Luxottica has a signed a 10-year licensing deal with the Prada Group for the exclusive production and distribution of frames and sunglasses under the Prada and Miu Miu brand names and bought some assets of Eyewear International Distribution (EID), Prada's 3-year-old joint venture with De Rigo, for €26.5 million, including its subsidiaries in Italy and Luxembourg. Its other 4 subsidiaries will be closed. De Rigo's Prada licenses were to expire in Semptember of 2005.
The move, which is expected to add about €120 million in sales to Luxottica's turnover in the first 12 months of the deal, followed the sale by De Rigo of its own 51 percent stake in EID to Prada for €8.4 million, plus some receivables. In the last year, EID turned out an operating loss of €0.9 million on sales of €31.3 million, mostly through agents and distributors. De Rigo will continue to manufacture some old models from EID's collection as a subcontractor of Luxottica, which will take over EID's inventories next week and start distributing them globally in September.
Luxottica, which has been helping to sell Prada and Miu Miu eyewear in the USA and Japan, feels it can increase widely and quickly the market penetration of these two brands worldwide, thanks to its own extensive wholesale and retail network. The distribution will not be as selective as that of Chanel, which represents less than 5 percent of Luxottica's total sales and is subject to renegotiation of a licensing agreement expiring at the end of 2004.
Revenues from Prada and Miu Miu eyewear will not be as high as those obtained from the Giorgio Armani and Emporio Armani licenses, which expired in May and went over to Safilo, but margins should be comparable. Combined with the acquisition earlier this year of Gianni Versace's licenses, the new deal and the introduction of new lines like Ray-Ban's ophthalmic and junior collections, which are doing better than expected, should make up for the loss of the Armani business, which still contributed €50 million in revenues during the 1st half of this year.
In fact, Luxottica's management states that it's not interested in any new acquisitions in the wholesale sector, as its production capacities in Italy are now fully utilized, although its own Chinese facility can handle some extra volume. On the other hand, Luxottica continues to look for suitable acquisitions in the US retail market that would raise its market share in that country and complement the businesses of LensCrafters and Sunglass Hut International.
Factoring in also the extra business and the synergies that it could obtain by taking over OPSM Group, Luxottica is looking at a possible increase of about 15 percent in turnover and profits as of 2004, resuming its former strong growth. Luxottica currently supplies only 10 percent of the sunglasses sold by OPSM in the South Pacific and Asia. Some staff consolidation can be envisaged as Sunglass Hut already has 134 stores in Australia, 19 in New Zealand and 4 in Singapore. Worldwide, Sunglass Hut has 1,898 stores and 13 new ones are in the pipeline for the rest of the year. LensCrafters has 873 stores in the USA and plans to add 20 doors by year-end.
Luxottica formalized its friendly bid for the Australian-based retail chain last June 16, but while Australian regulatory authorities have endorsed it, the Italian company has already been forced to extend twice the duration of the tender offer, which now expires next Aug. 15. It had do so in spite of an additional cash offer of 3.80 Australian dollars (e1.72m-$1.96m) a share promised by OPSM's board on July 2 to shareholders who accepted Luxottica's before July 18, in addition to a guaranteed special dividend of 10 cents a share.
Observers wonder whether shareholders are really satisfied with the 21.9 percent premium offered by Luxottica over OPSM's latest stock market price, considering that one of the bearish factors, the SARS epidemic in Asia, is being gradually eliminated. One major shareholder who raised its stake to 5.255 percent last Apr. 23 reportedly stated that it was not selling at this price, which values OPSM at the equivalent of €309 million or 8 times expected Ebitda. OPSM had sales equivalent to €130 million in the 6 months ended last Dec. 31.
In publishing relatively poor results for the 2nd quarter two days ago, Luxottica indicated that 2003 will remain a year of transition, with net earnings likely to remain at around €280 million from €373 million in 2002. In the quarter, the group had a consolidated operating margin of 15.8 percent on 19.6 percent lower revenues of €707.0 million, largely due to the weak dollars, and its consolidated net income fell to €67.7 million or 15 cents a share and a net margin of 9.6 percent. Assuming constant exchange rates, revenues would have declined by only 5.2 percent.
For the full 6-month period ended June 30, consolidated sales were down 19.8 percent to €1,411.5 million, or a 5.9 percent drop in local currencies. The gross margin declined to 69.3 percent from 71.0 percent in the year-ago period. Operating income fell from 19.6 to 15.8 percent of sales. The net margin decreased from 12.1 to 9.4 percent.
Aiding somewhat the bottom line, Luxottica spent only about 7 percent of sales on advertising in the period, as compared to 7.6 percent a year ago, focusing mainly on new collections. Debt was reduced by €53.3 million to €1,200.8 million and interest rates were cut in half from a year ago.
In the manufacturing and wholesale division, which had an operating margin of 22.0 percent, revenues declined by 13.8 percent in the 6-month period to €573.0 million, with a 5.3 percent drop in local currencies, but according to Luxottica, the eyewear industry performed even worse as a whole. North America was the weakest region for the group and its high-fashion brands had the toughest time in the market.
The group's retail sales went down by 20.2 percent to €940.0 million, with a 2.5 percent drop in local currencies and a 3.4 percent sales decline on a same-store basis. The operating margin fell to 13.0 percent from 16.0 percent in the year-ago period. Aside from the economy and the war in Iraq, one negative factor was the abnormally cool and rainy weather in the USA in the 2nd quarter, which contributed to a same-store sales decline of 3.7 percent for LensCrafters and Sunglass Hut during the period. Yet, despite the weather, Sunglass Hut performed slightly better overall than its companion in the quarter.
Immediately after the change of weather early this month, retail consumption picked up, resulting in a 2 percent sales increase on a same-store basis for the group. Luxottica has noticed an improvement in retailers' orders at whole since the beginning of June in the USA and Europe, indicating that they may have sold out the surplus inventories accumulated in 2002.