Luxottica’s stock price dropped by about 10 percent at the beginning of this month, immediately after the company issued a profit warning on its 2007 results and announced a worse-than-expected forecast for 2008.
Addressing analysts at in Investors’ Day organized at Oakley’s headquarters in California ahead of the release of final and detailed results, scheduled for next March 13, the company said it posted earnings per share of €1.08 in 2007, less than the previous company forecast of €1.11-1.13. That would mean a net profit of €492.4 million, up from $424.3 million in 2006.
For 2008, Luxottica’s EPS are now expected to range from €1.11 to 1.14 according to the company, compared with financial analysts’ estimates of €1.14, and this would mean lifting net income further to €506-520 million. Under normal circumstances, Luxottica would achieve EPS of €1.23-1.26 in 2008, but assuming a conversion rate of $1.45 to one euro, the exchange rate is expected to shave €0.06 off from the EPS, while the amortization of Oakley’s trademark will erase a further €0.03 and another €0.03 will be wiped out by a restructuring charge related to Oakley’s purchase. In 2009, EPS is expected to rise to more than €1.31, based on the same currency rates and not accounting for the possible amortization of Oakley’s trademark.
On the sales side, Luxottica’s net revenues rose by 6.2 percent to €4.967 billion, in line with the company’s updated guidance, based on an average euro rate of $1.37. The figure includes a contribution of €88 million from the consolidation of Oakley Inc. for last six weeks of the year, the completion in mid-November of the $2.1 billion acquisition of the U.S. sports company.
At constant currency rates, sales would have risen by 12.6 percent to €5.263 billion last year. Retail sales excluding Oakley’s properties fell by 1.8 percent to €3.234 billion, but were up by 5.6 percent in local currencies. Same-store sales were up by 1.2 percent, scoring worse than the 1.5-1.8 percent increase that had been estimated in January by the company’s chief executive, Andrea Guerra.
Optical retail sales fell by 0.1 percent in North America, with LensCrafters and Pearle Vision up by 1.2 percent and licensed brands, represented by the optical business of three store chains, down by 5.4 percent. Luxottica runs the eyewear operations of the retail groups Sears, Target and BJ’s but the group has decided to end the relationship with BJ’s.
Sunglass Hut’s worldwide sales rose by 1.7 percent on a comparable store basis, with sunwear increasing by 5.7 percent and sales of watches and accessories going down by 38.4 percent, as the group phased out these product categories. Same-store sales rose by 6.3 percent in Australia and New Zealand and jumped 15.7 percent in China.
Until about five years ago, nearly all of the group’s retail business was generated in North America, but now about 20 percent of retail sales are generated outside that region.
Global wholesale revenues, also without Oakley, rose by 16.2 percent in the full year to €1.993 billion. Excluding currency variations, wholesale revenues increased by 19.8 percent. The Ray-Ban brand showed double-digit growth, with its line of prescription frames rising by more than 40 percent, according to Luxottica. The Italian bank Centrobanca has estimated that Ray-Ban’s sales rose by 10 percent in 2007 to €559.2 million, but said the growth slowed down to 9 percent this year.
The Polo Ralph Lauren brand, which Luxottica poached from its rival Safilo and whose first collection was launched last year, generated nearly €90 million in sales, largely in the second half of 2007.
Luxottica’s latest forecast for its future revenues is more optimistic than those of financial analysts, who projected a turnover of €5.59 billion for this year. The company is talking about an overall 2008 turnover of €5.60-5.75 billion, noting that it would even reach €5.75-5.90 billion assuming no change in exchange rates.
Based on constant currency rates, Oakley is expected to contribute €600 million to the group’s total turnover, while the revenues of Luxottica’s continuing operations are seen rising by 4-7 percent. The wholesale side is expected to enjoy a fifth consecutive year of double-digit growth at constant foreign exchange rates.
Luxottica’s chief financial officer, Enrico Cavatorta, stressed that wholesale revenue growth will be «a low» double-digit figure and that the business is expected to improve its operating margin by about 0.50 percentage points compared with 2007, without giving a comparative figure.
North American retail sales are expected to rise by 2-4 percent this year at constant current rates, but the increase at comparable store sales levels should be limited to 0-2 percent. The company expects to achieve a 0.20-0.50 percentage point improvement in the operating margin of its North American retail business.
In Australia and New Zealand, Luxottica aims to raise its sales by nearly 10 percent this year, while boosting the operating margin by 1.0 percentage point. In China, revenues are forecast to soar by more than 20 percent and the operating margin to double. Luxottica expects to break even there this year, after a loss of nearly €10 million in 2007.
The group also shares some forecasts for certain business units. For example, LensCrafters’ revenues are estimated at reach nearly $2 billion in 2008 through its networks in North America and China. The Tiffany brand, launched in October, is expected to generate a turnover of €15 million this year, instead of the €10 million forecast by Centrobanca.
Analysts have predicted that the Chanel license will generate €184-225 million in sales this year. Luxottica has just announced the renewal of this key licensing contract, which was scheduled to expire on March 31. The new agreement will last for at least three years, and three more if certain business conditions are met. The Chanel license represents 3-4 percent of the group’s sales.
Looking further into the future, Luxottica’s group sales are expected to be above €6.1 billion in 2009, still based on the euro being worth $1.45. They should generate earnings before interest, tax, depreciation and amortization (EBITDA) of more than €1.4 billion, while operating profits (EBIT) should lie above €1.1 billion.
The profit forecast for 2008 calls for EBITDA of €1.20-1.25 billion, EBIT of €900-950 million and net debt €2.70-2.75 billion. Net debt is expected to go down to about €2.5 billion in 2009. Depreciation and amortization are expected to reach €300 million a year in both 2008 and 2009. Capital expenditure is also forecast to be about €300 million this year.
Luxottica confirmed that operating synergies with Oakley will reach €100 million in 2010. They should amount to €20 million in 2008 and €60 million in 2009. But Luxottica also plans a negative provision of €25 million for Oakley this year and a further €5 million impairment charge in 2009.