Luxottica's Smart Style


By Eric Wahlgren The future is looking bright again for Luxottica Group (LUX), the world's largest eyewear company. In July, the Milan-based outfit, which makes Ray-Ban sunglasses and owns the LensCrafters and Sunglass Hut chains, successfully outbid a Hong Kong rival for Cole National (CNJ), the name behind Pearle Vision, Sears Optical, and other U.S. eyeglass stores. The $495 million deal solidifies Luxottica's position as the top vision retailer in the U.S., adding roughly 2,900 outlets for a total of about 5,400. Davide Vimercati, an analyst in Milan with Kepler Equities, sees the acquisition as "one of the key drivers of growth."

A year ago, Luxottica's outlook was a lot cloudier. That was when the company lost its license to produce sunglasses for Armani -- the group's most important wholesale production license -- to fast-growing Italian rival Safilo Group, based in Padua. Luxottica's wholesale division represents roughly 40% of its business. Through these licensing pacts, it manufactures upscale shades for designers such as Chanel and Bulgari. But it also makes Luxottica's own brands of sunglasses which, in addition to Ray-Ban, include Revo and Killer Loop.

Luxottica moved swiftly to strike new licensing deals with other designers such as Prada, Versace and Donna Karan. In the first half of 2004, wholesale sales rose 6.6%, to $750 million, Luxottica said in its July 27 second-quarter earnings announcement. "They were able to offset the loss of Armani, which was a tough situation," says Paola Durante, a Merrill Lynch analyst in Milan who, like Vimercati, has a buy rating on the stock. Overall, the first-half results were just as impressive. Net income for the period increased by 12.7% over the same period last year, to $184 million, on 10.8% higher net sales of $1.91 billion.

WORLDWIDE PERSPECTIVE. Despite this strong performance, Luxottica's share price has fallen as stock markets worldwide have taken a beating. The company's American Depositary Receipts (ADRs), which are listed on the New York stock Exchange, are off 3% since Jan. 1, closing at $16.84 on Aug. 10. The benchmark Standard & Poor's 500 index has fallen by about the same amount in the same period. But analysts expect Luxottica's share price to rise as the company continues to turn in strong financial results: Vimercati sees net profit rising 10%, to $362 million, for the full 2004 fiscal year, which ends Dec. 30, on sales that are up by almost 8%, to $3.73 billion.

Durante, Vimercati, and Andrea Bettoni, an analyst in London with Jefferies International, all believe the stock could appreciate about 18% in the next 12 months. (None of the three analysts has any ties to Luxottica). "We are starting to see the positive effects of the new brands on the wholesale business," Bettoni says. "And the Cole National acquisition represents an interesting opportunity to strengthen its U.S. retail position."

The Cole National purchase could pump up Luxottica's earnings by 15% in fiscal year 2006, Vimercati estimates. The key challenge will be to boost the performance of Pearle Vision, the second-largest U.S. retail vision chain, which is less profitable than was No. 1 LensCrafters when Luxottica acquired it in 1995. Analysts are already bullish on the group's acquisition last September of a leading eyewear retailer in Australia and New Zealand, OPSM. Luxottica, notes Durante, "will benefit from all the strategic moves they have taken."

GREENBACK BLUES. Another big plus is new CEO, Andrea Guerra, 39, one of Italy's most admired young managers. Luxottica on July 1 confirmed Guerra was coming on board, announcing that current CEO Roberto Chemello, 50, would stay on as a director. Guerra has been widely praised for leading the international growth of once-struggling Merloni Elettrodomestici, now Europe's No. 3 appliance maker. "Guerra has an excellent reputation and is a choice that makes sense for a company like Luxottica that has a track record of making acquisitions," Vimercati says. "The other plus is that he will likely bring more visibility to the company."

Investing in Luxottica is not without risk, the main one being that it derives more than two-thirds of revenues from the U.S., even without factoring in the Cole National acquisition, so it's vulnerable if the greenback continues to weaken. In general, for every 10% decline in the dollar against the Euro, the outfit's earnings shrink by a similar degree, Vimercati says. Luxottica sunglasses are also considered luxury items, so a wobbly U.S. recovery could clip consumer purchases of shades, further denting revenues. At about 21 times 2004 full-year earnings, moreover, Luxottica's stock is no bargain.

Then again, this is a company with a dominant position in its industry, good growth prospects, and shares that are trading well below 12-months highs. For investors shopping for stocks this summer, it just might warrant a look. Wahglren writes for BusinessWeek Online from Paris


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