Even before the publication of Luxottica's sales results and Andrea Guerra's interview with an Italian newspaper, Standard & Poor's (S&P) raised Luxottica's long-term credit rating to “A-” from “BBB+,” with a stable outlook. The company continues to be considered more trustworthy than Italy, whose long-term debt is rated “BBB” by S&P.
The international rating agency confirmed its “A-2” rating for the group's short-term debt. Arguing that Luxottica's financial risk profile is “modest,” S&P underscored the group's “leadership positions in the profitable and fast-growing eyewear industry.”
S&P noted that a substantial portion of the group's sales stem from house brands, and that its prices are highly diversified, ranging from €80 to €300 per frame, with a focus on the middle of the range.
S&P estimates that Luxottica's vertical integration helps reduce its business risk and that its retail business is a sound contributor to profits, giving the group access to the profitable and stable U.S. prescription frame market.
The rating agency said that Luxottica is benefiting from the eyewear industry's fragmented competition, strong growth prospects, low market penetration, and huge untapped potential, especially in emerging markets. However, the company faces some volatility in earnings due to its exposure to the luxury and sunglasses market segments, which are less predictable than the prescription eyewear market.
With an expected free cash flow of more than €750 million over the next couple of years, the group can easily finance dividends and bolt-on acquisitions, according to S&P. The company could spend about €200 million a year in the future on acquisitions.
Under S&P's criteria, Luxottica rating could be lowered if Italy's rating is cut by three notches or more. S&P said that it may lower Luxottica's rating if sizable acquisitions or share buybacks lead debt to exceed a ratio of twice annual Ebitda, but S&P does not see Luxottica making any large acquisitions in the foreseeable future.
S&P's analysts feel that the growth in the sector is primarily driven by favorable market conditions in emerging markets, and they have not identified any major potential acquisition target. Evidently, they are excluding the option of a diversification by Luxottica into the ophthalmic lens market in a big way.