68 0.75 0.59 Key ratios and valuation 12/16A 12/17E 12/18E 12/19E 14 Growth/Margin (%) 12 Sales growth (%) (2.0) (9.8) 6.4 5.2 10 EBIT growth (%) (35.6) (144.4) 159.8 211.7 Net income growth (%) 108.3 (216.9) 106.8 1266.8 8 EPS growth (%) 67.9 (149.0) 179.9 183.7 6 EBITDA margin (%) 6.9 2.5 5.1 6.9 EBIT margin (%) 3.2 (1.6) 0.9 2.6 May- 15 Sep- 15 Jan- 16 May- 16 Sep- 16 Jan- 17 Pretax profit margin (%) (9.8) 0.6 3.4 2.0 Net income margin (%) 1.1 (1.4) 0.1 1.2 SFLG.MI FTSEUROFIRST 300 INDEX Valuation 12/16A 12/17E 12/18E 12/19E EV/Sales (x) 0.4 0.4 0.3 0.3 The price relative chart measures performance against the FTSEUROFIRST EV/EBITDA (x) 5.3 15.4 6.8 4.5 300 INDEX which closed at 1472.5 on 14/03/17 EV/EBIT (x) 11.7 (25.0) 39.5 12.1 On 14/03/17 the spot exchange rate was €1/Eu 1.- Eu.94/US$1 Dividend yield (%) 0.00 0.00 0.00 0.00 P/E (x) 30.2 (25.8) 376.6 27.6 Credit ratios (%) 12/16A 12/17E 12/18E 12/19E Net debt/equity (%) 5.5 3.1 0.2 (1.9) Net debt to EBITDA (x) 0.6 1.0 0.0 (0.2) Interest coverage ratio (x) 6.2 (1.9) 1.3 4.4 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates

Safilo Group Spa (SFLG.MI) 2 17 March 2017

Key charts

Figure 1: Safilo is the second-largest sunglass and Figure 2: Safilo’s brand portfolio covers a wider frame manufacturer range of price points than Luxottica % of frames market, FY15, retail value Safilo brand portfolio, FY15 results, Celine not renewed in Dec 16 ) %

( Chilli Beans

1% e r a h

s Vision Service Plan Global 3%

t e k r

a Essilor International SA 4% m

s e

s Safilo Group SpA 14% s a l g n

u Luxottica Group SpA 50% S

t Rodenstock GmbH 1% e k r a m

Fielmann AG 1% ) s e % (

m e a r r Vision Service Plan Global 2% f a

h e l s c a

t Safilo Group SpA 6% c e p

S Luxottica Group SpA 23%

Source: Euromonitor Source: Company presentation

Figure 4: We like the self-help story driven by the Figure 3: Group sales are over exposed to licenses, 2020 Strategic Plan, with the potential to remove a accounting for 75% of group sales number of low hanging fruit, in our view License expiry dates Eyeway project timeline

Moschino and Love Moschino (from Jan 2018) 2025 Elie Saab (Jan 2017) 2025 Marc Jacobs Group 2024 MaxMara 2023 Jimmy Choo 2023 Rag & Bone (Jan 2018) 2022 Fendi 2022 Givenchy 2021 Havaianas 2021 Swatch 2021 Tommy Hilfiger 2020 Pierre Cardin 2020 Hugo Boss Group 2020 Dior Group 2020 Max & Co 2019 Jack Spade 2018 Kate Spade 2018 Fossil 2018 Bobbi Brown 2018 Banana Republic 2018 Liz Claiborne 2017

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 5: The stock looks overvalued on a 5-year Figure 6: We worry that the Strategic Plan could be normalised EV/EBIT of 20x but looks attractive on derailed by licences leaving and poor execution; the FY18e EV/Sales of 0.4x on our estimates stock could see further earnings downgrades 12mth fwd. consensus EV/Sales Consensus EPS momentum

1.8x 1.6

1.6x 1.4

1.4x 1.2

1.2x 1 1.0x 1.0x 0.8 0.8x 0.7x 0.6 0.6x 0.5x 0.4 0.4x 0.4x 0.2 0.2x

- 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16

Safilo EV/sales Average Stdev+/-1 FY12e FY13e FY14e FY15e FY16e FY17e FY18e

Source: Thomson Reuters Source: Thomson Reuters

Safilo Group Spa (SFLG.MI)3 17 March 2017

Initiate with Neutral, TP of €6 We like Safilo for its turnaround story. The company launched its '2020 Strategic Plan’ in 2015 in which we see substantial scope for upside as the company removes low- hanging fruit with such initiatives as SAP implementation, improved manufacturing capabilities and insourcing of volumes. In addition, the company plans to cut costs by €25- 30m over the next three years, c2% of FY16 sales. Safilo's biggest challenge is its licences... The company derives about 75% of its revenues from licenses (data as of FY15 Annual report). Having lost the Gucci licence in late 2014, with the stock down 27% on the day of announcement, Safilo could potentially lose the Dior licence as well. We estimate this to be c€200m of revenue, almost a quarter of annual sales. We believe this is likely to be the case as LVMH has announced a JV with Marcolin. This JV has "the aim of becoming, in the future, the preferred partner of LVMH in the eyewear business" (source: Marcolin press release 31 Jan 2017). Therefore, as part of the Christian Dior holding, we expect Dior to utilise this manufacturing capacity and move it back in-house. Having said this, we believe this is a view shared by the market and that this is now largely priced in, as the stock has taken a further step down of 20% since the announcement. …and as such remains a ‘show me’ story. Despite our belief that this is largely priced in, we remain cautious on the name. We remind investors that the loss of licence agreements have derailed Safilo’s previous investment plan and we still haven’t seen the reacceleration of the own brand portfolio. Additionally following FY16 results on 15 March there is clearly some execution risk associated with the implementation of the 2020 Strategic Plan. The company has guided towards the ‘going forward portfolio’ net sales (i.e. ex-Gucci) to be down 15-20% in 1Q17. This is following disruption at its main distribution center in Padova as it implements fully automatised operations as part of the SAP implementation and EyeWay project. Therefore, the stock remains a 'show me' story.

Figure 7: The stock looks overvalued on a 5-year normalised EV/EBIT of 20x vs. historical average of Figure 8: The discount to the eyewear sector does 10x but looks attractive on FY18e EV/Sales of 0.4x not justify the earnings risk in our opinion 12mth fwd EV/Sales consensus numbers Safilo relative 12mth fwd consensus EV/EBIT valuation to the sector

60% 1.8x

1.6x 40%

1.4x 20% 1.2x - 1.0x 1.0x (20%) 0.8x 0.7x (34%) 0.6x (40%) 0.5x 0.4x (44%) 0.4x (60%) 0.2x

- (80%) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Safilo EV/sales Average Stdev+/-1 Prem. (disc.) vs. sector Avg. prem. (disc.) vs. sector

Source: Thomson Reuters , pricing as of 14 March Source: Thomson Reuters, pricing as of 14 March

Valuation looks stretched following FY16 results. The company trades on 12x EV/EBIT on our FY19e and a normalised EV/EBIT of 20x over the next five years, this is ahead of its 10-year historical average. Given the volatile earnings story, we also look at the EV/Sales valuation which looks much more attractive at 0.4x on our FY18e vs. the sector at 3x and history at 0.7x. As we mention above, this may not be the end of the earnings downgrade cycle. This is because i) we still don’t see significant outperformance of own brands, or ii) reassurance that more licences will not leave, or even iii) that the 2020 Strategic Plan will not be derailed by Dior or LVMH licences such as Fendi leaving or be executed poorly.

Safilo Group Spa (SFLG.MI)4 17 March 2017

Our target price of €6 is based on HOLT Linker and DCF. For our DCF, we use a relatively high WACC of 8% (given a levered beta of c1.3 and a high debt to equity ratio of 26%) and stringent terminal values with a growth rate of 1.5% and EBIT margin of 3.5% (given the volatility of the company’s historic earnings and potential risk associated with earnings going forward especially in consideration of the execution of the 2020 Strategic Plan). This gives us a target price of €6. Using our HOLT Linker, we reach a valuation of €6. Note we only use our explicit forecast years, i.e. out to 2021, before the default HOLT fade comes into effect for prudence. We forecast a Blue Sky valuation of €10… Assuming the company is able to meet its 2020 targets, accelerate the turnaround of its own brand portfolio and execute cleanly on the EyeWay transformation, we see scope for a 10% increase in operating profits. This leads us to forecast an operating profit of €54m in FY18. Applying an EV/EBIT multiple of at least 1 standard deviation away from the historical multiple gives us a Blue Sky valuation of €10. …and Grey Sky valuation of €3. Conversely, if the company sees further deterioration of own brands and EyeWay does not go as planned, introducing new disruption, we see the potential for a 25% decrease in operating profit to €37m. Applying a multiple one standard deviation below the historic average EV/EBIT multiple of 6.9x, gives us a Grey Sky valuation of €3. Risks to our investment case. For the downside; i) Dior terminates earlier than expected, ii) the own brands do not regain momentum, and iii) the 2020 Strategic Plan is executed poorly/ not smoothly as seen at FY16 results. To the upside; i) Dior does not leave, ii) own brands reaccelerate growth, and iii) the company is able to buy in another strong brand with the help of HAL Holdings (majority shareholder).

Safilo Group Spa (SFLG.MI)5 17 March 2017

Smaller-scale Luxottica Safilo manufactures frames under own brands and licence agreements. Safilo is the second-largest frame manufacturer after Luxottica according to Euromonitor (see Figure 9) and generated c€1.3bn revenues in FY16. The company is overexposed to sunglasses, a higher-growth category, which generated 60% of revenues at FY16 results. Euromonitor forecasts luxury sunglasses to grow at c8% cc over the next three years, a significant portion of the company’s revenues vs. 3% for overall sunglasses and 2% for Rx frames and lenses. Safilo has a 12% share of the Luxury eyewear market (source: Euromonitor). However, with Rx frames accounting for 33% of revenue, the company is less exposed to the more defensive prescription eyewear category and so more sensitive to discretionary spending than Luxottica, which has a more even exposure to prescription vs. sun in value terms.

Figure 10: Revenues are overexposed to Figure 9: Safilo is the second-largest sunglass and sunglasses; Luxury sunglasses are expected to be frame manufacturer the fastest-growing eyewear category % of frames market, FY15, retail value Revenue split by product, %

) 100% %

( Chilli Beans

1% e

r 90% a h

s Vision Service Plan Global 3%

t

e 80% k r

a Essilor International SA 4% m 70% s e

s Safilo Group SpA 14% s a

l 60% g n

u Luxottica Group SpA 50%

S 50%

40%

t Rodenstock GmbH 1% e

k 30% r a m

Fielmann AG 1% ) s 20% e % (

m e a r r Vision Service Plan Global 2% f a 10% h e l s c a

t Safilo Group SpA 6%

c 0% e

p FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 1H16 S Luxottica Group SpA 23% Rx frames Sunglasses Sport products Other

Source: Euromonitor Source: Company data, Credit Suisse research

The company is more evenly split between Europe and the US versus Luxottica and Essilor. Safilo sells its frames either through the wholesale channel, which accounts for 94% of sales, or via the retail channel, which accounts for 6% of sales. The retail exposure has fallen since FY09 when it sat at c11% of sales. The company now owns only 116 stores under the Solstice chain (at 9M16 results), which sells sunglasses in the US. This is down from just over 300 stores in FY09 across a number of banners. Despite some retail focus in the US, the company is underexposed to North America relative to Luxottica and Essilor, giving it more of a balanced regional exposure between the US and Europe. North America accounted for 41% of sales in FY16 and Europe 43%. However, it is overexposed to licences. Safilo’s biggest weakness has been its over- exposure to licence partners. Unlike Luxottica, which is c30% exposed to licences, Safilo generates 75% of its revenues from its licensed brands. Historically, this has put the company’s results at risk; it lost the Armani license in FY13, lost the Gucci licence and the smaller Kering licences more recently, and could potentially lose the Dior licence in 2020 (we discuss the dynamics around licences later in the report). Licences cover the premium and luxury segment but also higher volume, lower price segments as well, Figure 13 .

Safilo Group Spa (SFLG.MI)6 17 March 2017

Figure 12: …with a more balanced exposure to the Figure 11: The company is largely a wholesaler… US and Europe vs. peers % of revenue % of revenue. *RoW includes Latam from FY15, previously in N.America

100% 100%

90% 90%

80% 80%

70% 70%

60% 60%

50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 1H16 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 1H16 North America Europe APAC RoW* Wholesale Retail

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

The company has had a unsettled past which has left HAL Holding a majority owner…. Safilo relisted in December 2005 after the son of the founder took it off market in 2001 via a leverage buy-out between 2000 and 2001. The company moved quickly into retail, purchasing a number of key retail assets between 2006 and 2008, just before the financial crisis. To prevent the company from declaring bankruptcy in 2009, CEO Roberto Vedovotto (who took over from Massimilliano Tabacchi, grandson of founder Guglielmo Tabacchi) signed an agreement with HAL Holding. This recapitilisation agreement was a tender offer of HAL to control the high yield bonds issued by the group, as well as a proposed acquisition of equity interest and a reserved capital increase. This has left HAL Holding with a 42% stake in the company (see Figure 14).

Figure 13: Safilo covers a broader band of price Figure 14: HAL Holding owns the majority stake points than Luxottica after the deal in 2009 Break down of brands across segments, FY15 results, note Celine not Relevant shareholders renewed in Dec 16.

Rest of market, 42% HAL Holding N.V., 42%

BDL Capital Managament, 7% Only 3T S.r.L, 9%

Source: Company presentation Source: Company data, Credit Suisse research

…with a number of failed initiatives. Safilo has made a number of strategic decisions, such as the expansion into retail, which it has had to go back on soon after implementation. The HAL Holding transactions saw the company selling off the retail assets in 2009 having bought them in 2008 and writing off a significant amount of goodwill after revising down revenue expectations and suffering from the broader macro slowdown. We believe this has left the company struggling at times with its strategy and at a disadvantage to peers on some of the most basic operational initiatives. However, under new CEO Luisa Delgado (in place since October 2013) the company is deploying a new

Safilo Group Spa (SFLG.MI)7 17 March 2017

strategic plan: the ‘2020 Strategic Plan’ targeting a number of low-hanging fruit. We analyse this new strategic initiative in the next section. More recently it has lost the Kering licences…. As we have mentioned previously, the company’s key vulnerability is its overexposure to licence agreements. This was the biggest negative in FY13 with the loss of the Armani licence to Luxottica, which accounted for 11-12% of businesses. Following this, in September 2014, the company announced a change in the agreement with Kering and the loss of the Kering licenses as they stood from the start of 2017. Although the smaller Kering licences were partially compensated by new licence agreements, the loss of the Gucci licence, which accounted for c€200m revenues or just under 20% of revenues in 2014 (18% of revenues in 2016), will have a much larger impact on company profits than the Armani licence. As of December 2016, Gucci has been taken back in-house, but the new agreement means Safilo will continue to manufacture the frames until 2020. The agreement includes a high level of guaranteed volumes in the first two years from 2016 to 2018 but a drop in guaranteed volumes from 2019 to 2020. In addition, the company has been promised €90m in cash as compensation for the early termination of the agreement. €60m of this has already been received (half in January 15 and half in December 16) with the remaining €30m due in September 2018. Mechanically, the majority of it will flow through the P&L to compensate for the lost profits during 2017 and 2018.

Figure 15: Timeline of licence expiries Licence expiry dates

Moschino and Love Moschino (from Jan 2018) 2025 Elie Saab (Jan 2017) 2025 Marc Jacobs Group 2024 MaxMara 2023 Jimmy Choo 2023 Rag & Bone (Jan 2018) 2022 Fendi 2022 Givenchy 2021 Havaianas 2021 Swatch 2021 Tommy Hilfiger 2020 Pierre Cardin 2020 Hugo Boss Group 2020 Dior Group 2020 Max & Co 2019 Jack Spade 2018 Kate Spade 2018 Fossil 2018 Bobbi Brown 2018 Banana Republic 2018 Liz Claiborne 2017

Source: Company data, Credit Suisse research

…and Dior has been renewed for only another three years while LVMH has agreed a JV with Marcolin. In our initiation of Luxottica (‘Attractive entry point for the long sighted’), published last June, we argued few licences would follow the same path as Kering except those that are a part of larger conglomerates. We therefore see this as applicable for only those brands that belong to, or are related to, the LVMH Group. LVMH already controls the manufacture and distribution of LV eyewear and more recently has announced a JV with Marcolin for the intended manufacture of all brands. We can therefore conclude that Safilo will most likely lose the Dior licence (which, although is not owned by LVMH, is a part of Christian Dior Holding), of similar size to Gucci and smaller licences such as Fendi, Givenchy and Marc Jacobs when they come up for renewal. We do not expect an early termination of the Dior licence given it was renewed only in December 2016 out until the end of 2020. Why are brands leaving and after Dior will we see any more leave? Looking across the four big licences that have left or could leave Safilo – Ralph Lauren, Armani, Gucci and perhaps Dior – we believe only the last two have a similar reason for leaving. As we mentioned previously, the move by Gucci and possibly Dior is driven by the desire to take

Safilo Group Spa (SFLG.MI)8 17 March 2017

manufacturing back in-house and control distribution. As a category with strong underlying growth drivers and with the potential to grow faster than the wider luxury space, we can see why big conglomerates that can afford to control the category in-house would want to do so. Looking at Safilo’s licence portfolio without the LVMH brands, we struggle to identify any other licences at risk of going back in-house. Licences are now split between foundation, future core and rockets. The company now has >20 brands under licence (excluding sub-brands). Since the strategic update, these have been split between foundation, which includes Dior, future core, which includes Max Mara, and rockets, which includes Fendi. The company expects mid-to-high single- digit growth from the foundation, high single-digit growth from future core and double-digit growth from the rockets licences as part of the 2020 Strategic Plan. The company has three key proprietary brands. Safilo owns five proprietary brands; Safilo, Oxydo, Carrera, Smith and Polaroid. Carrera and Smith were bought in 1996, while Polaroid was bought in 2011/12. We believe the latter three are the most important brands for the company. Safilo reports that Carrera peaked in 2011 with net sales of €100m (wholesale) accounting for 0.5% of the frames (sun and Rx) market and Polaroid accounts for c0.1%, according to Euromonitor. Polaroid was bought for €65m in 2011 with the help of HAL Holdings, through Multibrands Italy BV. Multibrands loaned Safilo €44m of the purchase price in return for a share capital increase. At the time of purchase, Polaroid had revenues of $63m and an EBITDA margin of 14%.

Safilo Group Spa (SFLG.MI)9 Spa (SFLG.MI) Safilo Group 10 Figure 16: Licence brand portfolio 2008 2009 2010 2011 2012 2013 2014 2015 Alexander McQueen Alexander McQueen Alexander McQueen Alexander McQueen Alexander McQueen Alexander McQueen Alexander McQueen Armani Exchange Armani Exchange Armani Exchange Armani Exchange Balenciaga Balenciaga Balenciaga Balenciaga Banana Republic Banana Republic Banana Republic Banana Republic Banana Republic Banana Republic Banana Republic Banana Republic Bobbi Brown Bobbi Brown Bobbi Brown Bottega Veneta Bottega Veneta Bottega Veneta Bottega Veneta Bottega Veneta Bottega Veneta Bottega Veneta Celine Celine Celine Celine Celine Diesel Diesel 55DSL 55DSL Dior Dior Dior Dior & Dior Homme Dior & Dior Homme Dior & Dior Homme Dior & Dior Homme Dior & Dior Homme Emporio Armani Emporio Armani Emporio Armani Emporio Armani Fendi Fendi Fendi Fossil Fossil Fossil Fossil Fossil Fossil Fossil Fossil Giorgio Armani Giorgio Armani Giorgio Armani Giorgio Armani Gucci Gucci Gucci Gucci Gucci Gucci Gucci Gucci Hugo Boss, Boss & Hugo Hugo Boss, Boss & Hugo Boss, Hugo & Orange Boss, Hugo & Orange Boss, Hugo & Orange Boss, Hugo & Orange Boss, Hugo & Orange Boss, Hugo & Orange Jimmy Choo Jimmy Choo Jimmy Choo Jimmy Choo Jimmy Choo Jimmy Choo Jimmy Choo Jimmy Choo JLO JLO JLO JLO JLO JLO JLO JLO Juicy Couture Juicy Couture Juicy Couture Juicy Couture Juicy Couture Juicy Couture Juicy Couture Juicy Couture Kate Spade Kate Spade Kate Spade Kate Spade Kate Spade Kate Spade Kate Spade Kate Spade Liz Claiborne Liz Claiborne Liz Claiborne Liz Claiborne Liz Claiborne Liz Claiborne Liz Claiborne Liz Claiborne Marc Jacobs Marc Jacobs Marc Jacobs Marc Jacobs Marc Jacobs Marc Jacobs Marc Jacobs Marc Jacobs Marc by Marc Jacobs Marc by Marc Jacobs Marc by Marc Jacobs Marc by Marc Jacobs Marc by Marc Jacobs Marc by Marc Jacobs Marc by Marc Jacobs Marc by Marc Jacobs MaxMara MaxMara MaxMara MaxMara MaxMara MaxMara MaxMara MaxMara Max & Co Max & Co Max & Co Max & Co Max & Co Max & Co Max & Co Max & Co Nine West Nine West Nine West Pierre Cardin Pierre Cardin Pierre Cardin Pierre Cardin Pierre Cardin Pierre Cardin Pierre Cardin Pierre Cardin SAKS Fifth Avenue SAKS Fifth Avenue SAKS Fifth Avenue SAKS Fifth Avenue SAKS Fifth Avenue SAKS Fifth Avenue SAKS Fifth Avenue SAKS Fifth Avenue Valentino Valentino Valentino YSL YSL YSL YSL YSL YSL YSL Boucheron Tommy Hilfiger Tommy Hilfiger Tommy Hilfiger Tommy Hilfiger Tommy Hilfiger Tommy Hilfiger Tommy Hilfiger Stella McCartney Jack Spade Jack Spade Jack Spade Swatch Havaianas Givenchy

Elie Saab (Jan 2017) 17 March 2017 Moschino (Jan 2018) Rag & Bone (Jan 2018) Source: Company data, Credit Suisse research 17 March 2017

Maintain 2020 vision despite bumpy start We see significant scope for upside The company has plenty of low-hanging fruit. Because of the relatively challenging history, we believe this company has plenty of easy operational wins if management can execute well on the 2020 Strategic Plan. However, the crux of this investment story is around Safilo's ability to boost revenue exposure to proprietary brands, arguably a much harder objective. Admittedly the ‘easy wins’ could have been captured by the company around the launch of the 2011 to 2015 business plan but this was derailed slightly by the loss of the Armani licence and departure of the CEO to set up the Kering eyewear division. First, we recap on the initial 2011 to 2015 business plan to understand what, if anything, has changed and then we look at the potential for this company to meet its 2020 objectives. Business plan 2011-2015 covered six key areas. In the 2011 business plan, the key challenges were around house brands (which is still the case), European markets (no longer an issue, we believe) and management complexity (also resolved in the recent restructuring of the corporate structure). The strategic guidelines covered six points: ■ Brand portfolio management with focus on Carrera and acquiring new brands. Focus on expanding Gucci and becoming more selective with Dior. (Also in the 2020 Strategic Plan.) ■ Market development and regional co-ordination – become more selective in Europe and the US and more aggressive in the Far East. (Also in the 2020 Strategic Plan.) ■ Become the preferred partner for top international and local retailers. ■ Achieve efficient manufacturing, footprint and leading-edge service level. (Also in the 2020 Strategic Plan.) ■ Reduce complexity. (Also in the 2020 Strategic Plan.) ■ Employ best-in-class people. (Also in the 2020 Strategic Plan.) Of the financial goals, few were met as detailed in Figure 17.

Figure 17: Target vs. result for the 2011-2015 investment plan 2011-2015 investment plan (€m) 2010 2011e 2013e 2015e Net sales Target 1,080 1,100 1,125-1,200 1400-1450 Result 1,102 1,122 1279 EBITDA Target 108 120 150 210 Result 123 122 102 EBITDA margin Target 10% 11.0% 12.5% 15.0% Result 11.1% 10.9% 8.0% EBIT Target 68 83 115 175 Result 86 85 61 EBIT margin Target 6.3% 7.5% 9.5% 12.0% Result 7.8% 7.6% 4.8% CAPEX Target 31 30 37 33 Result 25 37 48 Leverage Target 2.4 2 1.1 0 Result 1.9 1.5 0.9 Source: Company data, Credit Suisse research

Safilo Group Spa (SFLG.MI) 11 17 March 2017

Understanding the 2020 Strategic Plan Management has not stepped away from the 2020 Strategic Plan... The 2020 Strategic Plan was delivered in March 2015. This plan was set out with the company already aware of the new strategic partnership with Kering, with 2015-2017 expected to be a transition period and sustainable growth coming in 2018-2020. The company guided that the loss of the Gucci licence would lead to a mid-single-digit decline in sales in 2017. … despite a slower start and some recent execution issues. However, it is clear the initial period of this plan from 2015 to 2016 was slower than expected, hindered by i) lower growth from the proprietary brands, ii) production backlogs as they transitioned manufacturing from third parties to the company plants, iii) a longer-than-expected clean- up of inventory for the going-forward brands, and iv) softer macroeconomic conditions in 2016, which has affected all the eyewear companies. Moreover, following FY16 results it appears execution of the IT transformation has not gone as smoothly as planned, causing significant disruption at the main DC in Padova in 1Q17. Four pillars – balance, focus, differentiate and simplify. Within this new strategy, the company hopes to accelerate growth and expand margins. Financial targets included 2020e sales of €1,600-1,700m, a CAGR of 6% vs. 2015 results, and 2020e EBITDA margin of 14%. Although the company still stands by the plan, given the slow start and recent execution issues, we believe these targets look ambitious and we do not think the market is pricing in any likelihood of success of the company reaching the targets. All four of the pillars look to drive both topline and margins but we believe some of them, e.g. accelerating proprietary brands, will be harder to achieve. ■ Balance: 40% of sales from proprietary brands by 2020. As we have mentioned previously, the company is overweight licences. This has been the case for some time with only marginal improvement since FY08 when own brands accounted for 19% of revenue versus 25% currently. As part of the 2020 Strategic Plan, management aims to rebalance the revenue exposure towards own brands. Succeeding on this initiative is now more important than ever given the developments with LVMH and the Christian Dior Holding. The three key own brands Carrera, Smith and Polaroid have struggled over the past couple of years as growth has slowed and Safilo has been slow to react with investments. Figure 18 details the growth comments of the proprietary brands.

Figure 18: Management comments on proprietary brand growth 1H14 9M14 1H15 3Q15 FY15 1Q16 1H16 3Q16 Polaroid Strong perf in Strong Strong POS and Performed well Net sales up LSD Subdued Better Over- Europe & North development consumer activation momentum delivering America Smith Key driver in NA Started Performed well Net sales up LSD On track Overall Growing growth acceleration mixed Carrera Good performance of +ve where execution Net sales down HSD, Subdued Still Still new core collection strong, not consistent in optical positive subdued subdued where executed with all markets momentum, sun the excellence restraint Source: Company data, Credit Suisse research

Carrera was relaunched in January 2015 but the reacceleration has been slow. In 2014, the company created 5Y plans for all its proprietary brands and in January 2015 relaunched Carrera, which had been struggling for some time. Optical has performed relatively well over the past couple of years, with the crux of the problem for the brand lying in the sun sales which have declined year-on-year for the past five years. However, as we can see from management commentary, growth has not yet recovered. With a one-year lead time on products, we think the turnaround story for these brands will be slow.

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The relaunch of brands has been supported by advertising spend. In the 2020 strategy the company guided towards €1.1bn of absolute advertising spend from 2015 to 2020 with 45% to be spent on proprietary brands. The company increased the level of advertising spend in FY15 but the lack of returns has meant that management decided to reduce absolute dollar spent in FY16 as they look for more efficient ways of spending with greater returns. We believe the company will have to invest more on an absolute basis than it did in FY16 (see Figure 19). No internal competition between proprietary brands. Carrera sits in the fashion & lifestyle segment, Polaroid in mass cool and Smith in sport. The average price of a pair of Carrera sunglasses is $144 (based on 43 products on the Nordstrom website), Polaroid sunglasses are €55-65, and Smith sunglasses $166. When we compare this to Ray-Ban with an average price of c$170 and Oakley at c$150, we see Carrera as similar to Ray-Ban and Smith to Oakley. The lack of internal competition is favourable for Safilo. The market attributes very little value to Safilo’s brands according to our proprietary brand analysis. We first launched our proprietary brand valuation analysis in our initiation of the Luxury sector in January 2015. We expand this analysis to look at our eyewear companies. We deduct gross investment from current EV reflecting what we think is the market-implied value of intangible assets to all stakeholders. Gross investments are calculated using the definition under the Credit Suisse HOLT framework. We believe these are closer to the replacement asset values given that adjustments made by HOLT include i) net working capital, ii) inflation- adjusted land and improvements, and iii) inflation-adjusted gross plant including capitalised operating leases. On that metric, we conclude that the market attributes negative value to the brands at Safilo vs. c60% of value for Luxottica coming from its brands. In other words, if the company were to be acquired at the current market value, the acquirer would get money off the gross investments because of the negative brand value.

Figure 19: We believe advertising spend will need to Figure 20: Safilo’s brands drive a discount to gross increase to help further own brands investments according to the market Advertising spend (both own brands and licenses), absolute and as Market-implied brand value using the HOLT framework, €m % of sales

160 12.0% 30,000

140 11.5% 25,000 120 11.0% 20,000 100 10.5% 15,000 80 10.0% 10,000 60 9.5%

40 9.0% 5,000

20 8.5% 0 Luxottica Essilor GV Safilo - 8.0% FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e FY19e (5,000) Intangibles Gross investments Advertising spend As % of sales

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse HOLT

Carrera has much less product newness than Ray-Ban. Product newness is increasingly important across luxury/premium and fast fashion. According to industry experts, Ray-Ban is seen more as a fashion brand than Carrera, with a greater degree of new product launches, customisation and personalisation. The VisionMonday EyeVote readers’ Choice awards for 2016, as voted for by optical retailers and ECPs in the US, awarded best frame brand for men and teens to Ray-Ban and best sunglasses fashion brand for men and kids to Ray-Ban (Ray-Ban picked up the most awards for branded frames/sunglasses). We believe management is aware one of the key

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reasons the relaunch of Carrera was not as successful as hoped was the lack of a fashion element of the new products. Management expects this to change with the Spring/Summer 2017 collection and aims for sales stabilisation in 2017. We believe Safilo can do this given the level of product newness and fashion in its licence brands such as Dior. Dior is the only brand currently offering highly decorated lenses for example. Online should help establish these brands but they lack an ecommerce footprint. We highlighted in our sector report (see: Visions are changing published alongside this report) how online can break down barriers to entry. It can enable smaller/start-up brands to engage the consumer without large-scale advertising costs. Neither Carrera or Polaroid have online transactional websites. Moreover, with 88,100 followers for Carrera and 16,100 for Polaroid, this hardly compares with the 2.7m Ray-Ban followers or 1.1m Oakley followers. We believe the company should see the re-launch of its brands more like a start-up would, focusing on digital marketing rather than print and paper as we see this as a more effective way of improving consumer engagement. This will be the hardest target to reach, in our opinion. We believe the equity story is heavily dependent on the ability to turn around its own brands. To make this process of rebalancing revenues easier, management could look to buy in new, larger and healthier (i.e brands showing strong positive growth and momentum with the consumer) brands such as Silhoutte or Maui Jim. However, these brands are now quite large and expensive; therefore, it could prove difficult for Safilo to buy without an impact on the balance sheet. Or, it would require significant help from HAL as we saw with Polaroid – through a reserved capital increase HAL, via Multibrands, provided Safilo with around two-thirds of the financial means to fund the transaction of the Polaroid Eyewear business (€44m out of a total cost of €65m). ■ Balance: between geographies... Like most of the eyewear companies under our coverage, Safilo is underexposed to the fast-growing markets. However, it lags even further behind peers such as Luxottica and Essilor in China, the second-largest eyewear market after the US. China accounts for <2% of revenue, and growth in the country has been hampered more recently by the inventory cleanup the company has done in the region and Gucci's overexposure (we believe c45% Asian sales were Gucci). During this inventory clean up, Safilo looked to break ties with indebted parties that were leading to a growing level of bad debt and trade receivables. It has the same emphasis as its peers on growing aggressively in fast-growing markets. ...and by channels – with online expansion as a positive. Online accounts for 5% of group sales, but this is largely through online wholesale partners. The company owns only one transactional website for the Smith brand which now accounts for >10% of Smith sales. Expanding in this channel will help the company gain direct to consumer access (similar to what Essilor has been doing) and understand more clearly the sellout trends. Although online requires investment and can be margin dilutive, we believe the potential upside for topline and brand development outweighs the negatives at this stage in the brand lifecycles. Conversely, we believe the company should look to sell off its retail assets. Developing read-through to the consumer and understanding the sellout trends is a reason, as with online, to maintain its retail exposure in the US. And admittedly the Solstice stores have provided a valuable test centre for new brands such as Bobbi Brown. However, the drag on topline and negative operational gearing the Solstice stores now give do not outweigh these positives in our view. We think the company does not see the stores as a strategic initiative and would look to sell once performance has improved to get a fair price for the stores. However, we believe, with the uncertainty of what online will mean for bricks and mortar stores and significant underperformance versus the market over the past five quarters, selling sooner rather than later would be more advisable.

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■ Focus: also ties into brand building and design studio network. This pillar of the strategy includes i) brand building, ii) commercial strategy, iii) design studio network and iv) digital. The commercial strategy includes an overhaul of the go-to-market strategy including such initiatives as integrated trade terms and better customer service, which we flag as an area of low-hanging fruit. The company grew c6% cc in FY14 but the top 100 customers, which account for 20% of business, grew at over double this rate at 15%. If the company can transfer the skills it has learnt with these top clients more broadly across regions, we see upside potential for sales. ■ Simplify: offers the greatest potential upside if executed well. The process of simplification appears another obvious, easy win for the company. This includes the supply network, the manufacturing and the IT transformation (EyeWay). As a manufacturer of frames, we find it counterintuitive, for example, that c70% of global volumes are sourced from third-party suppliers as of FY15. The supply chain and manufacturing capabilities have needed investment…. The company owns seven manufacturing plants, four in Italy, one in Slovenia, one in the US and one in China. On the manufacturing side, the company produced, as of 2015, only 30% of the volumes it sold, using third-party contractors for the remaining 70%. The 2020 Strategic Plan includes plans to reverse this split such that 70% return in- house. We have seen improvements of insourcing already at FY16 results, with production insourcing now sitting at 38% of total volume. …which should drive capacity utilisation. However, to do this, the company is having to invest significantly into its manufacturing plants, turning them into 'start to end' processing units with improved technology to boost efficiency. Historically, the plants have specialised in one particular function e.g. the Longarone Italy plant in metal semi-finished goods and finished goods, creating complex interplant flows. Owning the whole value chain for manufacturing the frames should provide potential margin upside and enable the company to be more flexible, implementing designs faster and therefore driving product newness and topline as well. The company is targeting 75% production completion per plant by 2020 from 25% in 2014 and finished FY16 with end- to-end product flows of 67%. This should also help with capacity utilisation, technically at around 65% in the Italian plants, vs. Luxottica’s Italian plant closer to 100%.

Figure 21: Safilo has streamlined its offering, Figure 22: Safilo should see both topline and reducing costs and helping margins margin improvements driven by improved IT Number of SKUs and active models over time. 2005 taken as base of EyeWay project timeline 100.

160

140

120

100

80

60

40

20

0 2005 1H09 FY09 FY10 FY15 Active models SKUs

Source: Company data, Credit Suisse research Source: Company presentation, Credit Suisse research

Scope for further cost saving in the manufacturing plants. Targets around i) indirect labour costs, down 40% by 2020e vs 2014, ii) lead time, down 75% by 2020e to 12 days (note this has already reduced from 45 days in 2014 to 30 days in 2016),

Safilo Group Spa (SFLG.MI) 15 17 March 2017

with order cycle time to become less than 4 hours, and iii) system efficiency up 38% by 2020e vs 2014, highlight the scope for cost reductions. We had the opportunity to take a tour of one of the production plants in Italy responsible for acetate frames. Here we saw both the new and old processes, with the new production lines driving the manufacture of the arms and frames from 15 days and 23.4 days to 3.5 days and 5 days, respectively. Number of distribution centres to be reduced. The number of DCs as of 2014 was >20. Management aims to reduce this to 3-6 by 2019 and finished FY16 with a reduction to 13 distribution centers with three main DCs in Italy, the US and HK as well as 10 more around the world. This should reduce logistic costs, improve efficiencies and boost margins. Moreover, greater efficiencies should help service clients more effectively and faster, thereby improving topline growth. Cost reductions rather than slower overhead growth. The company had guided to overheads growing at half the rate of sales, but is now looking to reduce absolute numbers with targets of €25-30m cumulated cost savings. This cost-saving benefit will mainly be in 2017 and 2018, with the expectation of cumulative savings of €10-15m in 2017, €20-25m in 2018 and €25-30m in 2019, in addition to a one-off restructuring cost of €20m largely booked in 2016 (€8-10m planned for 2016). This was driven by further appreciation by management of the current wastage in the business. Key projects include the closing down of the Polaroid Vale operation, rationalization of DC footprint, return management and purchasing. For example, of the €120m provision of inventories, c10% of FY15 sales, €20m was due to samples. Moreover, 93% of sales are made by 50% of SKUs. We model €30m coming out of both the COGS ‘other’ line as well as SG&A ‘other’ lines in the P&L over FY17/18/19. Launch of EyeWay drives IT transformation which is long overdue. As of March 2015, the company had 11 different ERP systems, 11 different product/customer master data and 11 different general ledgers with extensive manual activities and technological obsolescence. Therefore one of the key initiatives for the 2020 Strategic Plan was to launch a new IT platform, which covered five pillars: i) product creation, ii) product supply using standard platforms such as SAP, iii) corporate functions, iv) marketing and digital capabilities and v) commercial enabling. Safilo is now halfway through the SAP launch with 80% of turnover to be through the SAP system by the end of 2017. However, progress in 1Q17 has been slower than expected with management stating on the FY16 earnings call that it is roughly one-and-a-half months behind schedule. Complications in automising the main distribution center in Padova have led management to guide towards a 15-20% decline in the 'going forward brand portfolio' net sales over 1Q17. Inventory and obsolescence costs should fall. The combined effect of these programmes allows the company to have better planning, production and logistics, standardisation of operations and a new digital strategy. Again, this is an area of low- hanging fruit as most companies we cover have some level of SAP integration. Note currently a third of the inventory is covered by obsolescence costs, which is a charge of €50m to the P&L per annum and so 4% of FY15 revenue. However, the speed at which the company is trying to implement this overhaul does introduce some execution risk. For example, Luxottica launched its SAP services in 2011, which took c3 years to complete globally and was not without some disruption with the aim of removing 20% of inventory. We therefore forecast a reduction in inventory days over the next four years with substantial scope for even further reductions towards Luxottica’s current level. SMILE also indicates potential margin and topline upside. Similar to Luxottica’s STARS, Safilo offers wholesale partners a closer trade agreement/relationship called SMILE. This is an automatic re-assortment system that more accurately manages the customers' assortments, stock levels and reorders allowing for a shorter replenishment

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lead time. It can boost sell-through by an average of 25-50% according to the company and reduce inventory levels by c15%. However, it does involve holding the clients' inventory at their DCs; so there are some further inventory implications. In FY15 the company had 4,300 doors worldwide signed up to this programme; as of 3Q16 this had increased to 5,300 doors. We see greater penetration of this scheme as a positive for topline and margin development.

Figure 23: We forecast Safilo’s inventory days to reduce over the next four years as it sees the benefits from SAP integration Inventory days on hand

196 185 184 179 178 177 178 173 163 153

108 109 112 107 101 103 103 104 103 103

FY10 FY11 FY12 FY13 FY14 FY15 FY16e FY17e FY18e FY19e

Luxottica Safilo Source: Company data, Credit Suisse estimates We forecast a moderate miss to, albeit old, targets Modelling the topline development. Over the past five quarters, Safilo has started to report growth by region for the ‘going forward brands’ i.e. ex Gucci. We model on this basis including a scope effect to back out the group constant currency growth including Gucci. We forecast an 11% decline in the topline at cc for FY17. Following management guidance on the FY16 earnings call, we have reduced our 1Q17 going forward brand constant currency growth to -18% given the disruption at the distribution center. Although management stated the orders remain sufficient, we assume little recovery over the year given the lack of transparency around how quickly the company can solve the issue and whether clients have re-ordered following the delay. This leaves us forecasting FY17 cc growth of going forward brands net sales of roughly flat. Including a €140m scope effect in FY17 (given Gucci was 18% of FY16 net sales) leaves us forecasting an 11% decline in topline group at cc in FY17. We assume a recovery to 5%/6% growth as the drag of Gucci is lost in FY18e. Our forecasts are supported by an effective implementation of the 2020 Strategic Plan, increasing penetration of licence brands and a recovery in the own brand portfolio. In addition, for retail growth, we forecast further declines in FY17 before some recovery in FY18, although we would note it is likely this chain is sold off in the next 1-2 years. The full details of our topline forecasts are included below.

Safilo Group Spa (SFLG.MI) 17 17 March 2017

Figure 24: Breakdown of sales forecasts by channels Sales by channel, €m FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e FY20 Wholesale revenue 1,095 1,042 1,097 1,190 1,178 1,058 1,126 1,185 1,246 Retail revenue 81 80 82 89 75 73 76 80 84 Total 1,175 1,122 1,179 1,279 1,253 1,130 1,202 1,265 1,330 Wholesale revenue 2% (2%) 6% 1% (0%) (12%) 7% 5% 5% Retail revenue 4% 2% 3% (10%) (15%) (7%) 5% 5% 5% Total, cc growth 2% (2%) 6% - (1%) (11%) 6% 5% 5% cc growth going fwd brands Wholesale revenue NA NA NA NA NA NA NA NA NA Retail revenue NA NA NA NA NA NA NA NA NA Total going fwd. brands NA NA NA 4% 4% (0%) 6% 5% 5% Source: Company data, Credit Suisse estimates

Figure 25: Breakdown of sales forecasts by region. Note Gucci accounted for 45% of Asia business Net sales by region, €m FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e FY20e Europe 471 471 487 509 538 458 488 517 548 North America 489 458 495 531 509 490 518 539 562 APAC 199 178 177 155 115 101 107 112 118 RoW 17 15 20 84 91 82 89 95 102 Total 1,175 1,122 1,179 1,279 1,253 1,130 1,202 1,265 1,330

Europe 5% 1% 4% 6% 7% (15%) 7% 6% 6% North America 1% (3%) 9% 1% (4%) (7%) 6% 4% 4% APAC - (6%) 0% (21%) (22%) (14%) 7% 5% 5% RoW (incl Latam FY15) (2%) (2%) 39% 4% 4% (11%) 8% 7% 7% Total , cc growth 2% (2%) 6% - (1%) (11%) 6% 5% 5% Scope 51 60 140 - -

Europe NA NA NA 10% 9% (3%) 7% 6% 6% North America NA NA NA 3% (0%) 3% 6% 4% 4% APAC NA NA NA (18%) (10%) (2%) 7% 5% 5% RoW NA NA NA NA 10% 1% 8% 7% 7% Total , cc growth of going fwd brands NA NA NA 4% 4% (0%) 6% 5% 5% Source: Company data, Credit Suisse estimates

We include the potential loss of the Dior licence in FY21 in our estimates. The commentary in Marcolin’s press release suggested the JV with LVMH will cover more than just the Celine and Louis Vuitton brands in the future. We quote: "with the aim of becoming, in the future, the preferred partner of LVMH in the eyewear business". We therefore assume the Dior licence as part of Christian Dior Holding is not renewed after 2020. Unlike Gucci we doubt Safilo will be able to negotiate a transition period as we do not believe the licence will be terminated early given it was only signed in December 2016. Therefore we include in our forecasts a negative €100m scope effect in FY21 (roughly 50% of licence revenues as of today given there is a probability associated with this happening or not). Although this may seem harsh we would rather be prudent with our forecasts. Despite cost-saving initiatives, gross margins will likely be hit by the Gucci deal. We think the key drivers of gross margin will be planned overheads reduction, improvements in capacity utilisation of production plants and improved inventory management. However, these will be negated, in part, by lower topline leverage and by the new Gucci deal as the company continues to manufacture the products but does not realise any profits from these volumes, i.e they cover the costs of production and attempt to maintain the capacity

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utilization at Safilo’s plants. Our detailed breakdown of COGS is given below. We include part of the overheads cost savings in ‘other industrial costs’. This leads us to forecast an 220bps gross margin decline in FY17, and a slight recovery thereafter.

Figure 26: Detailed COGS model COGS, €m FY12 FY13 FY14 FY15 FY16e FY17e FY18e FY19e Purchase of raw materials and finished goods 343 324 341 371 391 363 390 414 Reported growth 11% (6%) 5% 9% 5% (7%) 7% 6% Cost inflation 4% (2%) (1%) (3%) 6% 2% 1% 1% Capitalisation of costs for increase in tangible assets (7) (8) (9) (10) (12) (11) (10) (9) Reported growth (19%) 11% 11% 19% 16% (8%) (10%) (10%) Change in inventories 17 (8) (25) 2 (22) (20) (22) (23) Wages and social security contributions 93 84 98 101 114 116 118 120 Reported growth (6%) (10%) 17% 3% 14% 2% 2% 1% Cost inflation (7%) (12%) 25% (5%) 17% 2% 2% 1% Subcontracting costs 16 13 21 20 24 22 19 16 Reported growth (12%) (20%) 61% (4%) 21% (10%) (10%) (20%) Depreciation 20 18 19 22 23 25 27 30 Rental and operating leases 1 1 1 1 1 1 1 1 Reported growth (11%) 21% (2%) 3% 18% 3% 3% 2% Other industrial costs 14 14 14 16 18 13 10 9 Reported growth 2% 4% (0%) 8% 15% (25%) (25%) (10%) Total 496 438 460 522 537 509 535 557 Reported growth 10% (12%) 5% 13% 3% (5%) 5% 4%

Gross profit 680 684 719 757 716 621 667 707 Gross profit margin 57.8% 61.0% 61.0% 59.2% 57.1% 54.9% 55.5% 55.9% Source: Company data, Credit Suisse estimates

EBITDA margins helped in FY17/18 by Gucci compensation. We forecast a drop of 430bps in FY17e EBITDA margins given the top line deleverage. We also book the €90m Gucci compensation through our estimates in FY17/18. However, although these may support reported numbers, we do not include them in the adjusted profit numbers based on the understanding that they are one-offs. We assume some of the overheads cost savings flow through the other sales and marketing expenses as well as other G&A expenses; this totals c€30m of cost savings through FY17/FY18/19e. We assume low single-digit wage inflation and rental/operating lease growth. We ramp up advertising and promotional costs as a percentage of sales to 11.3% in FY19 as we believe the company will need to invest further into its own brands and stick to management guidance around €1.1bn of absolute advertising spend between 2015 and 2020. We also adjust down royalty expenses as a percentage of sales in the outer years as we assume own brands start to contribute to a larger proportion of sales and we understand the Kering licenses had one of the highest royalty rates. This leads to a forecast EBITDA margin of 8.4% in 2020e. This would take its margins broadly in line with Marcolin, which were at c9% as of FY15. Potential margin upside if move into lenses is successful. Although we do not model this explicitly in our forecasts, the company has recently moved into lens finishing and edging with Smith in the US. If this pilot project is successful and the company looks to do the same with other brands and regions, we would expect some margin upside given our thoughts around this part of the value chain.

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Figure 27: Summary of operating profit model Operating model, €m FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e FY20e Selling and marketing expenses (462) (452) (479) (527) (513) (475) (492) (508) (525) General and administrative expenses (148) (149) (158) (171) (168) (166) (167) (170) (172) Other operating income/(expenses) 4 (8) (6) (18) (1) 36 42 3 3 Impairment loss on goodwill - - - (40) (150) - - - - Total operating costs (606) (609) (643) (756) (832) (605) (618) (675) (694) Operating profit 74 75 75 1 (116) 15 49 33 53 Operating margin 6.3% 6.7% 6.4% 0.1% (9.3%) 1.4% 4.1% 2.6% 4.0%

Adjustments - 10 8 61 156 (33) (39) - - Adj. operating profit 74 85 83 61 40 (18) 10 33 53 Adj. operating profit margin 6.3% 7.6% 7.0% 4.8% 3.2% -1.6% 0.9% 2.6% 4.0%

EBITDA 115 112 111 82 81 62 100 87 111 EBITDA margin 10% 10% 9% 6% 6.5% 5.5% 8.3% 6.9% 8% EBITDA pre non-recurring items 115 122 118 102 85 29 61 87 111 Adj. EBITDA margin 9.8% 10.9% 10.0% 8.0% 6.8% 2.5% 5.1% 6.9% 8.4% Source: Company data, Credit Suisse estimates

We forecast 0x net debt/EBITDA in FY18. As part of the 2020 Strategic Plan targets, the company also guides to becoming net cash positive from 2017 with FCF of c€350-400m. Given the slower start to the plan and some implications on inventory due to the transition to own plant manufacturing, we expect the company to become net debt neutral in FY18 and net cash in FY19. We assume capex discipline with investments in PPE around 3.7% and roughly flat purchase of intangible assets, as a percentage of sales. We assume the company does not start paying a dividend given a lack of guidance/clarity.

Figure 28: We forecast further balance sheet discipline for Safilo Net debt to EBITDA (adj.), (x)

8.9x

4.5x

2.9x 2.4x 1.9x 1.9x 1.5x 1.4x 0.9x 1.0x 0.6x 0.0x

(0.2x)

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e Source: Company data, Credit Suisse estimates

Risk of overexposure to GrandVision. The two key factors that would put our estimates at risk would be i) no recovery in own brands, ii) poor execution of the 2020 Strategic Plan and iii) the company’s high exposure to GrandVision. GrandVision accounted for 3.6% of business in FY10, just after the HAL transaction. The retail chains now account for c7%. Given that we believe these chains will struggle over the medium-to-long term due to the development of online, we highlight significant weakness of GrandVision as a risk to Safilo.

Safilo Group Spa (SFLG.MI) 20 17 March 2017

Valuation EPS momentum has been negative and valuation now looks stretched after FY16 results. On a normalised basis over the next five years Safilo trades on an EV/EBIT of c20x on our numbers. This is clearly ahead of its long-term historical average of c10x. However, earnings multiples are influenced by the volatile earnings history and our forecasts incorporating the loss of the Gucci licence. On EV/Sales, the company trades on 0.4x FY18e, against the sector at 3x and 0.7x historical average and therefore it looks attractive on this metric.

Figure 29: Safilo is trading on 0.4x EV/Sales on our Figure 30: EPS momentum has been strongly FY18 numbers, below history of 0.7x negative 12mth fwd. consensus EV/Sales Consensus EPS momentum

1.8x 1.6

1.6x 1.4

1.4x 1.2

1.2x 1 1.0x 1.0x 0.8 0.8x 0.7x 0.6 0.6x 0.5x 0.4 0.4x 0.4x 0.2 0.2x

- 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16

Safilo EV/sales Average Stdev+/-1 FY12e FY13e FY14e FY15e FY16e FY17e FY18e

Source: Thomson Reuters, pricing as of 14 March Source: Thomson Reuters

Figure 31: Global eyewear comps table Valuation Metrics Rating Market P/E EV/Sales EV/EBITDA EV/EBIT Div. Yield EV/Gross profit cap (€m) CY17E CY18E CY17E CY18E CY17E CY18E CY17E CY18E CY17E CY18E CY17E CY18E Essilor O 24,202 26.0x 23.7x 3.3x 3.1x 14.1x 13.0x 18.5x 17.0x 1.4% 1.6% 5.6x 5.2x GrandVision U 5,848 23.5x 21.6x 1.9x 1.8x 11.5x 10.8x 16.5x 15.5x 1.5% 1.6% 2.6x 2.4x Luxottica O 24,262 26.2x 23.1x 2.5x 2.4x 12.3x 11.1x 16.8x 15.0x 2.0% 2.2% 3.9x 3.7x Safilo N 412 nm nm 0.4x 0.4x 16.1x 7.6x nm nm - - 0.7x 0.7x Fielmann NC 6,014 32.1x 30.6x 3.9x 3.7x 18.2x 17.2x 21.2x 20.1x 2.7% 2.9% NA NA Hoya NC 17,329 22.5x 20.6x 4.2x 4.1x 14.4x 13.7x 8.8x NA 1.5% 1.5% NA NA Global eyewear avg 25.6x 23.2x 3.2x 3.0x 13.7x 12.7x 15.8x 16.3x 1.7% 1.8% NA NA Source: Company data, Credit Suisse estimates. Pricing as of close of 14 March. Multiples vary to those in the financial tables as this table takes a fixed EV as of close of 14 March

We struggle to be more bullish on the name given the licence overhang. We believe this company is still very much a 'show me' story. We therefore keep our forecasts more conservative and, using the same methodology as for our other companies by combining the DCF and HOLT Linker, we forecast a target price of €6. For our DCF we use a relatively high WACC of 8% and stringent terminal values with a terminal growth rate of 1.5% and terminal EBIT margin of 3.5%. This gives us a target price of €6. We assume growth will gradually return to c2% following the drop in FY21 driven by the loss of Dior as own brands make up the loss. Additionally we believe margins will be negatively impacted by the loss in sales but will recover over the long term. We are relatively harsh on our assumptions as we would prefer to be cautious given lack of transparency. Our HOLT Linker derives a 12-month fair value of €6/share. Our HOLT-based valuation approach incorporates our five-year explicit forecast period. Beyond this, the HOLT model assumes CFROI® to gradually fade to 6% and asset growth to fade to 2.5%,

Safilo Group Spa (SFLG.MI) 21 17 March 2017

reflecting the economic reality of competition, eliminating excess returns and growth regressing to the corporate average. We forecast a Blue Sky valuation of €10… Assuming the company is able to meet the 2020 targets, accelerate the turnaround of its own brand portfolio and executive cleanly on the EyeWay transformation, we see scope for a 10% increase in earnings and therefore forecast FY18 operating profit of €54m. Applying an EV/EBIT multiple 1 standard deviation away from the historical multiple at 12.8x gives a Blue Sky valuation of €10/share. ..and Grey Sky valuation of €3. Conversely if the company sees further deterioration of own brands and EyeWay does not go as planned, introducing new disruption, we see the potential for a 125% decrease in operating profit to €437m. Applying a trough multiple of 6.9x on EV/EBIT gives a Grey Sky valuation of €3/share.

Figure 32: Detailed DCF Free cash flow to the firm, €m FY16 FY17e FY18e FY19e FY20e FY21e FY22e FY23e FY24e FY25e FY26e Net sales 1,253 1,130 1,202 1,265 1,330 1,294 1,270 1,257 1,255 1,263 1,282 Organic sales growth (1.2%) (11.4%) 6.4% 5.2% 5.2% (2.7%) (1.9%) (1.0%) (0.2%) 0.7% 1.5%

Clean EBIT 39.5 (17.6) 10.5 32.7 53.0 31.9 34.0 36.2 38.7 41.6 44.3 Margin 3.2% (1.6%) 0.9% 2.6% 4.0% 2.5% 2.7% 2.9% 3.1% 3.3% 3.5%

Cash tax paid (28.0) (2.6) (16.6) (10.1) (18.5) (10.7) (11.3) (12.1) (12.9) (13.9) (14.8) Tax rate (as a % of EBIT) 71% (15%) 158% 31% 35% 33% 33% 33% 33% 33% 33%

Depreciation & Amortization 47.2 46.2 50.3 54.2 58.3 60.6 40.9 39.8 39.0 38.6 38.5 As a % of capex 129% 119% 105% 104% 109% 109% 107% 106% 104% 102% 100%

Change in working capital 20.3 24.4 5.5 7.7 0.4 18.4 2.5 2.5 2.5 2.5 2.6 As a % of sales 1.6% 2.2% 0.5% 0.6% 0.0% 1.4% 0.2% 0.2% 0.2% 0.2% 0.2%

Capex (52.3) (53.4) (55.5) (57.3) (60.2) (62.8) (38.1) (37.7) (37.6) (37.9) (38.5) As a % of sales 4% 5% 5% 5% 5% 5% 3% 3% 3% 3% 3%

FCFF 26.7 (2.9) (5.8) 27.2 33.0 37.5 24.1 25.9 27.8 30.0 32.1 Discounted FCFF (2.9) (5.4) 23.4 26.2 27.6 16.5 16.3 16.3 16.3 16.1 Source: Company data, Credit Suisse estimates

Safilo Group Spa (SFLG.MI) 22 17 March 2017

Figure 33: DCF model WACC, in €m unless otherwise stated FY17e Gross debt 140 Market cap. 397 D / (E + D) 26% Pre-tax cost of debt 7%

Levered beta 1.3 Risk-free rate 3% Market risk premium 5% WACC 8%

Terminal growth rate 1.5%

Fair value FY17e Total EV 404 FY1E net debt 27 Market value of minorities 2 Pensions 31 Fair value of equity 345

Equity value per share (12-month, €) 6 Source: Credit Suisse estimates

Safilo Group Spa (SFLG.MI) 23 17 March 2017

Figure 34: HOLT Linker valuation

SAFILO GROUP (SFLG)

Current Price: EUR 6.58 Warranted Price: EUR 6 Valuation date: 14-Mar-17

Sales Growth (parallel % point change to forecasts) Dec 14A Dec 15A Dec 16E Dec 17E Dec 18E

EUR -2.0% -1.0% 0.0% 1.0% 2.0% Sales Growth, % 5.1 8.5 -2.0 -9.8 6.4

e

g EBITDA Mgn, % 11.1 8.0 6.9 2.5 5.1

n -2.0% -74% -70% -66% -61% -56% a

h Asset Turns, x 0.77 0.8 0.8 0.7 0.7 c

t n i

o -1.0% -47% -41% -35% -29% -22% p

) CFROI®, % 5.5 3.5 3.5 1.2 3.0 s % t

l s e a l l

c Disc Rate, % 5.7 5.5 5.9 5.9 5.9 a e 0.0% -19% -12% -5% 3% 12% r r a o f

p Asset Grth, % 7.3 4.5 0.8 0.7 2.2

(

o t n i g

r 1.0% 7% 16% 25% 35% 46% a

M Value/Cost, x 1.1 1.0 0.8 0.8 0.8

A

D Economic PE, x 19.6 30.0 22.4 62.4 24.8 T

I 2.0% 34% 44% 55% 67% 80% B

E Leverage, % 34.8 37.7 51.1 50.7 50.8 a t

a More than More than Sales Growth (%) D 10% Within 10% 10 10% upside o downside i r 5 a n e

c CFROI & Discount Rate (in %) 0 S

t

s 8 -5 y l

a 7 -10 n

A 6

e -15

s 5 2011 2013 2015 2017 2019 2021 s i 4 u S 3 t EBITDA Margin i 12 d 2 e

r 10

C 1

- 8 0

2011 2013 2015 2017 2019 2021 T Historical CFROI Historical Transaction CFROI 6 L Forecast CFROI Forecast CFROI

O CFROI Discount Rate 4 H 2 Asset Growth (in %) 0 8 2011 2013 2015 2017 2019 2021 6 4 Asset Turns (x) 0.9 2 0.8 0 0.7 -2 0.6 0.5 -4 0.4 -6 0.3 2011 2013 2015 2017 2019 2021 0.2 Historical Asset Growth Rate Forecast Growth 0.1 Forecast Growth RAGR Normalised Growth Rate 0.0 2011 2013 2015 2017 2019 2021

Source: Credit Suisse HOLT®. CFROI and HOLTare trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries.

Source: Company data, Credit Suisse HOLT

Safilo Group Spa (SFLG.MI) 24 17 March 2017

Financials

Figure 35: Summary P&L Income statement, €m FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e FY20e Total sales 1,080 1,102 1,175 1,122 1,179 1,279 1,253 1,130 1,202 1,265 1,330 Gross profit 630 652 680 684 719 757 716 621 667 707 747 Operating profit 68 86 74 75 75 1 (116) 15 49 33 53 Operating profit margin 6.3% 7.8% 6.3% 6.7% 6.4% 0.1% (9.3%) 1.4% 4.1% 2.6% 4.0% Adj. operating profit 68 86 74 85 83 61 40 (18) 10 33 53 Adj. operating profit margin 6.3% 7.8% 6.3% 7.6% 7.0% 4.8% 3.2% (1.6%) 0.9% 2.6% 4.0% EBITDA 108 123 115 112 111 82 81 62 100 87 111 EBITDA margin 10.0% 11.1% 9.8% 10.0% 9.4% 6.4% 6.5% 5.5% 8.3% 6.9% 8.4% Adj. EBITDA 108 123 115 122 118 102 85 29 61 87 111 Adj. EBITDA margin 10.0% 11.1% 9.8% 10.9% 10.0% 8.0% 6.8% 2.5% 5.1% 6.9% 8.4% Profit for the period 5 31 27 16 39 (52) (142) 4 25 15 28 Profit for the period pre non-recurring 5 31 26 39 45 7 14 (16) 1 15 28

Adj. Diluted EPS 0.01 0.57 0.42 0.62 0.70 0.10 0.22 (0.26) 0.02 0.24 0.44 % growth (112%) 3731% (26%) 49% 13% (85%) 109% (217%) (107%) 1267% 83% Diluted EPS 0.02 0.49 0.43 0.25 0.62 (0.84) (2.27) 0.06 0.39 0.24 0.44 % growth (101%) 3160% (12%) (42%) 149% (235%) 170% (103%) 544% (39%) 83% Source: Company data, Credit Suisse estimates

Figure 36: Summary Balance Sheet Balance Sheet, €m FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e FY20e Non-current assets 834 860 901 871 944 941 844 851 856 859 861 Inventories 220 220 208 213 248 254 273 257 254 249 253 Receivables 271 272 280 239 266 244 237 221 231 239 248 Cash and Cash equivalents 88 90 59 83 89 87 109 113 133 146 157 Current assets 640 641 590 594 654 640 682 654 680 697 721 Assets held for sale - - - - - 10 1 1 1 1 1 Total assets 1,475 1,501 1,491 1,466 1,598 1,591 1,527 1,506 1,538 1,557 1,583

Equity to parent 756 804 858 843 972 998 873 877 901 916 944 Minorities 11 12 5 3 3 1 - 0 0 1 1 Borrowings (long term and short term) 344 329 275 265 252 177 157 140 135 128 113 Trade payables 204 200 211 205 211 220 248 241 253 264 277 Other Liabilities 159 157 143 150 161 195 248 248 248 248 248 Liabilities 708 685 628 620 624 592 654 630 636 641 638 Total Equity and liabilities 1,475 1,501 1,491 1,466 1,598 1,591 1,527 1,506 1,538 1,557 1,583 Source: Company data, Credit Suisse estimates

Safilo Group Spa (SFLG.MI) 25 17 March 2017

Figure 37: Summary cash flow Cash flow, €m FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e FY20e Operating cash flow 98 56 80 69 27 115 89 74 81 77 87 Net purchase of PP&E (27) (21) (26) (28) (28) (34) (41) (43) (45) (46) (48) Net acquisitions - - (58) ------Others 3 (10) (15) (12) (11) (6) (3) (11) (11) (11) (12) Investing cash flows (23) (31) (99) (40) (39) (40) (44) (53) (55) (57) (60) Financing cash flows 16 (27) (11) (5) (23) (71) 5 (17) (5) (7) (15) Effect of exchange rates 3 7 (1) 1 5 4 2 - - - - Net increase (decrease in cash) 93 4 (31) 24 (30) 8 51 4 20 13 11

Net debt (cash) 256 238 215 183 163 90 48 27 2 (18) (44) Net debt to EBITDA (adj.) 2.4x 1.9x 1.9x 1.5x 1.4x 0.9x 0.6x 1.0x 0.0x (0.2x) (0.4x) Source: Company data, Credit Suisse estimates

Safilo Group Spa (SFLG.MI) 26 17 March 2017

Credit Suisse PEERs PEERs is a global database that captures unique information about companies within the Credit Suisse coverage universe based on their relationships with other companies – their customers, suppliers and competitors. The database is built from our research analysts’ insight regarding these relationships. Credit Suisse covers over 3,000 companies globally. These companies form the core of the PEERs database, but it also includes relationships on stocks that are not under coverage. For more information, see our November 2016 PEERs report: A chain reaction: Supply chain strategies.

Figure 38: Safilo PEERs map

Source: Credit Suisse PEERs

Safilo Group Spa (SFLG.MI) 27 17 March 2017

Companies Mentioned (Price as of 14-Mar-2017) Christian Dior S.A. (DIOR.PA, €207.4) Essilor International SA (ESSI.PA, €110.8) Fossil Group (FOSL.OQ, $16.51) GrandVision N.V (GVNV.AS, €22.98) Hugo Boss (BOSSn.DE, €68.25) Jimmy Choo (CHOO.L, 165.0p) Kering (PRTP.PA, €238.8) LVMH (LVMH.PA, €198.35) Liz Claiborne, Inc. (KATE.N, $23.79) Luxottica Group (LUX.MI, €50.1) Ralph Lauren (RL.N, $80.03) Safilo Group Spa (SFLG.MI, €6.58, NEUTRAL, TP €6.0) Swatch Group (UHR.S, SFr347.1)

Disclosure Appendix Analyst Certification I, Catherine Tillson, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:

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Safilo Group Spa (SFLG.MI) 28 17 March 2017 available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit- suisse.com/sites/disclaimers-ib/en/managing-conflicts.html . Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Safilo Group Spa (SFLG.MI)

Method: Our target price of €6 is based on a simple average of our Credit Suisse HOLT(R) Linker (TM) and our DCF valuation. We believe the stock should look more attractive despite the risk associated with the name as the company looks to implement its 2020 Strategic Plan. Given the stock is trading close to our target price, we rate the shares Neutral. Risk: Key risks to our Neutral rating and €6 target price are i) one of the key licences such as Dior terminates their agreement early or does not renew their agreement. ii) broader slowdown in the eyewear sector especially in the US. iii) the proprietary brands fail to gain market share and consumer traction, and iv) the business sees significant disruption as it implements its IT transformation.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (SFLG.MI, ESSI.PA, LUX.MI, BOSSn.DE, LVMH.PA, PRTP.PA) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (SFLG.MI, BOSSn.DE) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (SFLG.MI, BOSSn.DE) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (SFLG.MI, ESSI.PA, LUX.MI, BOSSn.DE, LVMH.PA, RL.N, PRTP.PA) within the next 3 months. Credit Suisse has a material conflict of interest with the subject company (UHR.S) . Credit Suisse AG is acting as an agent in relation to the company's announced share buy-back program. For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=284947&v=-5y761gy5trau63yp7isadkyjf . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. The following disclosed European company/ies have estimates that comply with IFRS: (BOSSn.DE, PRTP.PA). Credit Suisse has sent extracts of this research report to the subject company (SFLG.MI) prior to publication for the purpose of verifying factual accuracy. Based on information provided by the subject company, factual changes have been made as a result. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse International ...... Catherine Tillson ; Guillaume Gauvillé, CFA To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the FINRA 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse International ...... Catherine Tillson ; Guillaume Gauvillé, CFA

Safilo Group Spa (SFLG.MI) 29 17 March 2017

Important Credit Suisse HOLT Disclosures With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report. The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur. Additional information about the Credit Suisse HOLT methodology is available on request. The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur. CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse. Important disclosures regarding companies or other issuers that are the subject of this report are available on Credit Suisse’s disclosure website at https://rave.credit-suisse.com/disclosures or by calling +1 (877) 291-2683.

Safilo Group Spa (SFLG.MI) 30 17 March 2017

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