Luxottica's tough first half

Luxottica is one of the largest sellers of sunglasses on the planet, particularly in the luxury, fashion and sportswear arenas. They own Ray-Ban and Oakley's, as well as manufacture many different brands across the globe for all of the fashion houses. If you have a brand, old or new, the chances are that they are made in their 6 factories in Italy, three in China, one in Brazil, as well as a single facility in the USA and according to the company, a small plant in India. Pretty narrow focus. I am guessing then that you can be pretty sure that your last set of sunnies bought from their retail outlet (where you are most likely to have bought them) the Sunglass Hut was made in Italy or China. Be they Bvlgari, Chanel, Coach, DKNY, Giorgio Armani, Persol, Ralph Lauren, Michael Kors, or even more recent brands such as Tory Burch.

The company also owns a brand called Lenscrafters, an onsite lab which can manufacture and create your glasses inside of an hour. You would also be interested to know that the company, even though the links run deep with Italy and the now 80 year old founder Leonardo Del Vecchio (who is still at the company), has the majority of their sales in North America. Mostly the US. So for their core business to work harder in that part of the world, the sun needs to shine harder. Total sales for North America for the first half of this financial year was 2.739 billion Euros. Relative to total group sales of 4.719 billion Euros, North America is 58 percent of sales. Europe is only 21 percent of group sales, this is a company that is still dominated by the old world, nearly four-fifths of the sales taking part in a collective region of around 12 percent of the globes population.


A pair of sunglasses is pretty much a fashion accessory, although those of you with eye problems will tell me that it is a necessity. To protect one of the five senses must just be done. The luxury market, soft or at the absolute top end (Von Cleef & Arpels sells rings for 100's of thousands of Dollars) has been under pressure. The consumer is certainly a little more wary, perhaps it is a great recovery post the financial crisis, and now we are in a little bit of a lull. Sales and profits for the first half of the year were flat to marginally lower. This does not help when the stock of the business trades on a growth multiple. The price has unwound a lot to reflect this, the ADR (the one we own) trades on a 26 multiple. There is an underpin of a 2 percent yield (less the dividends withholding tax that goes to Rome central).

Areas of strength include opening of a Ray Ban store in mainland China, that territory (like for most luxury businesses) has been good, Hong Kong bad. Oakley has been weak, in the coming weeks we are likely to see many new cool products at the Olympics. The company says in their second half outlook that they are "entering with good momentum in sun". New roll outs in Macy's and Galeries Lafayette hardly sound new school, sunglasses do require a retail presence in order to satisfy their consumers. In other words, you have to try sunnies on. Although online sales are growing fast.


The outlook is marginally higher, which possibly explains why the stock initially traded lower, and then in the aftermarket went higher. Basically ending where they finished. Here is the outlook: "Sales growth: +2-3% at constant exchange rates. Adjusted operating income and adjusted net income aligned to net sales growth." The governance issues do bother us. The fact that there have been three CEO's in two years and the major shareholder is meddling and can't let go. Nonetheless, the thesis is intact. There are more middle income people across the planet, sunglasses are an expensive item, yet the life is comparable to that of a durable good. They will not last longer than they take to go out of fashion. We remain bullish on the long term prospects of the business, which is a leader in their industry. Now, about that sun, if only it could shine a little more. Part healthcare, part consumer, only about eyes.