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Folli Plans 25% More China Shops to Offset Greek ‘Disaster’

Sept. 16 (Bloomberg) -- Folli Follie Group, the Greek operator of Hellenic Duty Free Shops and maker of jewelry and handbags, aims to expand 25 percent in China in coming months as business abroad helps offset the decline of its local market.

Folli Follie plans a chain of at least 125 boutiques in China by the end of 2011 compared with the 100 shops it currently operates in 34 cities, Chief Executive Officer George Koutsolioutsos said in a phone interview from Folli Follie’s Athens headquarters. The company expects further growth in greater China and smaller cities, he said.

“We’ll continue to speed up growth in China as it’s a booming market,” while “domestic sales are suffering as the Greek market is a disaster,” he said. “Our international sales are doing well, but Greece is still a big question mark.”

China’s economic growth, which Citigroup estimates will amount to 9 percent this year, offers luxury-goods makers an expanding market to make up for declining demand in the U.S. and Europe. Greece, where gross domestic product may shrink by more than 5 percent in 2011, needs to fully implement an austerity plan agreed to with the European Union, Jean-Claude Juncker, who heads the group of euro-area finance ministers, said today.

Folli Follie fell 8 percent to 6.90 euros, the lowest price since Aug. 12, as of the 5:20 p.m. close of trading in Athens trading. The stock was the worst performer on Greece’s benchmark FTASE 20 Index today.

‘Weak’ Home Market

“The company is very well diversified geographically, especially in China, but still about half of the group sales come from Greece,” said Dimitris Birbos, an analyst at Athens-based Marfin Analysis who has a “buy” recommendation on the stock. “The economic situation in Greece remains very weak and that’s having a negative impact on cash flows, which the company needs to reduce and refinance debt.”

Folli entered Asia a little more than a decade ago, and Koutsolioutsos said it counts Japan, China, Hong Kong, Malaysia, Singapore and Indonesia among key markets in the region. Asia accounted for 37 percent of the group’s 989.6 million euros ($1.37 billion) in sales last year. Greece generated 49 percent of revenue. That compares with 34 percent from Asia and 51 percent from Greece in 2009.

In Greece, “we haven’t yet reached bottom,” Koutsolioutsos said in the interview yesterday. At the same time, “during these difficult times, we find it less costly to open shops and we can maximize advertising.”

Cash-Flow Questions

Greek retail-market “weakness” and “concerns over the cash-flow generation ability are largely responsible for the pressure on the stock,” Vassilis Kararizos, an analyst at Athens-based Proton Bank said. Proton has an “outperform” recommendation on Folli Follie.

Retail sales in June fell 8.3 percent from a year earlier, according to Hellenic Statistical Authority data. Industry revenue dropped at the fastest pace in three years from mid-July through the end of August, the National Federation of Greek Commerce said on Sept. 1.

Follie plans to reduce debt to about 2.6 times earnings before interest, taxes, depreciation and amortization by the end of 2011 from 3.4 times Ebitda a year earlier, said Koutsolioutsos, who turned 43 today. To achieve that, the company will use capital provided by Shanghai-based Fosun International Ltd. and cash flow, he said. Net debt stood at 652.2 million euros at the end of last year.

Fosun’s Stake

Fosun, with businesses that include health care and mining, agreed in May to pay 84.6 million euros for a 9.5 percent stake in Folli Follie. Fosun, which has since increased the holding to 10.02 percent, is targeting companies showing fast growth in China that are based in the U.S., Europe and Japan to accelerate expansion, billionaire Guo Guangchang, its co-founder and chairman, said Sept. 15.

“I don’t know if Fosun wants to invest more or not,” Koutsolioutsos said. “The synergies we’ve got will help us speed up China’s expansion.” The company is “very comfortable with Fosun as a shareholder as we have good chemistry and are on good terms with them.”

To contact the reporters on this story: Manuel Baigorri in Madrid at mbaigorri@bloomberg.net; Natalie Weeks in Athens at nweeks2@bloomberg.net

To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net

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