Luxottica and the Armani Group have decided not to renew their 14-year-old eyewear licensing contract, after it expires next May 31. The announcement last Thursday sent the value of Luxottica's stock down by nearly 14 percent, as the Giorgio Armani and Emporio Armani lines together represent about 7.2 percent of the group's total annual consolidated sales of over 3 billion euros. It recovered nearly 5 percentage points the following day, after the world's largest eyewear manufacturer assured investors that it will make up for the resulting loss in turnover with a couple of other important deals, and it continued to improve slightly today, reaching e12.73 at the time of going to press.

Luxottica says in fact that should be able to announce early next year at least one other acquisition on the retail front, joining its LensCrafters and Sunglass Hut International chains, but nothing could be found out for the moment on the name or the location of the chain, although there was a rumor out today in Milan that it's discussing a possible acquisition in Australia. Suppliers are said to have a lot of bad debt in that country, where the group already has some Sunglass Hut stores. The group says it's looking at various alternatives. There are indications that it could make its choice known as of next January or February. As previously reported, Luxottica is interested in acquiring retail chains in geographical areas where its presence at the wholesale level is not particularly strong.

Furthermore, Luxottica says it's in licensing negotiations with some other major global brands. Speculation is centering in particular around Louis Vuitton, a luxury brand which has been in a testing mode with De Rigo, a company in which the LVMH group has a minority stake, but nothing would prevent Luxottica from taking over an existing license from another company once it expires.

Luxottica notes that it took only two years for its own well-oiled apparatus to build up sales of Chanel to a level that exceeds those of all its other licensed brands, including Giorgio Armani. The conflict of interests between the Chanel and Yves Saint Laurent brands led Luxottica to give up on the YSL license a couple of years ago. Safilo took it over later, based on assurances that it would be capable of combining it with its own licensed Christian Dior line.

Luxottica, which is suffering also from the strengthening euro, is telling investors that it anticipates net earnings of at least 75 U.S. cents per American Depositary Share in 2003 following the loss of the Armani contract, if the US dollar and the euro remain at parity, but the company would not reveal its projection for 2002. Its EPS were 52 cents in 2000, 63 cents in 2001 and 61 cents in the first 9 months of this year. Should the planned retail acquisition go through in the early part of next year, Luxottica says its EPS could be as high as 88 cents.

As for Armani, the word out in the market is that it has already found a solution that will ensure the continuity of the line, and that this solution should be announced in a couple of weeks' time. Industry observers point to Safilo of its new licensee, mainly because of its large production capacity and its ability to work with multiple brands. Another alternative may be a joint venture deal like the one that links De Rigo with Prada. Another solution would be the acquisition of a controlling interest in an existing company, as Gianni Versace has already done with IC Optics. Armani recently acquired a 60 percent stake in a Venetian footwear company to get its shoes made under its own control, replacing previous licensing deals (details in Shoe Intelligence).

The final choice may even be a combination of two different solutions, considering that Armani wants to emphasize the distinction between the Giorgio Armani and Emporio Armani lines. Armani will keep for the moment its small minority stake of about 5 percent in Luxottica, but it's unlikely that it will continue to have a seat on its board of directors. By sitting on the board, Armani probably knew about Luxottica's plans for further retail expansion.

According to Luxottica, the split with Armani occurred because of significant differences regarding design, minimum guaranteed revenues and distribution. It seems that Armani wanted to turn its eyewear models into trendier and less classical products, with a more selective distribution and a higher positioning in the market.

Such a strategy would have led to a major decline in sales of Armani products for Luxottica, which managed to keep them steady this year in spite of major changes in design requested by the Italian fashion house. According to Luxottica, the more selective distribution strategy imposed by Armani would also have exerted a negative impact on the 22 other brands sold by the group, as some opticians may have decided to cut the group off completely if they could not buy from the coveted Armani line.