While going ahead with the planned friendly takeover bid for the Australian OPSM chain for €327 million, which will end up giving Luxottica a total of 3,415 retail outlets around the world, Leonardo Del Vecchio, the group's chairman, told shareholders last week that the revenue shortfall resulting from his split with Giorgio Armani is well on its way to being absorbed.
The collections licensed by the renowned Italian designer accounted for 20 percent of the group's revenues, but just 4 months into 2003, orders for the group's new lines ? Ray Ban ophthalmic frames, Versace and Versus ? had already compensated for half of this loss. They've been selling well since MIDO and are already on display in the optical stores' windows. By the 3rd quarter, three-quarters of the gap should have been filled, at least in terms of volume, based on the orders in hand, and the 4th quarter should see a return to the former levels of activity. For the full 12 months of 2003, Luxottica expects the new lines to contribute 14 percent of group sales, growing to 20 percent in the early months of 2004.
In spite of the bad results posted in the 1st quarter, with turnover off by 20 percent and margins clipped, Del Vecchio remains relatively optimistic about the results for the entire year. The poor 1st half of 2003 cannot stand comparison with the excellent results of the same period a year ago. Instead, while the 2nd half of 2002 proved extremely tough, the 2nd half of this year looks distinctly positive for the moment. Aside from restoring the balance on the wholesale side, the revenues of the 619 OPSM outlets in Australia and Asia will start to swell the group's revenues. They may also contribute more profit immediately, assuming that the integration of the Australian chain will proceed as smoothly as that of Sunglass Hut International. The process is expected to be completed by the end of the year.
Further acquisitions are a key component of Luxottica's strategy. Negotiations are underway with two-three brands, including ?some pretty influential ones,? and with certain US retail chains. Luxottica wants in fact to raise its market shares in the USA from the current overall level of 15 percent ? 11 percent for prescription eyewear, mainly via LensCrafters, and 35 percent in the medium-high segment of the sunglass market ? but the timing of the planned takeovers remains uncertain. After all, it took two full years to get the OPSM operation off the ground.
With regard to the fashion hosue of Gianni Versace, which is not doing well financially, Del Vecchio has agreed to sit on its board of directors but he doesn't want a stake in the company. The licensing agreement binds Versace to Luxottica for a 10-year term, with a unilateral option for Luxottica to renew it for a further 10 years.
Del Vecchio is not particularly worried about the current state of the sunglass market, which is flat in the USA and declining in Europe, particularly in Italy. Induced by the poor economy, it should recover rapidly unless there's another war or another major health scare on the scale of SARS. The tourist industry - a vital factor for the sunglass market ? is already recovering after its recent downturn, though it's unlikely to climb back to previous levels. The devaluation of the dollar is not a major problem either, though it had a negative impact on first-half results, as while 70 percent of group revenues are in dollars, over 70 percent of its costs are in the same currency.
According to Del Vecchio, the split with Armani occurred because of the designer's insistence on making distribution more selective, particularly in the USA where he wanted the number of outlets carrying his lines cut in half. The Italian entrepreneur thinks that this won't happen with Chanel, whose license expires in December of 2004, because the brand is already distributed exclusively at the top end of the market. Chanel models have been available at cut price recently only because the optical chains have been doing their best to reduce stocks, claims Del Vecchio.
As reported, Armani has left Luxottica's board, although he remains a shareholder. The newly elected board has 9 members as opposed to the original 7, with the addition of Sabina Grossi, chief investor relations manager and a key personality in Del Vecchio's entourage, and of two other directors - Enrico Cavatorta and Mario Cattaneo.