As the current net debt level is only 1.31 times earnings before interest, tax, depreciation and amortization (EBITDA), Luxottica can keep up with its current pace of a small or medium-sized acquisition every two to three months and its balance sheet even allows it to envision ?something a little bit bigger? for this year, says the group's chief financial officer, Enrico Cavatorta.
For his part the group's chief executive, Andrea Guerra, is looking at better than expected results for 2007. Luxottica had last predicted that its sales would increase by 8-10 percent this year from last year's level of €4.68 billion and that its net profit per share would grow to an indicated €485-496 million from the €424.3 million reported in 2006 for its continuing operations. In reporting its results for the first quarter of this year, the management said the group will at least reach the upper end of these ranges, but it may be able to do even better than that, despite a further weakening of the dollar against the euro, thanks to ongoing efforts to boost the size and profitability of its retail and wholesale businesses.
The reaction to the Luxottica's newest lines of prescription frames was very positive during the crucial month of April, but the company plans to wait until the end of May before deciding whether to review its forecasts, which were based on a constant exchange rate of 1.30 dollars per euro. Luxottica has a reputation of releasing conservative forecasts. Last year, it upgraded its full-year guidance in July.
In the first quarter of 2007, Luxottica booked a 6.7 percent increase in sales to €1,299.8 million, despite an 8.3 percent decline in the value of the dollar against the euro and bad weather conditions in North America that affected retail sales in February. An additional challenge came from the fact that the first quarter of 2006 had also been strong, especially in terms of comparable store sales. However, the company managed to beat the estimates of financial analysts, who had forecast sales of nearly €1,260 million.
Retail sales fell by 1.6 percent to €833.6 million in the quarter, while wholesale rose by 20.4 percent to €548.5 million. At constant exchange rates, overall sales would have risen 13.1 percent, with increases of 6.3 percent at retail and 24.3 percent at wholesale. Comparable store sales rose by 1.6 percent. The company said it is confident of achieving its full-year target of a 4-5 percent growth in comparable retail sales and increasing the profitability of its retail operations by at least 0.50 percentage points.
Operating income (EBIT) rose by 13.9 percent for the group to €224.1 million. While it fell by 13.3 percent to €101.4 million in the retail section, it rose by 27.5 percent to €151.0 million in the wholesale segment. The overall operating margin rose to 17.2 percent of sales from 16.2 percent, and while the margin for retail fell to 12.2 percent from 13.8 percent, the wholesale margin increased to 27.5 percent from 26.0 percent.
In the first quarter of last year, retail operating profits had been boosted by a $13.0 million gain stemming from a reimbursement, related to legal costs and expenses, by an insurance company. Without that gain, last year's retail operating margin would have been 12.5 percent. Luxottica also points out that it booked a €3 million cost lately for the start-up of new retail operations in China, which trimmed 0.4 percentage points off from the margins.
Excluding one-off items, Luxottica's retail profitability improved and remained on target to raise margins by 0.5-0.7 percentage points for the full year. In the first quarter, retail margins improved by 0.2 percentage points in North America and by about 0.5 points in Australia and New Zealand.
On the flip side, the 1.5 percentage point rise in margins for the wholesale business is already ahead of the group's full-year target of a 1.0 percentage point increase.
The group's net income from continuing operations rose by 20.3 percent to €128.3 million in the quarter, slightly ahead of investors' forecasts. This doesn't include the results of Things Remembered, the U.S. gift chain sold last September for $200 million.
During the quarter, the company saw an increase in its net debt to €1,327 million from €1,149 million at the end of December, as working capital rose to €374.2 million from €248.3 million in the fourth quarter due to seasonal factors, but it was better than €382.2 million in the first quarter of 2006. Debt levels were lifted by a $199 million payment made in January in advanced royalties for the Polo Ralph Lauren license and by $110 million spent for the acquisition in February of a U.S. retailer, D.O.C.
Luxottica continued to expand in the first quarter with the opening of 149 new stores, by rolling out the newly acquired Burberry and Polo Ralph Lauren brands and by further building up existing ones, like its house brands Persol and Ray-Ban. The closing of the D.O.C. acquisition and the opening of new stores occurred faster than Luxottica had expected, and acquisitions and new stores could contribute 2-4 percentage points to full-year sales growth.
Luxottica says it has simplified the Polo Ralph Lauren lines it took over from Safilo, cutting the number of collections from eight to five ? Purple Label, Polo, Ralph Lauren, Ralph and Chaps ? and increasing the entry level price to $89 per pair. The company claims that the Polo Ralph Lauren launch was extremely successful in the USA, reaping sales of €6-7 million in the first quarter, and the focus is now on Europe.
Regarding Persol, Luxottica intends to boost the brand's annual sales to about €100 million in a couple of years' time from €40 million currently as it builds up its image as that of a premium collection. The key Ray-Ban brand enjoyed continuous double-digit sales growth in the quarter, underpinned by a new advertising campaign.
Comparable store sales for the North American optical business rose by 0.1 percent year-on-year in the first quarter, with LensCrafters and Pearle Vision rising by 3.2 percent and ?licensed brands? (counters in Sears, Target and other superstores) declining by 9.9 percent. The decline in licensed brands stems from a decision to cut down on promotions and focus on profits. In the Asia-Pacific region, same-store sales were up by 4.7 percent.
Sunglass Hut's worldwide comparable store sales recorded a 5.4 percent increase in the quarter, with sales of sunglasses rising by 10.5 percent and watches and accessories dipping by 38.4 percent. Luxottica intends to phase out the sale of watches by the year-end.
In spite of difficult retail conditions in North America, the group managed to control its retail costs. Luxottica says it monitors the evolution of its personnel costs on a weekly basis and is able to reduce them within days in the event of a slowdown in sales.
The group reports encouraging results from the 60 LensCrafters optical stores that it has so far remodelled in North America. Their comparable store sales lie 4-5 percentage points above average. The retail chain is scheduled to open 38 more new stores in the second quarter.
In China, Luxottica has grouped under the LensCrafters brand its 53 stores in Hong Kong, its 24 stores in Beijing and its 8 stores in Shanghai. The business is now run by a single organisation with headquarters in Shanghai, and is expected to break even this year.