Luxottica expects sales to post a «mid-single digit» increase in 2010, while operating income will enjoy twice the growth pace of revenues and net profits will rise three times faster. The forecasts are based on constant exchange rates and excluding non-recurrent items. Growth will be patchy, with Western economies showing gradual signs of improvement and emerging markets posting a double-digit increase. In the first two months of the year, comparable store sales in North America were up by 3-4 percent, bolstered by California and the Southeast of the U.S.

The group achieves about 60 percent of its revenues in the U.S., so any additional gains of the dollar against the euro would further underpin Luxottica's consolidated results. Last year, the dollar/euro rate averaged 1.40. Luxottica warned that costs are likely to increase this year, but at a slower pace than revenues.

The consensus of analysts' forecasts currently indicates that 2010 revenues will near €5.3 billion, beating the record €5.202 billion booked in 2008. Ebitda is seen close to €1.0 billion and net profit around €425 million.

In a presentation to the financial community called «Strengthening Our Leadership,» the company outlined its initiatives to return to growth after the retrenchment suffered in 2009 that it described as its «toughest year ever.» The group highlighted four engines of growth: the Oakley brand, emerging markets, the U.S. and Europe and efficiency measures.

Luxottica ended 2009 with a 2.1 percent decline in revenues to €5.094 billion notwithstanding double-digit growth for its home brands Ray-Ban and Oakley. Retail sales rose by 1.0 percent to €3.139 billion and wholesale dropped by 6.6 percent to €1.955 billion.

Group Ebitda slipped by 14.3 percent to €869.1 million, operating income was down by 22.2 percent €583.2 million and net income decreased by 17.1 percent to €314.8 million. Operating income for the retail business was down 14.7 percent at €367.5 million and shrank by 19.2 percent to €355.5 million for the wholesale division.

Eliminating non-recurrent items and the impact of a 53-week fiscal year in certain markets, the decline was less severe, with consolidated Ebitda down by 11.1 percent to €873.9 million, operating profits retreating by 17.3 percent to €588.0 million and net income down by 14.0 percent at €317.9 million. Overall, the group's results disappointed the market, pushing down the share price.

On the upside, Luxottica generated free cash flow of €691 million in 2009 compared with €302 million a year earlier. The improvement was achieved by trimming capital expenditure to €200 million from €296 million as well as lower financial charges, €85 million against €122 million, and taxes, €71 million compared with €266 million. But the most impressive change was the swing of working capital to a positive €181 million from a negative €14 million. Luxottica does not expect working capital to be cash generative this year and its target is to reach break-even.

Thanks to the cash generation, the group cut net debt to €2.339 billion at the end of 2009 from €2.950 billion a year earlier and reduced the debt/Ebitda ratio to 2.7 from 2.9. In 2010, Luxottica aims to further trim its debt and approach a ratio of 2.0 times Ebitda.

The company also decided to increase its dividend by 59 percent to €0.35 per share, representing a total outlay of €160 million. Analysts expect net debt to be close to €2.1 billion at the end of 2010 and the dividend paid from 2010 results to increase further to €0.39 per share.

 

 

Luxottica stressed that the recovery seen in comparable store sales in the fourth quarter in North America continued in January and February. The LensCrafters chain increased comparable store sales by more than 7 percent in the first two months of the year. The company explained that it has been training staff at the chain to be more «entrepreneurial.» Nearly all the increase in sales derives from convincing patrons to buy, because store traffic and the average ticket have remained largely unchanged compared with the previous year. Kerry Bradley, the group's head of North American retail, highlighted that initiatives to bolster turnover in the region have not yet started.

One of LensCrafters's strategic moves is to boost the share of sun products over the coming years to 40 percent of sales from 20 percent currently. Bradley does not expect the approach to clash with Sunglass Hut (SGH) because LensCrafters will focus on prescription sunglasses and will have a smaller assortment than its peer. LensCrafters also has an older clientele than SGH, with the core being aged between 35 and 50.

LensCrafters, which traditionally focused on privately paid purchases, is also seeking to lift traffic by attracting more insured clients, who now represent about 30 percent of its clients compared with 10-15 percent five years ago. Growth in this sector will be underpinned by market share gains by the group's U.S. vision care unit EyeMed, which insures 26 million people and has more than 100 million members through discount programs. EyeMed is expected to have more than 30 million insured clients by the end of the year, according to Bradley.

LensCrafters aims to offer more one-hour services for lenses as well as new improved premium lenses. It intends to attract contact lens wearers, a market that it has ignored so far, and to achieve that it entered alliances with the online contact lens and drugs platforms VisionDirect.com and www.drugstore.com.

LensCrafters has about 1,000 stores and sees the potential for «several hundred new locations.» But the tally is expected to remain virtually unchanged this year and expansion will resume in 2011 with the roll-out of streamlined stores without an optical laboratory. The new format will enable it to establish shops in less patronized areas but that can still be «very profitable» with an annual turnover of $1 million thanks to a leaner cost base.

Oakley, along with Ray-Ban, is expected to benefit from LensCrafters' enhanced sun offer. But the brand will also continue to find support from the integration with the Luxottica group and its own product launches.

Oakley will launch its online site in April for 19 continental European countries and is due to complete its integration with Luxottica in Brazil and South Africa this year. The brand sees room for growth in Europe and is carrying out marketing campaigns in 20 winter resorts in Switzerland, Italy and France to promote its products. In China, Oakley has found a distributor with strong links with department stores.

Oakley wants to leverage Luxottica's expertise to bring products faster to the market as well as develop its women's product range. It will also reinforce its product customization program, which already represents over 25 percent of sales in Oakley stores and online. The brand currently has 23 customizable products. But its chief executive, Colin Baden, believes the number has to increase because in five years' time «customers are going to expect that half the products they buy, they've influenced how it looks in some way.»

Luxottica's chief executive, Andrea Guerra, highlighted that Oakley enjoyed double-digit growth over the past five years and he believes that the brand can maintain that pace for the next five years. He is strongly convinced that Oakley's foray into prescription eyewear will be a significant growth engine.

Ray-Ban, whose sales increased by 11.6 percent last year, is also expected to continue growing thanks to a stronger presence in emerging markets and in prescription as well as the launch of new products. The brand will be supported by the introduction of dedicated sun and prescription collections for emerging markets, with ad hoc price positioning, styling and fitting for local markets, and advertising campaigns to boost brand awareness. Prices in emerging economies would be about 20-30 percent lower than in Europe.

According to Luxottica, Ray-Ban already enjoys a strong image in emerging countries. In India, brand awareness reaches 97 percent for aided responses and 84 percent for unaided answers. The scores total 70 percent for aided recognition and 40 percent for unaided responses in Mexico, 65 and 35 percent in Brazil and 37 and 21 percent in China.

Emerging markets represented about 14 percent of Luxottica's 2009 wholesale revenues and are expected to rise to 20 percent in 2012. The number of stores in those economies is also forecast to increase to 12 percent in 2012 from 6 percent in 2009.

Luxottica also intends to introduce further technology and «rare prints» for Ray-Ban, which can add €40-50 to the tag price of a frame compared with a base product.

In 2010, the group will also launch its STARS partnership program in Latin America and India, as well as increase it in Italy, France, Spain and the U.K. The scheme includes the automatic replenishment of stores and generates about 30 percent higher profitability than the wholesale average. The program currently covers 1,049 selected stores and is scheduled to reach 3,000 in 2012. Half of the 700-800 stores the group plans to add to the scheme this year half will be located in Europe and the remainder in emerging markets.

Sunglass Hut will continue to build up its network by expanding in new distribution channels such as department stores and travel retail, which could add 250 stores in 2010, as well as entering new markets in sunny climates. By the end of 2011, agreements with department stores in North America, Australia and South Africa could add more than 500 new stores.

The chain also wants to change its business approach to become «a high-churn model» with a fast-flow in new products and rapidly unloading unsold goods to its nearly 200 outlets. The time lag between launch and the markdown of products will be cut to four months from nine to 12 months, but the discount will not be much higher than the existing one.

SGH plans to have six collection launches this year compared with three in 2009. In the future, it aims to have 10-12 annual launches and even possibly organize a couple per month at the height of the season. Luxottica argues that SGH is not competing with other eyewear companies but with other product categories, so holding launches every four to five weeks is the correct timing to attract clients. SGH will benefit from a 30 percent increase in marketing spending this year. It will also open a flagship store on New York's Fifth Avenue on April 2.

Guerra noted that «rich people are back in the stores» and the group's high-end Ilori sunglass stores registered a 15 percent increase in comparable sales at the beginning of the year. The company noted that overall demand for luxury goods is picking up even though clients are focusing mainly on entry-level prices around €200 a pair.

In wholesale, the group noted that its revenues are skewed toward sunglasses, which represent around 65 percent of revenues compared to 35 percent for prescription, while in the global eyewear market sun products represent 40 percent and prescription 60 percent. Prescription being a larger and more resilient segment than sunglass, Luxottica underlined the need to grow in the former by jointly promoting Ray-Ban and Oakley's sunglass and prescription eyewear. The company reckons it could rebalance its wholesale revenue split toward 60 percent for sunglasses and 40 percent for prescription.

Luxottica will pursue its «transformation program» to install a single information technology system for the whole group. Launched in 2008, program is scheduled to be half completed by the end of the year and finalized in 2012. It is due to reduce back office and procurement costs, and cut the number of distribution centers from 23 in 2009 to 18 in 2010 and ultimately to nine. The reorganization is expected to permanently slash inventory levels by 20 percent.

Guerra added that 2010 will not be a year of large acquisitions as the group will concentrate on organic growth and boosting efficiency.