Luxottica ended the second quarter with a 2.4 percent rise in sales to €1,633.5 million and a net profit of €162.1 million, up by 8.0 percent, yet again beating market expectations. The sales figure was at the top end of the analysts' forecast range and net profits were about €4 million higher than expected. The group suffered from a 12 percent depreciation of the dollar against the euro. At constant currency rates, turnover was up by 9.5 percent.

Luxottica Group Consolidated Income Statement

('000 Euros, Three months ended June 30)

 

2011

2010

% Change

Manufacturing/Wholesale

704,xxx

651,xxx

8.1

Retail

930,xxx

944,xxx

-1.5

NET SALES

1,633,544

1,595,124

2.4

Cost of Sales

542,674

529,756

2.4

Selling Expenses

488,101

484,763

0.7

Royalties

28,509

27,632

3.2

Advertising Expenses

113,260

115,345

-1.8

G&A

164,482

157,875

4.2

Trademark Amortization

19,701

21,422

-8.0

Net Interest Expense

26,024

25,687

1.3

Other Net

(1,152)

(3,934)

-70.7

Pre-Tax

249,642

228,708

9.2

Tax

85,822

77,813

10.3

Minority Interests

1,734

843

105.7

NET

163,820

150,895

8.6

Euro/Share (diluted)

0.4

0.3

6.1

The group's performance in Western Europe was the surprise element in the quarter. Luxottica booked record wholesale sales in the region thanks to a strong sun season and registered double-digit growth in Italy, Spain, France and Germany. The only negative market was Portugal, down by a high-single-digit figure.

For the fifth quarter in a row, sales of luxury and premium brands booked double-digit growth, with Burberry, Chanel, Persol, Polo Ralph Lauren, Prada and Tiffany outperforming .The house brand Ray-Ban continued to enjoy double-digit growth thanks to prescription frames. The other leading house brand, Oakley, registered positive sales growth but was hit by some capacity constraints that are expected to be overcome by end of July or early August. Oakley improved sales and orders in Europe, partially thanks to more locally suited products, and posted a 29 percent increase in phone replenishment orders during the quarter in the region.

Total sales rose by 7.5 percent in dollar terms in North America despite a two-week planned stoppage of wholesale shipments due to the rollout of a SAP information technology platform. Overall sales in emerging countries were up by 14.2 percent on a currency-neutral basis, led by China, India, Eastern Europe and Southeast Asia.

The wholesale division booked its best quarterly results in terms of sales and profitability. It bolstered sales by 8.1 percent to €704.0 million. At constant currency rates the increase reached 11.6 percent worldwide, 14.0 percent in Europe, 4.0 percent in North America, 15.0 percent in emerging markets and 14.0 percent in the rest of the world.

The top line of the retail business fell by 1.5 percent to €929.6 million due to the dollar's weakness. The division achieves about 80 percent of its revenues in North America. At constant currency rates, worldwide sales were up by 8.0 percent.

Across the group, comparable sales were up by 5.4 percent in the second quarter.

In North America, LensCrafters increased comparable store sales by 5.7 percent and Pearle Vision by 0.3 percent, while the licensed brands Sears and Target booked a 4.3 percent decline. LensCrafters sales were lifted by prescription sun products and premium prescription frames and lenses. The chain was forced to rely on third-party laboratories a couple of times during the quarter to meet demand for lenses.

Same-store sales rose by 1.8 percent in Australia and New Zealand. After six quarters of decline, the Australian retailer OPSM booked a 1.2 percent rise in comparable store sales despite a still uncertain business environment in the country.

LensCrafters' Chinese unit boosted comparable sales by more than 20 percent. The Chinese chain opened 14 stores during the quarter and is expected to open an additional 35-36 in the second half of the year. The group has about 250 stores in the Asian powerhouse and aims to have 500 locations by the end of 2013.

Sunglass Hut increased worldwide comparable store sales by 7.8 percent. The chain returned to double-digit growth in North America, while its online store sunglasshut.com increased sales by 64.0 percent. T he banner has completed the rollout of points of sales in 670 Macy department stores in the U.S.

The group's Ebitda margin widened to 21.6 percent in the second quarter from 21.0 percent a year earlier while the operating margin increased to 16.9 percent from 16.2 percent.

The operating margin of the wholesale business rose to 26.8 percent from 24.1 percent a year earlier, while the operating margin of the retail division slipped to 14.0 percent from 14.5 percent. Without the dollar's depreciation, retail profitability would have been higher in the quarter than a year earlier.

Luxottica said that first-half results “provide an excellent basis for us to look with confidence to the second half of the year.”

Deutsche Bank was less upbeat, downgrading the stock to “hold” from “buy.” The bank expressed satisfaction about the company's sales growth but is concerned about a slowdown in margin growth in the second half of the year. The consensus of analysts' forecasts is for Luxottica's full-year revenues to rise to nearly €6,200 million in 2011 from €5,798 million a year earlier, while the Ebitda margin will rise to 18.9 percent from 17.8 percent and the operating margin to 13.5 percent from 12.6 percent.

Luxottica's net debt rose to €2,118 million at the end of June from €2,071 million at the end of March after paying €203 million in dividends during the quarter. Capital expenditures reached €74 million in the quarter. The net debt ratio stood at 1.9 times Ebitda. The group aims to cut that to 1.6-1.7 times at the end of 2011.

Luxottica is studying the possibility of entering a couple of Southeastern Asia markets and expanding in the eastern part of the Mediterranean basin. It has to pursue the rollout of its information technology platform for another 18 months. The next market to be involved will be France followed by Iberia, China and Brazil. The IT upgrade is expected to reduce inventories, which could decline by 20 percent in the next three years.