Luxottica enjoyed a 6 percent rise in sales to €1.392 billion in the first quarter thanks to higher volumes and an improvement in the price mix. But the performance was dampened by a slip in the gross profit margin of its wholesale operations due to a change in accounting rules and additional inventories. At constant exchange rates, consolidated turnover rose by 7 percent.
In the quarter, the group's price mix fell by 1.5 percent, which was less than the company was expecting, but showed an improvement compared with the last six months of 2009. Luxottica noted that the premium and luxury segments picked up in the quarter and now believes it can finish the year with a slight increase in the average selling prices.
Gross profit increased by 3.5 percent to €891.9 million but the margin on sales shrank to 64.1 percent from 65.6 percent a year earlier. In conference call, the group's chief executive, Andrea Guerra, said he was not worried about the margin dilution. He added that the margin will pick up in the second quarter thanks to further improvement in the price mix and industrial efficiencies.
Overall, the group's results were roughly in line with the consensus of forecasts made by financial analysts, which indicated revenues of €1.370 billion, Ebitda of €247 million and a net profit of €98 million.
In the quarter, Luxottica booked an Ebitda of €242.6 million against €227.0 million a year earlier, an operating income of €171.2 million compared with €154.2 million, and a net profit of €95.1 million versus €78.8 million. The operating margin soared to 12.3 percent of sales from 11.7 percent as operating costs grew less than sales, up by 2.0 percent to €720.7 million.
Guerra said the results are a solid and promising start to the year. He added that he is optimistic about 2010 but remains cautious. He stressed that the business environment and consumers are more selective and not all brands and markets ?will make it.? Luxottica's guidance for the full year is a mid-single-digit increase in sales, while operating income is due to enjoy twice the growth pace of revenues and net profits should rise three times faster. The forecasts are based on constant exchange rates and exclude non-recurrent items.
In the first three months of 2010, Luxottica's wholesale business increased revenues by 10.4 percent to €553.5 million. Its operating income was up by 14.4 percent to €120.1 million, bolstering the margin to 21.7 percent from 20.9 percent. April was also a strong month for wholesale, but growth was slightly below the average for the first quarter.
At constant exchange rates, wholesale turnover was up by 9.1 percent, increasing by 7.8 percent in Western Europe, declining by 0.6 percent in North America, rising by 30.2 percent in emerging markets and growing by 14.2 percent in the rest of the world.
Western Europe represented 49.5 percent of the wholesale business, North America 21.2 percent, emerging economies 13.8 percent and the rest of the world 15.5 percent.
U.S. sales were hit by Luxottica's decision not to carry out a transaction with a large wholesale client but are expected to enjoy a recovery in the growth rate in the second quarter. The group's home brand Oakley increased wholesale turnover by 10 percent in North America, while sales of Ray-Ban's prescription collection jumped by 20 percent. Worldwide sales of the two home brands reached double-digit growth, with Oakley in the «high teens,» Guerra noted.
European wholesale revenues were underpinned by a flurry of special launches for Burberry, Chanel, Dolce & Gabbana, Persol, Prada, Ray-Ban and Versace. All European markets enjoyed growth, but Mediterranean countries underperformed. Luxottica is monitoring the situation in Southern Europe and warned that it may not be able to maintain the same growth pace in those countries in the near future. This is especially true of Greece and Spain, where the economy is not in good shape. In emerging markets, Luxottica registered a solid growth trend in all markets, especially in China.
The group's retail operations pushed up sales by 3.4 percent to €838.2 million. At constant currency rates, the increase reached 5.6 percent. Operating income rose by 6.8 percent to €88.0 million, boosting the margin to 10.5 percent from 10.2 percent a year earlier.
Globally, Luxottica's comparable store sales were up by about 3.5 percent, but the growth rate declined slightly in April due to a slowdown at Sunglass Hut (SGH). In the first three months, SGH's worldwide comparable store sales soared by 8.1 percent.
In North America, quarterly comparable store sales were up by 6.6 percent at LensCrafters, up by 3.4 percent at Sears Optical and Target Optical, up by 10.8 percent for SGH and up by 14.9 percent at O Stores. The region saw a strong rebound in sunglass sales, including Florida and California where sales had dropped last year. At LensCrafters, comparable sunglass sales were up by 10.3 percent. The upmarket retailer saw an increase in traffic, an «excellent» conversion index (representing sales achieved with people visiting the store) and an improvement in the sale of multiple pairs of eyewear during the quarter. The sales pace remained strong in April at the chain.
Comparable sales went down by 12.2 percent at Pearle Vision in the first quarter because of the high revenues generated a year ago by an aggressive promotion, but the chain was back to positive comparable figures in April. Guerra warned that the growth rate seen in the North American retail business in the four months to April is not sustainable for the rest of the year but will remain positive.
In Australia and New Zealand, optical sales plummeted by 11.9 percent, partially due to a tough comparison base.
For the second year in a row, Luxottica achieved positive free cash flow in the first quarter. Cash generation totaled €43 million thanks to the containment of its working capital and a cut in capital expenditure. Usually, the group books a negative cash flow in the first quarter for seasonal reasons.
Net debt rose to €2.421 billion at the end of March from €2.337 billion at the end of 2009 as the dollar's surge against the euro bloated the value of dollar-denominated liabilities. Excluding the impact of exchange rates, the debt ratio fell to 2.7 times Ebitda from 2.8 times in December. Luxottica confirmed its target of trimming the debt ratio toward 2 times Ebitda, at constant exchange rates, by the end of 2010.
The company granted 1.92 million stock options to a selected group of employees. It also awarded rights to senior managers to receive a combined 865,000 shares if the firm achieves certain earnings targets over the next three years. The bonus to managers is expected to cost about €18 million.