Luxottica said that the launch of the three Armani brands it snatched from Safilo has been excellent and that the labels are expected to generate more or less €130 million in revenues this year, and about 10 percent of that amount was achieved in the first quarter. The brands' impact is expected to be much more visible in the coming quarters.

Taking over from Safilo (see next article), Luxottica signed a 10-year worldwide license agreement, which started in January, for Giorgio Armani, Emporio Armani and A/X Armani Exchange. The Giorgio Armani label alone had already reached 3,000 premium wholesale locations by the end of March, Luxottica's management said. The collection consists of four segments and 37 styles. The Emporio Armani collection has also been shipped to retailers and it will be followed by A/X, which is exclusively for the North American market.

In a conference call with analysts about the results of the first quarter, Luxottica's chief executive, Andrea Guerra, said that the “big expenses” for the Armani brands are over and the second and third quarters will benefit from the collections.

Luxottica raised its global first-quarter sales by 4.2 percent to €1.864 billion. At constant exchange rates, they were up by 5.6 percent, lifted by emerging markets, while southern Europe continued to weigh on the group's performance.

In terms of local currencies, European sales rose by 3.0 percent in the quarter, with northern Europe up by 8.0 percent, lifted by double-digit wholesale revenue growth in France, Germany, and the Nordic countries as well as high single-digit growth in the U.K. Sales in the region were supported by prescription frames. Eastern Europe was the growth engine in the region, increasing by 21 percent. Sales in Russia grew by more than 15 percent.

In southern Europe, the group's sales were down by 10.0 percent. Guerra stressed that the company was expecting weak sales but the quarter turned out to be worse than predicted. Sales in Italy proved to be resilient but they went down in Spain, Portugal and Greece. Sales in Greece have resumed their growth over the past couple of months but Luxottica expects sales in Iberia to remain soft throughout the year. Guerra noted that Italy only represents about 4.0 percent of Luxottica's total revenues, and Spain less than 2.0 percent.

North American sales were up by 4.0 percent in dollar terms, driven by a 9.4 percent increase in wholesale revenues, as the company continued to gain market share there, and by a 3.0 percent increase in comparable store sales.

Luxottica Group Consolidated Income Statement

('000 Euros, Quarter ended March 31)

 

2013

2012

% Change

Manufacturing/Wholesale

780,999

726,794

7.5

Retail

1,083,120

1,061,378

2.0

NET SALES

1,864,119

1,788,172

4.2

Cost of Sales

645,713

622,564

3.7

Selling Expenses

562,685

571,572

-1.6

Royalties

36,170

32,518

11.2

Advertising Expenses

111,553

101,978

9.4

G&A

233,181

225,945

3.2

Net Interest Expense

23,830

31,636

-24.7

Pre-Tax

250,987

201,960

24.3

Tax

90,366

71,061

27.2

Minority Interests

1,387

1,923

-27.9

NET

160,622

130,899

22.7

Euro/Share (Diluted)

0.34

0.28

21.4

Sales in emerging markets were up by 17.0 percent, with Brazil up by 30.0 percent, Turkey by 25.0 percent and China by 20.0 percent.  The company is gearing up for Brazil's sun season, which begins in October and has started local production of Ray-Ban glasses, which are scheduled to be in stores by June. The Vogue collection is enjoying strong sales in Brazil and Sunglass Hut now has 25 stores in the country. In China, Luxottica does not see a slowdown and expects sales to strengthen in the coming years. The company added that 70 percent of the sales growth in the country is coming from the prescription business and 30 percent from sunglasses.

Total wholesale revenues were up by 7.5 percent for the group in the quarter to €781.0 million, indicating further gains in market share. The wholesale division grew by 9.3 percent in constant currencies, with emerging markets up by 19.0 percent, the rest of the world up by 25.0 percent and Western Europe flat. Wholesale growth was generated at 75-80 percent by higher volumes and at 20-25 percent by price and product mix.

In the first quarter, Western Europe represented 37.0 percent of wholesale revenues, North America 26.0 percent, emerging markets 25.0 percent and the rest of the world 12.0 percent.

Luxottica's retail sales went up by 2.0 percent to €1.083 billion. On a currency-neutral basis, the growth reached 3.1 percent. Sunglass Hut grew by 6.6 percent worldwide. Overall, comparable store sales were up by 3.7 percent in the quarter for the group.

In North America, LensCrafters' comparable sales grew by 3.6 percent, while at the licensed brands Sears and Target they fell by 6.3 percent. Same-store sales rose by 8.1 percent in Australia and New Zealand, with OPSM Australia up by 10.0 percent. In China, same-store sales were up by a double-digit rate. Overall, same-store sales were up by 10.0 percent in emerging markets.

The group's operating margin rose to 14.7 percent in the first quarter from 14.3 percent a year earlier. The margin of the wholesale division increased to 24.1 percent from 23.8 percent and is expected to further benefit from the Armani brands and the growth in Brazil, which should offset the cost of integrating Alain Mikli, the French designer eyewear company recently acquired. Luxottica expects the wholesale division to bolster its full-year operating margin by 0.5-1.0 percentage points.

The operating margin of Luxottica's retail business widened to 12.2 percent from 11.8 percent in the same quarter a year ago, with the North America back to all-time highs in terms of profitability.

Adjusted net profits rose by 10.5 percent to €159.0 million in the quarter. Luxottica generated free cash flow of €4.0 million, down from €36.0 million a year earlier, as capital expenditures increased to €69.0 million from €61.0 million and the company paid about €50.0 million in royalties during the period. Luxottica pays some licensing royalties every two to three years and big payments accumulated during the quarter. Net debt rose to €1.816 billion at the end of March, representing 1.3 times Ebitda, from €1.662 billion three months earlier due to the €93.0 million spent to buy Alain Mikli and the €45.0 injected into the Italian retailer Salmoiraghi & Viganò.

Luxottica has to repay €240.0 million in debt this year but had €580.0 million in cash available at the end of March. The company plans to continue its acquisition policy, focusing on emerging markets. It also intends to pursue a dynamic management of its portfolio of licenses, which may lead it to shed or acquire some brands over the next couple of years. To boost the group's financial flexibility, the board of directors has approved a €2.0 billion medium-term note program to issue debt in some countries, excluding the U.S. The bonds will be listed in Luxembourg.