Luxottica is going to produce more outside Italy and explore expansion opportunities in high-growth markets such as China and Russia under the management of Andrea Guerra, the company's new CEO, who addressed analysts a few days ago in presenting excellent results for the company in 2004. However, strong sales growth in the 4th quarter was not matched yet by a corresponding increase in profit margins.

For the quarter, Luxottica reports a 31.0 percent sales increase to €941.7 million, or 41.7 percent up on a currency-neutral basis. While retail sales advanced by 37.3 percent to €730.1 million, with a 4.1 percent increase in comparable store sales, the wholesale business recorded a hefty 16.7 percent increase to €258.7 million. However, operating income for the period was up by only 5.5 percent to €104.5 million, or a margin of 11.1 percent, while net income remained practically stable at €59.8 million - an increase of 0.2 percent that took the net margin down to 6.3 percent of sales.

For the full year, the consolidated operating margin (Ebit) remained stable at 15.3 percent of sales, but the group's net income increased by 7.3 percent to €286,874,000 on 14.1 percent higher revenues of €3,223.9 million, indicating a slight decline in the net margin from 9.5 to 8.9 percent of sales. The pre-tax margin improved from 13.8 to 14.2 percent.

Manufacturing and wholesale operations showed an operating margin of 21.3 percent, up from 19.2 percent in the previous year. The operating margin of Luxottica's retail operations instead dropped only slightly to 13.4 from 13.5 percent of sales, mainly because of the dilutive effective of the group's acquisition of OPSM Group in Australia.



The group's total revenues would have increased by 21.6 percent during the year assuming constant exchange rates. Retail sales rose by 15.7 percent to €2.3 billion, thanks mainly to OPSM, but on a same-store basis, retail sales were up by 4.2 percent. The loss of the Armani licenses didn't prevent the group from reporting a 10.0 percent increase in wholesale revenues to €1,094 million.

The management stresses that all the group's optical and sun retail brands improved their market shares and their profitability, in stark contrast with prevailing market trends.

The €600 million acquisition of Cole National, plus dividend payments of €95.5 million, raised the group's net debt up by €240.9 million to €1,711.3 million last year. The forecast for 2005 calls for a total turnover of between €4 billion and €4,150 million and for earnings per share of €0.68-0.70, equal to net income of € 306-315 million. The wholesale business is expected to grow by 6.5 percent. Retail sales are budgeted to increase by 13 percent in local currencies, or by 5 percent on a same-store basis, reaching an operating margin of about 14 percent. The equity ratio should go down to between 2 and 2.2 times operating income before amortization and depreciation (Ebitda), as compared to 2.6 times at the end of 2003 and 2.7 times at the end of 2004.

Most of the sales improvement will come from the acquisition of Cole National, which is also expected to raise to nearly 50 percent the number of frames coming from Luxottica by the end of this year. The company will try to differentiate its Pearle Vision brand from that of LensCrafters and it will try to improve the product offerings for Cole's licensed optical counters at Sears, Target and BJ's. About 25 percent of Target's locations will be closed by the end of this year because of insufficient profits. Cole National's headquarters will be closed and the group will try to take its best people to its LensCrafters/Sunglass Hut head office in Cincinnati.

Big opportunities for future expansion in the USA, where Luxottica now has a market share of about 20 percent, are seen by the fact that the country's population over the age of 55 is expected to grow by 33 percent by 2015 and by its growing attention to fashion. Franchising will be a tool. In China, the number of target customers could double or triple in the next few years, and OPSM's now profitable network of stores in Hong Kong may be used as a platform to enter that large promising market.

The group's new involvement in the mass market will probably lead it to reduce from 85 to 75 percent the amount of products sourced from Italy over the next 12-24 months. On the other hand, the higher economies of scale reached in the USA will lead Luxottica to take a stronger role in the supply of lenses and coatings from its own laboratories, using new technologies and generating higher margins for the group.

Meanwhile, Luxottica is going ahead with the compulsory redemption of the shares it still doesn't own in OPSM Group. At the end of a tender offer launched for these shares last Jan. 4, Luxottica held 98.5 percent of the Australian group's equity. The bid will cost the company a total of about €62 million once the transaction is completed, probably around March 23. The stock was de-listed last Friday.