By  on July 29, 2009

MILAN — Still reeling from “an extremely difficult January and February,” Luxottica Group SpA posted a 12.7 percent drop in net profits to 115.7 million euros, or $158.5 million, in the second quarter, compared with 132.6 million euros, or $181.6 million, in the same period the previous year.

However, a well-balanced brand portfolio and the performance of the Ray-Ban and Oakley brands in both their sun and optical businesses helped drive sales up 3.5 percent to 1.4 billion euros, or $1.92 billion, compared with 1.34 billion euros, or $1.84 billion, in the second quarter last year. Currency conversions were made at average exchange for the respective periods.

Luxottica, which has eyewear licenses with Bulgari, Burberry, Chanel, Dolce & Gabbana, Donna Karan, Prada, Salvatore Ferragamo and Versace, among others, said the economic environment today “is less uncertain albeit certainly still challenging,” with North America “still suffering,” although June results were positive. The European market is picking up, Luxottica said, while business in Japan fell, as did emerging markets, “affected by the decline in the tourism industry.”

Earnings before interest, taxes, depreciation and amortization (EBITDA) dropped 5.9 percent to 277.3 million euros, or $378.9 million. Operating income dropped 10.5 percent to 206 million euros, or $282.2 million.

“We outlined our priorities for 2009 from the very beginning: a solid financial position and an immediate search for a new equilibrium and efficiencies in manufacturing and distribution, while maintaining our commitment to growth and the search for new solutions that would support the long-term growth of Luxottica,” said chief executive officer Andrea Guerra.

The executive pointed to the spike in sales and the group’s free cash flow of 260 million euros, or $356.2 million, reached through tight control over working capital. “The very positive results achieved to-date allow us to be more confident going into the second half of the year, thanks to a less challenging scenario overall,” said Guerra.

Luxottica also secured a 10-year extension to the license agreement with Gianni Versace SpA for the company’s signature brand and Versus optical frames and sunglasses.

Before the release of the results, Luxottica shares on Tuesday closed up 1.5 percent to 16.27 euros, or $23.16 at current exchange rates, on the Milan Bourse.

Following the breakdown of talks to sell shares in Italian eyewear maker Safilo Group SpA that was revealed on Monday, Centrobanca analyst Simone Ragazzi said in a research note on Tuesday: “We would like to see Luxottica acquire Safilo as this would strengthen Luxottica’s leadership of the eyewear market without it requiring a capital increase, breaching its banking covenants or paying out a significant amount of money.”

Given Luxottica’s larger scale compared to Safilo, its strong cash flow and the strength of its management in past M&As, Centrobanca identified the giant eyewear maker as “a potential predator” of Safilo. Centrobanca’s rating of Safilo on Tuesday moved to “sell” from “hold.” Safilo shares closed down Tuesday by 8.45 percent to 0.39 euros, or 55 cents.

The acquisition would work for Luxottica, said Ragazzi, as it would “further consolidate its worldwide leadership in eyewear acquiring more profitable brands and avoiding antitrust problems by divesting some of Safilo’s assets (the Solstice retail chain, for example).” Ragazzi also said eyewear groups FGX and Marcolin are “unlikely predators” for Safilo “due to the mass market position of the former and the smaller dimensions of the latter,” but said De Rigo “could be a possible predator” given its size, which is similar to Safilo’s. De Rigo produces eyewear collections for brands such as Celine, Ermenegildo Zegna, Escada, Etro, Givenchy and Jean Paul Gaultier.

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