Ferragamo's "Not as Bad" EBIT Surprise Triggers Relief Rally—Are Store Closures Delaying the Need for a Turnaround?

Ferragamo’s Earnings Surprise: Relief Rally Driven by Lowered Expectations

Investors responded quickly and positively to Ferragamo’s latest financial update, sending the company’s shares up more than 8% in early trading. This surge followed the announcement of the 2025 results, where adjusted EBIT dropped by 30% to €24.3 million. Although this represents a steep decline, the market’s reaction suggests that expectations had been set even lower, and the actual results were not as dire as feared.

Analysts had anticipated a more significant shortfall, so while a 30% decrease in operating profit is substantial, the fact that Ferragamo outperformed these muted forecasts was enough to trigger a relief rally. This outcome reflects a scenario where the company’s results were “less bad” than anticipated, rather than signaling a genuine turnaround in business performance. Investors appear to be reacting to the company clearing a lowered bar, rather than to any fundamental improvement in its operations.

This scenario highlights the importance of managing expectations. Ferragamo’s updated outlook for 2025-2026, which includes plans to shutter approximately 70 underperforming stores, is central to this narrative. The market’s positive response hinges on whether this earnings beat is a one-off result of cost-cutting, or the beginning of a sustainable recovery. For now, the relief comes from surpassing low expectations.

Cost Discipline Masks Revenue Challenges

Ferragamo’s recent stock rally conceals two contrasting trends. On the positive side, strict cost management allowed the company to deliver better-than-expected profits. However, revenue continued to slide, with annual sales falling 5.7% to €977 million, highlighting ongoing challenges. The improvement in EBIT was achieved through expense control, not through sales growth.

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• Largest Single Loss: 6.74%

Wholesale Weakness and DTC Resilience

The company’s wholesale segment was the main source of weakness, declining sharply as Ferragamo adopted a more selective distribution model. While this strategy hurts short-term sales, it is intended to strengthen the brand and protect margins over time. In contrast, the direct-to-consumer (DTC) business showed stability, growing 0.4% for the year at constant exchange rates and accelerating to 6.3% growth in the fourth quarter. These gains suggest that efforts to improve conversion rates and increase average transaction values are beginning to pay off, providing some support for profitability.

Management’s decision to close about 70 underperforming stores over the next two years is a key part of their cost-saving strategy. By reducing overhead and focusing on higher-quality locations, Ferragamo aims to protect margins and set the stage for future growth, even if it means sacrificing some sales in the short term.

Ultimately, the market’s optimism is based on cost reductions rather than a turnaround in revenue. The EBIT beat was achieved through aggressive expense management, not through a recovery in the core business.

Turnaround Prospects: Early Progress and Ongoing Risks

Initial data from early 2026 paints a mixed picture for Ferragamo’s recovery. The company’s performance varies by region: sales in the United States grew by double digits, while Europe remained flat and China continued to decline. This divergence underscores the risk of relying too heavily on one market to offset weakness elsewhere.

The plan to close 70 stores, primarily in China, acknowledges persistent challenges in that region. This targeted approach is designed to improve profitability, but it carries execution risks. While early results in the US are encouraging, the overall success of the strategy depends on maintaining US momentum and stabilizing the Chinese business through store closures.

Wholesale remains a vulnerable area, with management warning that this channel could continue to face headwinds due to a more selective approach and the recent, though now resumed, pause in shipments to Saks. Fluctuations in wholesale can quickly impact sales, adding another layer of uncertainty to the recovery.

External risks also loom. Although Ferragamo’s exposure to the Middle East is minimal—less than 2% of revenue—the company cautioned that ongoing conflict in the region could affect the broader luxury sector if it persists. This highlights the fact that Ferragamo’s turnaround is subject to both internal execution and external macroeconomic factors.

In summary, while there are credible signs of progress, the recovery remains fragile. US growth provides a foundation, and store closures are a necessary adjustment, but ongoing risks in wholesale, geographic concentration, and global instability mean that the market is still cautious. The recent rally was a response to a better-than-expected result, but the real challenge is turning these early improvements into a lasting, broad-based recovery.

Valuation Outlook and Upcoming Catalysts

While the relief rally has established a new baseline for Ferragamo’s stock, questions remain about its valuation. Analyst estimates suggest potential upside of +8.37%, but price targets range widely from €3.2 to €7, reflecting significant uncertainty. The midpoint of this range suggests that investors are cautiously optimistic, but not fully convinced of a successful turnaround.

The next major test will be the company’s 2026 guidance and first-quarter results. These updates will be crucial in determining whether the recent “less bad” performance can be followed by genuine progress. Key areas to watch include stabilization of revenue, especially in China’s wholesale channel, and evidence of margin expansion driven by operational improvements rather than further cost-cutting.

Investors should look for signs that the positive trends are sustainable. Continued strong growth in the US is encouraging, but it must persist. The closure of 70 stores in China is a necessary move, but the market will want to see that it leads to stabilization rather than simply shifting the problem. Any indication that wholesale pressures will continue or that US growth is faltering could prompt a reassessment of expectations.

In conclusion, Ferragamo’s current valuation reflects a bet on the company’s ability to execute its turnaround plan. The recent stock rally was a response to surpassing low expectations, but the next phase will require evidence of real, revenue-driven progress. With analysts divided, the stock is likely to remain volatile as new results emerge.