Luxottica expects its revenues to increase to €4.9-5.0 billion in 2007 from the €4,676 million booked last year as the company continues to expand its international reach.
However, the chance of reaching such a milestone is overshadowed by the fact that the group will experience a certain slowdown in its growth rate to 8-10 percent, assuming a constant exchange rate of $1.30 for the euro, compared with the 13.1 percent rise experienced last year. Financial analysts were expecting the group to announce a higher sales pace and had forecast 2007 sales close to €5.1 billion.
The relative sales slowdown in sales is partly do to a less favorable exchange rate, which will certainly hit first-quarter results, as well as the phasing out of watch sales and in-store optical laboratories at Pearle Vision, one of its retail chains in the USA.
Nevertheless, the management expects the group to achieve a further increase of one percentage point in its profit margins and is targeting basic earnings per share of €1.07-1.09 for this year against EPS of €0.95 in 2006 from continuing operations, excluding the recently sold Things Remembered chain in the USA. That would mean an anticipated net profit of €485-494 million for 2007 as compared to €424.3 million in 2006 and €342.3 million in 2005. The EPS achieved in 2006, which was equal to 9.1 percent of sales, was higher than the group's own guidance of €0.93-0.94.
The eyewear group said it expects 2007 earnings before interest, interest, tax, depreciation and amortization (EBITDA) to range between €1,060 million and 1,085 million, against €976.8 million in 2006, while operating profit before interest (EBIT) for the year is seen coming in at €840-860 million compared with €756 million.
The net debt position should improve further from the level of €1,149 million recorded last Dec. 31, falling to €1,050-1,120 million at the end of 2007 thanks to another year of strong cash flow generation, after booking a free cash flow of €400 million in 2006.
Luxottica's board of directors surprisingly raised its dividend for the 2006 financial year to €0.42 per share from €0.29 a year earlier, beating analyst expectations of a €0.36 payout, reflecting an increase in the share of net profits distributed to shareholders to 45 percent of the total from 38 percent previously. The group's chief executive, Andrea Guerra, said that the 45 percent payout ratio is sustainable for the future but warned that the company does not intend to go beyond a ratio of 50 percent.
The management is confident that the global eyewear market continues to have strong growth potential as new customers crop up in emerging markets, as U.S. citizens increase spending in fashion and luxury goods, and as an aging Western population will require more spectacles.
Luxottica estimates that about two-thirds of the world population now has access to its products and that the market is undergoing radical changes. For example, eyewear sales are expected to be higher in Mexico this year than in the affluent German market.
One of the most significant market chances for Luxottica is the shift going on among North American consumers from a casual and sport look to a more fashionionable and luxury-orineted one, making the world's biggest economy a leading emerging market for luxury goods. The USA is seen by the company as a relatively underdeveloped market for luxury goods, which only accounts for 25 percent of consumer demand compared with 35 percent in Japan. Over the past three years, sales in luxury stores have grown four times faster than overall retail sales due to the changes in the U.S. consumer's tastes.
Guerra believes that this trend is deep-rooted, offering significant business opportunities in the fashion and luxury sector. Eyewear sales continue to be underpinned by the transformation of spectacles from a purely functional object to an essential accessory for fashion houses, he said, noting that eyewear now represents 2-3 percent of overall accessory sales compared with a few decimal points some years ago.
Luxottica has earmarked €300 million for investments this year, of which €225 million will be used to expand and upgrade the group's retail brands, which currently comprise about 5,700 stores worldwide. Now that the integration of Cole National, bought in 2004, is completed, Luxottica can envisage increasing its debt levels again to finance further major acquisitions, but Guerra ruled out that the company would enter a takeover battle against Safilo, feeling that there are sufficient opportunities for both companies.
Luxottica is predicting breakeven results at the operating level on sales of €75 million in China, where it is rolling out its LensCrafter brand after making four acquisitions in the past couple of years. China is not expected to play a major role in the group's total turnover for at least a couple of more years as Luxottica's current strategy is to ?prepare the future? there, as Guerra put it in commenting on the company's 2006 results. In India, Luxottica will continue to focus on the wholesale side of its business because of continued legal restrictions in retailing.
In 2006, the group's overall sales growth of 13.1 percent was driven by a 30.9 percent increase in wholesale revenues to €1,715 million, while retail sales went up by 7.6 percent to €3,294 million in terms of euros. Excluding the exchange rate effect, total revenues would have increased by 14.0 percent.
The already high operating profits stemming from the wholesale business rose by a further 46.5 percent to €445.8 million, representing an EBIT margin of 26.0 percent. The EBIT on retailing rose by 21.5 percent to €431.5 million, or an improved margin of 13.1 percent.
Within the wholesale segment, Luxottica's sales to third parties went up by 28.6 percent in 2006, increasing by 28.9 percent in Europe, by 31.9 percent in the Americas and by 23.9 percent in the rest of the world. Europe represented 61.5 percent of this turnover, the Americas 23.0 percent and the rest of the world 15.5 percent.
Wholesale revenues are expected to increase by about 15 percent this year. The company is anticipating continued strong growth in this domain over the next three years thanks to the ongoing expansion of its Ray-Ban brand and to the development of its newly acquired licenses. The Polo Ralph Lauren brand, launched by Luxottica about two months ago, should generate approximately €100 million in retail sales this year. The Burberry license, acquired last year, has immediately increased its market penetration in Japan and the USA.
The Tiffany brand, for which a 10-year license was signed in December, will be launched at the end of the year or in early 2008. Luxottica does not expect any additional brand acquisition in the immediate future as it continues to focus on promoting Polo Ralph Lauren and on the launch of Tiffany.
The company will also seek to develop new distribution channels for its wholesale business this year, focusing on department stores among others. It plans to raise its advertising expenditures this year by 20 percent.