Safilo admitted last week that it has lost the battle to retain the key A/X Armani Exchange, Emporio Armani and Giorgio Armani licenses expiring at the end of 2012. The Italian fashion group is now ready to re-embrace its former licensee, Luxottica, with which it previously had a 15-year partnership.

In the first nine months of this year, sales of the three Armany lines sales amounted to €125 million, or 15.0 percent of Safilo's total revenues. In 2010, they generated about €165 million in sales, representing 15.3 percent of Safilo's turnover, much less than the sales that Luxottica had generated with them in the past. According to Equita, an Italian brokerage firm, the Armani brands generated more than €200 million in sales in 2003, when it passed from Luxottica to Safilo. After having fallen below that threshold under Safilo's stewardship, Equita believes that Luxottica could return above the €200 million sales level in two to three years. Equita forecasts that the Armani brands will be profit-making from the first year, and that they will contribute €50 million in profits to Luxottica by 2015.

Safilo said it made its best offer to keep the brands but its management had already indicated a few weeks ago that an unnamed rival was acting very aggressively and expressed the feeling that the outcome would be determined more by the structure of the deal than the level of the royalties.

No details have been released about the possible structure of Armani's new contract with Luxottica. In February 2006, Luxottica snatched the Polo Ralph Lauren license from Safilo by offering an advance payment on royalties of $199 million for the 10-year agreement, which started on Jan. 1, 2007, but it is unclear whether something similar has happened with Armani, which may have seen Luxottica as a better bet to develop its business.

Luxottica and Armani said that for the time being they have signed only a non-binding letter of intent for a global 10-year license, which should be formalized at a later stage, for the manufacture and distribution of sun and prescription eyewear under the three brand names from January 2013 on. The first collection is scheduled to be presented in 2013.

Luxottica's chief executive, Andrea Guerra, described Armani as “one of the greatest equities” in the world and said there would be no production capacity issue if it won back the license. Luxottica and Armani go back a long way. The eyewear company signed a manufacturing and distribution agreement for the Giorgio Armani brand in 1988, later followed by a deal for Emporio Armani. The companies fell out in November 2002 due to “different strategic priorities,” according to Luxottica's wording at the time, and their partnership ended in the first half of 2003. One of the problems was said to be the lack of a selective distribution policy in the U.S. at the time. The designer Giorgio Armani moved on to Safilo but retained his own shareholding of nearly 5.0 percent in Luxottica. At the time of the rupture, Armani noted that being a shareholder of Luxottica “has always been rewarding.”

For Safilo, the loss is a severe blow for its profit and loss account, but the company stated that it remained confident that it would achieve its medium-term business and economic, meaning evidently that it hoped to start new projects to achieve them. On Sept. 29, Safilo explained that if it were to lose Armani, it would immediately focus on its remaining brands. The company also identified four or five interesting licenses expiring in a “reasonable” time frame for which it could bid. It noted that there are some appealing brands that are not yet present in eyewear. Just before announcing the acquisition of Polaroid Eyewear (see the following story), the group said it was ready to carry out some acquisitions to boost its portfolio of house brands.

The group has been forced to review the business plan that it presented on Sept. 29 in Paris, indicating that losing Armani will knock €150-200 million off its sales forecast for 2015 and that the Ebitda margin would reach only 13.5 percent. The original business plan called for Safilo to reach revenues of €1.40-1.45 billion by 2015, with a margin of 15.0 percent.

Financial analysts estimate that the Armani licenses have accounted for more than one-third of the group's profits. Safilo previously announced that the loss of the licenses would have dire consequences on its manufacturing structure, especially in Italy where the Giorgio Armani and Emporio Armani brands are fully produced.

Safilo's share price has been under significant pressure since June, when it was trading above €12.50, on concern that it could lose the Armani deal. The decline accelerated in the past days when it became increasingly obvious that it would lose it out to Luxottica. After the announcement, Safilo's share price rose sharply as investors showed relief that the excruciating wait was over. Safilo is currently trading around €4.90 per share after falling below €4.25 last week. A Milan-based brokerage firm, Intermonte, said that the decline in the share price experienced over the past weeks, on expectations that Safilo would lose the licenses, largely factored in the impact of the news. The broker set a target price for the share at €5.50. Equita also sees Safilo being worth €5.40 per share without Armani.

Separately, Luxottica has denied speculation that it may bid for Alain Afflelou, the French eyewear retailer controlled by Bridgepoint. The Italian group noted that its focus in Europe is on the wholesale segment, aside from the sunglasses it sells through a few Sunglass Hut stores. There is also some media speculation that Guerra could be asked to take the helm at Intesa Sanpaolo after the bank's chief executive, Corrado Passera, became industry minister under the new Italian government head by Mario Monti.