Luxottica has decided to reduce investments by about €50 million to less than €300 million this year in an effort to maintain its profit margins, which were trimmed by the dollar's weakness against the euro and the slowdown of the U.S. economy.
In North America, where the group has about 80 percent of its retail business, the group intends to open slightly more than 100 new stores this year compared with an original target of 150 and almost 400 openings in 2007. The company kept unchanged its investment plans in emerging markets and for the so-called ?New Journey? projects linked to the integration of Oakley.
To the surprise of many observers, the management reiterated its 2008 guidance of earnings per share of €1.11-1.14 based on a euro worth $1.45. In the first quarter, the European currency traded at an average of about $1.50. Nevertheless, Luxottica's chief executive, Andrea Guerra, did give a caveat, indicating that it is difficult to imagine the euro averaging $1.45 in 2008. A 10 percent fall in the greenback knocks 9 percent off the group's EPS.
In the first quarter ended March 31, group sales rose by 7.6 percent to €1,399 million. The increase reached 16.6 percent at constant currency rates. Last year's figure did not include Oakley, which was bought in November last year. When adding Oakley to last year's tally, the year-on-year comparative is a negative 3.2 percent after currency conversions. But in North America, the company's largest market, turnover, including retail and wholesale, grew on a pro forma basis in dollar terms by 2.7 percent to $1,163 million.
Luxottica's retail and wholesale businesses followed different trends, with the former affected by the weakness of the dollar and U.S. economy and the latter boosted by the acquisition of Oakley and strong growth in all markets. For the retail business, revenues dropped by 6.5 percent to €779.1 million, although on a currency-neutral basis they rose by 4.8 percent.
In North America, comparable store sales for the LensCrafters and Pearle Vision chains fell by 3.1 percent. On a same-store basis, the turnover was down by 1.8 percent at the group's sunglass stores and off by 8.4 percent for the licensed brand stores, with a positive score at Target and a negative score at Sears. Overall, the drop in comparable store stores for North America was about 4.0 percent against a 3.0 percent decline worldwide.
On a comparable store basis, Luxottica's optical retail sales fell in Australia and New Zealand by 1.0 percent and rose by 9.6 percent in China. Global comparable store sales for Sunglass Hut declined by 1.6 percent.
Luxottica estimates that its U.S. sunglass stores gained market share and that LensCrafters and Pearle Vision maintained their positions as they outperformed North American department stores and specialty stores, which booked a 5.0 to 10.0 percent drop in eyewear sales in the quarter, respectively. The trend in the USA was patchy, with the Eastern and Southern states performing better than the Great Lakes region and the Western states.
Luxottica also indicated that even though client traffic is slowing down in the USA and ?economically challenged? customers are delaying purchases, affluent customers continue to buy frames, and are even ready to trade up on lenses, but are less inclined to buy a second or third pair of glasses. This has led to an increase in the average value in transaction for the group.
The slowdown in the USA affected the profitability of the group's retail business, whose operating margin declined to 8.6 percent of sales, 3.6 percentage points lower than results reported in the first quarter of 2007. However, when including Oakley on a pro forma basis, the drop narrows to 3.2 percentage points.
To tackle the U.S. slowdown and lift profitability, the group is cutting costs. It has moved staff to weekend shifts when customer traffic is higher. At LensCrafters the average shift has been cut to 4.4-4.6 people from 5.0 last year.
Luxottica is also more aggressively pushing entry-price level products, while spreading out best practices to bring bottom and medium performing stores to the level of its top-tier shops. At senior level, each retail brand will be overseen by an executive general manager with a dedicated team.
Guerra expects the measures to be fully implemented by May 15. He claims that the group has been fast at introducing a contingency plan to offset tighter business conditions, but nevertheless admitted that the group should have acted 30 or 45 days earlier. He reckons that the retail business will no longer experience the sharp volatility it went through in the fourth quarter of 2007, even though it will continue to suffer ?some slight ups and downs.?
Guerra added that overall performance of the retail business improved in the month of April compared with the first quarter and that the average decline in comparable store sales could reach 2.0 percent for the full year.
Meanwhile, Luxottica's wholesale business raised its sales by 32.9 percent in the first quarter to €619.6 million, boosted by Oakley. At constant currency rates, the rise totaled 37.6 percent. Sales in Europe, which represented 58.3 percent of the turnover of the wholesale operations, increased by 17.0 percent at constant currency rates. Revenues in the Americas were up by 85.7 percent at constant exchange rates and increased by 68.4 percent for the rest of the world. The Americas came to represent 24.9 percent of the division's turnover and the rest of the world 16.8 percent.
The Ray-Ban and Oakley brands booked double-digit growth. Sales were also underpinned by the launch of the Tiffany brand, which is now present in the USA and Japan, and will be gradually distributed in other regions. The Polo Ralph Lauren brand, which was launched last year, also performed well and is now available in Europe, impacting new orders from July. To further boost sales at Ray-Ban, Luxottica has introduced more than 30 color frames for its Wayfarer model.
The wholesale business benefited more than retail from Oakley's takeover, because the latter is skewed toward sales to third parties. In 2007, wholesale revenues represented 77 percent and 82 percent of Oakley's turnover and operating profits, respectively, compared with 38 percent and 59 percent for Luxottica on a stand-alone basis.
Nevertheless, Oakley also had a negative impact on the wholesale business in the first quarter because of the U.S. company's lower profitability and the fact that it achieves most of its sales and operating profits in the second and third quarters, due to its focus on sunglasses, while Luxottica performs better in the first and second quarters. In 2007, Oakley achieved 20.7 percent of its sales and 9.3 percent of its operating income in the first quarter, compared with 27.5 percent and 28.6 percent respectively for Luxottica.
In the first quarter, Luxottica's wholesale operating profit rose to €172.8 million but the operating margin declined to 24.3 percent of sales, down by 3.2 percentage points from the figure reported for in the first three months of 2007 but up by 1.0 percent on a pro forma basis. Overall, Luxottica booked group operating profit of €207.1 million, representing 14.8 percent of sales. The margin is 2.4 percentage points lower than the figure reported a year earlier but the decline shrinks to 0.8 percentage points on a pro forma basis.
Synergies from the purchase of Oakley boosted earnings by €2 million in the first quarter but integration costs reached €4 million, less than the €7 million initially expected as some of the charges slipped to the second quarter, when they are now expected to reach €11 million. Overall, the annual one-off costs stemming from the integration of Oakley remain unchanged at €25 million in 2008 and operating synergies are still estimated at €20 million.
Net profits declined to €103.7 million in the first three months from the €128.3 million reported a year earlier, with an EPS dropping to €0.23 from €0.28.
Luxottica anticipates that from the second half of the year its results will benefit from the effects of its cost-cutting efforts, an increase in operating synergies with Oakley and a 53-week year. The additional trading week is expected to add about $10 million in operating profits. The group will also enjoy easier comparatives thanks to the 3.0 percent decline that its retail operations suffered on a same-store basis in the fourth quarter of 2007.