Luxottica said that the situation in southern European markets has been improving, enabling it to book a sales increase of 9 percent in the third quarter for the whole of Western Europe.

In a conference call, Luxottica's chief executive, Andrea Guerra, said that European markets are still progressing at different speeds, with northern Europe growing very fast. But Mediterranean Europe is “really improving,” he said.

The group's wholesale revenues in the Nordic countries, France, Germany and the U.K. enjoyed double-digit growth rates in the quarter. Spain returned to growth while Italy was slightly negative. Sunglass sales of luxury brands in Western Europe were strong, led by Chanel, Dolce & Gabbana, Oliver Peoples, Persol, Polo, Prada and Tiffany. Two house brands, Ray-Ban and Oakley, continued to register double-digit growth. The prescription business outpaced the sunglass activity thanks to the reorganization of the division implemented about three years ago.

Luxottica increased its global quarterly sales by 17.0 percent to €1.783 billion, in line with the expectations of financial analysts. At constant exchange rates, sales were up by 6.7 percent. The top line was lifted by a rise of more than 10 percent of the U.S. dollar against the euro. But the boost received from the strength of the greenback is expected to peter out because the average exchange rate in the fourth quarter of 2011 stood at $1.35 to the euro. The euro is currently worth $1.30.

In North America, which remains the group's largest market, sales growth exceeded the group's initial expectations. In Brazil, which is expected to rapidly become the group's second-largest wholesale market after the U.S following the purchase of Tecnol in January, the integration of local operations with the Luxottica group continues. Guerra said that the introduction about a month ago of Vogue prescription frames, which are produced locally by Tecnol, has been well received in Brazil.

He added that the integration of the sales teams, the engineering upgrade and supply chain reorganization have been completed in Brazil, while the integration of the information technology platform is still under way and is expected to be achieved in the first quarter of 2013. The production of Ray-Ban models in Brazil will start next spring, while the manufacturing of Oakley glasses is scheduled to begin at the end of 2013.

The expansion in Brazil is already underpinning sales and is expected to enhance earnings from 2013, Guerra said.

Luxottica's wholesale division raised its global quarterly sales by 16.5 percent to a record €646.8 million. At constant exchange rates, the increase reached 10.7 percent. The division benefited mainly from an increase in volumes, but higher prices contributed by a quarter to a third of the improvement as a price increase for Ray-Ban, decided in March, and the higher positioning of the group's luxury brands came into effect.

The wholesale division booked double-digit growth in China, Turkey, Mexico, India, Brazil and Eastern Europe during the quarter. Overall wholesale revenues for Ray-Ban, Oakley and luxury brands were up by double digits. In North America, wholesale revenues for Oakley rose by 8 percent in dollar terms.

At constant currency rates, wholesale revenues grew in all areas with Western Europe up by 7 percent, North America 12 percent, emerging markets 22 percent and the rest of the world 3 percent.

In the third quarter, Western Europe represented 36 percent of wholesale revenues, North America 29 percent, emerging markets 22 percent and the rest of the world 13 percent.

Luxottica said that its STARS program, under which it offers to manage customers' stores as if they were its own, taking care of the merchandising and replenishment, has been applied to close to 3,000 doors. The latest country where it was rolled out was Italy, where distribution patterns are more complex than in other developed countries.

The group's retail sales rose by 17.3 percent to €1.137 billion. On a currency-neutral basis, growth was limited to 4.4 percent. Comparable store sales rose by 5.9 percent in the quarter.

Luxottica Group Consolidated Income Statement( ‘000 Euros, Three months ended Sept. 30)

 

2012

2011

% Change

Wholesale

646,8xx

555,1xx

16.5

Retail

1,136,7xx

968,7xx

17.3

NET SALES

1,783,486

1,523,807

17.0

Cost of Sales

596,155

524,657

13.6

Selling Expenses

571,907

505,421

13.2

Royalties

29,350

23,070

27.2

Advertising Expenses

120,023

103,098

16.4

G&A

194,934

152,936

27.5

TrademarkAmortization

22,236

20,090

10.7

Other Net Expenses

33,439

29,268

14.3

Pre-Tax

215,442

165,268

30.4

Tax

76,361

52,990

44.1

Minority Interests

465

1,097

-57.6

NET

139,081

112,278

23.9

€/Share (diluted)

0.30

0.24

25.0

In North America, LensCrafters' same-store sales grew by 2.5 percent, while at Sears and Target they grew by 2.6 percent. Same-store sales rose by 8.5 percent in Australia and New Zealand, with OPSM up by 12.0 percent, while Sunglass Hut (SGH) grew by 8.8 percent worldwide, with North American sales up by 8.4 percent and Mexico up by more than 30 percent. Comparable store sales at Pearle Vision fell by 2.6 percent. The American banner, which is being transformed into a franchising chain, is no longer included in the group tally.

At Oakley's own stores, comparable retail sales were up by 11.4 percent in North America. They were up by 11.0 percent for GMO, the group's South American retail chain.

Guerra noted that SGH had opened a store in mainland China to protect its brand name but there are currently no plans to develop the banner in the country even though it is performing “really well” in Hong Kong.

The group's operating margin rose to 14.0 percent in the third quarter from 13.0 percent a year earlier. The margin of the wholesale division increased to 19.3 percent from 18.9 percent even though it was hit by a 0.40 percentage-point dilution stemming from Tecnol's acquisition. The operating margin of the retail business widened to 14.6 percent from 13.2 percent.

Net profits rose by 30.6 percent to €138.6 million in the quarter. Luxottica generated record free cash flow of €271 million during the period. Net debt stood at €1.887 billion at the end of September, representing 1.4 times adjusted gross operating earnings (Ebitda), a level that the company had expected to reach at the end of the year. Quarterly Ebitda was up by 24.0 percent at €342.1 million.

Looking ahead, Guerra said that the information technology platform of Luxottica's Italian plants would be upgraded in January, one year after the measure was carried out at the group's Chinese plants. He expressed confidence that the upgrade will be seamless but said that inventories will be increased by €15-20 million by the end of the year to ensure that deliveries are not affected.

He added that the first quarter of 2013 would be challenging because of a tough comparison base due to the strong performance posted in the first quarter of 2012. The company will be evaluating potential price increases for Ray-Ban and Oakley in the coming months, he added. Next year's group results will also be supported by the advent of Armani models that are expected to be in the market between February and March. Previously held by Safilo, Luxottica's 10-year worldwide license starts in January.