The world's largest eyewear group believes that the market may be stabilizing after experiencing deteriorated trading conditions between September and February. Meanwhile, Luxottica surprised financial analysts with a relatively strong set of first-quarter results that beat their expectations and pushed the share price up by more than 10 percent last Friday.
Net income dipped by 22.5 percent to €80.4 million, beating forecasts made by financial analysts of a bottom line profit of €62 million. Most strikingly, quarterly results were marked by a positive free cash flow of €78 million compared with a negative flow of €20 million a year earlier. Traditionally, Luxottica books a negative cash flow in the first three months due to the absorption of working capital.
Thanks to cost-cutting and efficiency measures, Luxottica reduced its working capital needs to €35 million in the quarter from €150 million a year earlier. Capital expenditures were also trimmed to €45 million from €50 million.
To align production with falling demand, Luxottica reduced manufacturing in Italy by 25 percent in the first quarter. The company said temporary production stoppages are now over in its factories and production levels will be about 10 percent lower in the second quarter compared with the same period last year.
After difficult market conditions in the first two months of the year, Luxottica experienced an improvement in customer traffic in North America and a pick-up in replenishment orders made over the phone or by internet across Europe during the month of March.
In April, the group booked a 9 percent increase in sales, boosted by growth in Australasia, Latin America and continental Europe and a stabilization of business conditions in North America. However, the Spanish and Japanese markets continued to perform poorly. So, after seeing first-quarter revenues drop by 6.2 percent at current exchange rates, and fall by 11.6 percent at constant rates, to €1.312 billion, Luxottica limited the decline to 3 percent over the first four months of the year.
Andrea Guerra, the company's chief executive, pointed out that the company is not yet back at the level of growth of the past few years. He said the visibility over future performance remains low at between two to three weeks. Guerra expects second-quarter results to be better than those of the first quarter but he did not rule out that the improvement in market conditions could be only temporary, and stressed that the group continues to have contingency plans ready if the business environment were to sour again.
Among the positive elements seen in the past weeks was an improvement in client traffic, which in the last 45 days has been in line with the same period last year in North America. Overall in the first three months, clients preferred the group's more economical retail chains and shunned LensCrafters. The chains Pearle Vision, Sears and Target showed ?very positive? results during the whole of the quarter, while LensCrafters only started to see a positive trend in March.
In North America, combined comparable store sales for LensCrafters and Pearle Vision were down by 7.7 percent year-on-year in the quarter, while comparable store revenues were up by 9.5 percent for licensed retail brands. In Australia and New Zealand, comparable store sales rose by 1.5 percent, while the global same-store revenues of Sunglass Hut went down by 10.3 percent.
Sunglass Hut's worst performances were in the U.S. and the Middle East, while the brand enjoyed double-digit growth in Australasia, Hong Kong, Singapore, Thailand and South Africa. In the U.S., Sunglass Hut's sales dropped by about 15 percent in the first quarter, but improved in April, falling by only 10 percent.
Luxottica's total retail sales rose by 4.1 percent in local currencies, but fell by 5.0 percent at constant exchange rates, to €810.8 million. Sales were underpinned by advertising on television. Luxottica cut its total advertising budget by about 12 percent, but concentrated expenditures on television commercials. The decision seems to have paid off, Guerra said. For the full year, advertising expenses should be reduced by 10 percent compared with 2008.
Medical insurance programs also kept Luxottica's retail sales afloat, offsetting the decline in «free to choose» purchases, the company said, adding however that in April there was a change in the trend and purchases by clients of managed vision care were slacking while those carried by free-to-choose customers were picking up.
In April, LensCrafters launched a new advertising campaign aimed at broadening the retailer's customer base. The purchase of multiple pairs of frames continued to decrease at LensCrafters, falling by 19 percent during the quarter. But there again, the trend reversed in the past weeks and LensCrafters recouped in the last two months half of the decline in multiple purchases experienced in the first two months of the year.
Luxottica is continuing the review of its locations and has already closed about 35 Sunglass Hut stores. As the group enters the ?sun season,? Sunglass Hut will be focusing on Ray-Ban, Oakley and Prada as well as on polarized lenses. The retailer has introduced a new incentives program for salespeople and will be continuously refreshing its product assortment in its best locations as well as offering exclusive products.
The group's wholesale revenues dropped by 19.0 percent to €501.6 million, or by 19.8 percent at constant exchange rates, as clients decided to cut inventory levels. The company believes that destocking by clients is practically completed: since March the order intake has been positive, reaching single-digit growth in March and April compared with a more than 20 percent decline in January and February.
The pick-up in wholesale orders reflected a recovery in Europe, which represented 54.5 percent of the unit's revenues in the first quarter. European wholesale sales dipped by 22.3 percent in the quarter at constant currency rates.
The Americas represented 30.3 percent of wholesale revenues, which went down by 7.6 percent, and the rest of the world totaled 15.2 percent of sales, which fell by 29.2 percent.
Luxottica said that the launch of its new optical collections has been very well received and that it is seeking to accelerate shipments.
The group's house brands Ray-Ban and Oakley continue to perform better than its luxury brand licenses. The optical Ray-Ban collection launched in 2003 now represents 20 percent of the brand's sales, and according to Luxottica, Ray-Ban is now the largest optical brand worldwide.
Oakley increased its revenues by 7 percent in dollar terms. The optics business enjoyed a mid-single digit growth, while the apparel, footwear and accessories (AFA) activities booked double-digit growth.
Luxottica indicated that nearly 1,000 retailers have joined its affiliation program STARS. The group launched the scheme about a year ago and offers to manage its wholesale customers' stores as if they were its own and takes care of the merchandising and replenishment.
The firm's operating income before amortization (Ebitda) fell by 16.6 percent to €229.6 million in the first quarter. The operating income shrank by 24.3 percent to €156.7 million, dragged down by a 32.8 percent fall in the wholesale business to €105.3 million and by a 1.1 percent decline in retail to €83.6 million.
Guerra confirmed the firm's policy of seeking «minor but important alliances in some parts of the world.» In November, Luxottica reached a franchising deal with the real estate developer DLF Group to open more than 100 Sunglass Hut stores in high-end malls and premium locations across India.