MILAN — Executives at Luxottica Group SpA, the Italian eyewear giant that in January unveiled a surprise merger with French lens maker Essilor, on Thursday said that the integration process is proceeding “on schedule” and — although remaining tight-lipped overall — some details of a post-merger vision emerged, including its benefits to wholesalers.
During a conference call Thursday morning to review the group’s 2016 results, Massimo Vian, Luxottica chief executive of operations, said the integration process with Essilor is proceeding “absolutely on time and in line with the process.”
Perhaps the greatest level of insight into the possible merger’s effects came from Luxottica’s president of wholesale distribution Paolo Alberti, who on the call said the integration would be very beneficial to wholesalers. Referring to Luxottica customers who are currently supplied by Essilor, Alberti said they will have two advantages: “They will have to buy less stock from us, because stock will be where the lenses are.”
Another advantage, he explained, would be faster and better service to customers. He said he expected the effects to be particularly positive for Ray-Ban and Oakley, which would benefit from Essilor technology in terms of prescription frames. “In general we have had very good reactions to this possible merger” from wholesalers, Alberti said.
In the few prepared remarks on the merger, Vian said the operation made sense for many reasons, including that both sides of the eyewear equation — frames (prescription and sun) and lenses — were looking at double-digit sales growth over the next five years. According to slides distributed during the call, the increase would be 19 percent in the case of frames and 17 percent for lenses. In 2021 there will be demand for nearly 1.2 billion frames and some 715 million pairs of ophthalmic lenses.
Vian outlined two scenarios for Luxottica: “Either on our own or — much better — as a combined entity.” In the stand-alone scenario, Vian said, “We could continually seize opportunities in the market, grow on own with our own distribution and target 15 billion euros [or $15.8 billion, at current exchange] in sales in 2024. But as a combined entity we would strengthen our offer for eye care professionals and consumers, coupling brand management with eye care, a crucial pillar in our model to achieve vertical integration.”
In 2016, Vian said, referring to previously issued statements on the merger’s potential financial effects, the combined entity would have had some 16 billion euros, or $16.8 billion, in sales; Luxottica alone had revenues of 9.08 billion euros, or $9.5 billion, in the just-ended year.
A merger “is, of course, the direction we are headed in,” Vian said, adding, “The combination will allow us to put our foot on the gas and accelerate our vision of making a complete pair: frame and lenses together… Consumers craving personalization and speed will get the most perfect fit delivered in a short period of time with better end-to-end service. This is where we believe the combined magic is.”
During the call, an analyst asked how the proposed merger has affected Luxottica’s 2017 capital expenditure. “There are absolutely no changes for what has been decided for 2017,” Vian answered. “I stress that all our assets at Luxottica and Essilor complement each other perfectly. Timing for the potential combination is perfect, there will be an overlap of our strengths.”
Vian did, however, offer some insights to the current performance of the company, saying that Luxottica started the year “at the right speed. In the last 10 to 15 days of February the momentum is really positive…We are very optimistic for the next weeks and the full year.”
But analysts said the group’s guidance for the current year — with sales forecast to grow low- to midsingle-digit (at constant exchange rates), with adjusted operating income and net income seen increasing 0.8 to 1.0 times and 1.0 time sales, respectively — was disappointing. They also were concerned with the large (100 basis points) drop in the retail distribution margin in 2016.
In terms of retail margins, chief financial officer Stefano Grassi said that he didn’t expect them to be as much of a drag in 2017 as they were in 2016, when there were many store openings. He said these new stores will start operating at full regime, from a top-line perspective, from the second half of 2017 and “should create profit accretion and improving margins.”
Grassi explained that in 2016 pressure on retail margin resulted from the fact that sales growth came more from volumes than price mix and that Luxottica recovered on price mix at the end of the year, even as it was not enough to offset the performance of the rest of the year. He said the goal was to get LensCrafters back to “healthy growth” in North America and that this process was begun at the end of last year, “getting out of promotional activity, which was stronger in the first nine months.”
Going ahead, Vian said that in terms of retail, the company was squeezing costs, approving much smaller stores that require [fewer] people to run them. This will help the retail channel “move faster to profitability,” he said. Vian added that in North America there is a “massive” transformation underway at the group’s 4,000 bricks-and-mortar locations. With improving margins in mind, last year Luxottica closed some 150 LensCrafters locations that “were profitable but not in line with our expectations,” he said. Grassi added that North America would be a “cleaner market, less promotionally driven… It will be a tangible difference in how we do our business…We definitely expect improvement in retail in 2017.”
In terms of sales growth, Grassi said he expected half of the growth in 2017 to come from same-store sales increases while the other half will result from new retail footprints. In 2016 Luxottica acquired large retailers in both Italy — Salmoiraghi & Viganò — and Brazil — Oticas Carol — the executives said.
Retail will also see an evolution in capex, Grassi said, with absolute spending values in 2017 on the same level as 2016. About one-third of capex this year will go to retail, “probably more to store renewals than openings, as there will be more store revamps than openings,” Grassi said. The remainder of capex will be split between investments in infrastructure, operations and supply chain and investments in digital.
Executives on the call were also questioned on the emerging challenge to Luxottica’s business model posed by brand owners who are setting up their own production, as Kering is doing with its brands and as LVMH Moët Hennessy Louis Vuitton is reported to be considering with its brands. Vian retorted that scale is important: “We feel we are definitely about numbers. We are playing a different game, we have power in distribution — in wholesale and retail — and the power we can put in our e-commerce as well. These are very important tests for the industry. We are convinced we can offer any license performances of different magnitudes than they could realize by themselves.”
Speaking of licenses, Vian offered some initial insight into the recently signed deal between Italian carmaker Ferrari SpA and Ray-Ban. Vian said the new collection “is ready” and that seven new styles will be launched this spring.