The industry giant reinforced its role as an optical powerhouse in the 4th quarter and in the full 2005 financial year, delivering strong results. Luxottica's operating income shot up by 39.2 percent to €145.5 million in the quarter, contributing to raise net income by 43.2 percent to €85.6 million. The operating margin stood at 13 percent, an increase of 180 basis points from the same period a year earlier.

Net sales increased by 18.0 percent to €1.118.8 billion in the quarter, and most of the growth was organic. Retail sales were up by 15.3 percent to €849.6 million, and they included a same-store increase of 4.9 percent. The Sunglass Hut chain posted a gain of almost 12 percent in same-store sales, marking the third consecutive quarterly double-digit increase. Total wholesale turnover rose by 28.5 percent to €331.3 million, with strong performance for key luxury brands like Bvlgari, Chanel, Prada and Versace.

Luxottica's net income rose by 19.3 percent to €342.3 million for the year. Total revenues reached €4.371 billion, an impressive climb of 34.3 percent, largely driven by the acquisition of Cole National, which diluted profitability. In fact, the operating margin before amortization and depreciation (EBITDA) ended up lower at 13.8 percent of sales, compared with 19.8 percent in the previous year. While the margin increased from 25.6 to 26.9 percent in the wholesale segment of Luxottica's business, it decreased from 16.6 to 14.7 percent at the retail stage, although Cole National's profitability tripled.

 

 

Retail sales jumped by 40.5 percent for the full year to €3.3 billion, with comparable store sales up by 5.5 percent. With LensCrafters' same-store sales up by 7.2 percent and those of Sunglass Hut rising by 14 percent, Luxottica Retail outpaced the U.S. premium retail sector's growth of 6.1 percent. Sunglass Hut moved its operating margin up by 300 basis points, with 10 percent of the stores fetching sales of more $750,000, as the format continued its shift toward fashion and luxury, offering more women's lines. Luxottica closed 93 of the chain's doors while opening 112 new locations and remodeling 145 others. Pearle Vision, a key segment of Cole National's business, turned around to a positive operating profit in 2005.

Operating margins went up also at OPSM in Australia and New Zealand, in spite of restructuring charges, and they are on their way to reach 14 percent of sales this year. The company now has a single service organization for all its retail and wholesale operations in the region. Sunglass Hut is starting a new course in the region. Luxottica products have come to represent 29 percent of retail sales in the Pacific and 20 percent of sales in its Hong Kong stores.

Five new flagship stores are due to be opened in Beijing during the 1st half of this year, and half of stores in Hong Kong will be remodelled. Including Luxottica's stores in Hong Kong, total sales of US$60 million are expected in Greater China for all of 2006.

Most of the 19.7 percent growth in wholesale revenues was organic during the year. Wholesale sales to third parties increased by 18.3 percent , but they jumped by 27.5 percent in the 4th quarter, thanks in part to the addition of the Dolce & Gabbana line. By region, wholesales revenues rose by 16 percent in Europe, by 22 percent in the Americas and by 18 percent in the rest of the world. Europe represented 61 percent of Luxottica's total sales, the Americas 22 percent, and the rest of the world 18 percent. The company is growing in Russia, and it is now going direct in Korea.

House brands came to represent 60 percent of the group's wholesale revenues, with Ray-Ban generating sales of more 11 million units. Luxottica will take all its licensed brands to the end of their respective contracts, but at the same time the company said it will gradually consolidate its brand portfolio, shedding off some properties and acquiring new ones. The decisions have already been made, but they have not been disclosed yet.

The company reduced its net debt from €1.716 billion in 2004 to €1.435 billion at the end of its 2005 financial year, and it should decline further in 2006 to €1.19-1.26 billion, or 1.3-1.4 times the EBITDA.

Going forward, Luxottica is budgeting an overall sales increase of 8-10 percent for this year, but earnings will rise by 18-20 percent. The wholesale business should grow at a double-digit rate and raise its operating margin by a further 100 basis points. Group EBITDA is expected to reach more than €900 million, up from €791.7 million in 2005.

In the retail sector, the management views its Pearle Vision business in the USA as a driver in 2006 and 2007 for growth and profitability, with operating margins rising at a double-digit rate in 2007. In 2006, Luxottica plans to triple its advertising for this brand, while boosting the presence of Luxottica's frames to make up about 70 percent of Pearle's frame sales by the end of the year. The chain's integration with the group's existing American retail platform will be enhanced as some of LensCrafter's own laboratories will work for some of Pearle's stores. They will work for other Cole National operations in the future.

For Sunglass Hut, the company anticipates double-digit growth over the next three years, adding that it is its most important asset. It plans to open 120 new Sunglass Hut stores in the USA, and fashion products will represent between 40 and 50 percent of their sales. There will be more fashion also in the 900 Lenscrafters stores, while Pearle Vision will focus more on ?trusted eye care.?

The company expects to reel in about €120 million from its Dolce & Gabbana line, which it began to ship out in November. It doesn't expect a strong performance from the new Burberry license at the beginning of this year, as it is relatively new to the brand portfolio. Ray-Bay is expected to continue to deliver solid results. In terms of geographical expansion at the wholesale level, Luxottica has its eye on Russia, Dubai, Korea, the Middle East, Mexico, China and Turkey.

The company now has over 6,000 retail locations, including about 5,500 optical and sunglass stores, mainly in North America, Asia and the Pacific. This should make it more attractive for high-end brands to work with the group. Luxottica will try to have tighter control over its distribution in 2006. There are currently no new acquisitions in the works, but a disposal of Things Remembered, the American giftware store chain inherited with Cole National, is 50 percent certain to be signed within the next three to four months. The price tag is said to be around €150 million.