MILAN — An acceleration in the second quarter improved business in China and the U.S. and fewer headwinds are prompting Luxottica’s management to confirm the group’s outlook for 2018.
But a softer European market and weaker wholesale channel dented the eyewear company’s performance in the six months ended June 30, with adjusted net profit decreasing 3.9 percent to 545 million euros. On an adjusted basis and at constant exchange rates, net profit increased by 11.6 percent, benefiting from the lower cost of debt, the Italian Patent Box, and from the Trump administration’s tax reform in the U.S.
Reported net income was down 5.7 percent to 530 million euros. At constant exchange rates, earnings were up 9.8 percent.
In the period, sales dropped 7.7 percent to 4.55 billion euros. At constant exchange, they rose 0.3 percent.
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Although it accelerated in the second quarter, the retail division’s revenue was down 6.5 percent to 2.82 billion euros. At constant exchange, the channel rose 2.8 percent thanks to the contribution of Sunglass Hut, of Ray-Ban stores, OPSM in Australia, as well as the “excellent performance” of e-commerce platforms.
The wholesale division was down 9.6 percent to 1.73 billion euros. At constant exchange, the channel was down 3.6 percent, with strong growth in North America partially offsetting a temporary slowdown in Europe due to new commercial policies and unseasonable weather conditions.
In addition to its proprietary brands Ray-Ban, Oakley, Vogue Eyewear, Persol, Oliver Peoples and Alain Mikli, the company produces and distributes eyewear for brands including Giorgio Armani, Burberry, Chanel, Michael Kors, Prada, Ralph Lauren, Tiffany & Co., Valentino and Versace, among others. In the period, Luxottica renewed the five-plus-year license agreement for the design, production and worldwide distribution of prescription frames and sunglasses for the Philippe Starck and Starck Eyes brands.
“The growth in the markets where we completed the new commercial strategy, including North America and Asia, confirms the value and effectiveness of the initiatives undertaken,” said executive chairman Leonardo Del Vecchio, noting he was pleased with the performance. “We look with confidence at Europe’s prospects, the region where we are reorganizing our distribution strategy.”
Del Vecchio said the company continues “to invest in product excellence and innovation. Our Made in Japan manufacturing capability and Barberini’s lenses further expand our luxury portfolio. The group’s digital evolution is ongoing. Our e-commerce business is more and more important in our strategy and our communication is now focused on digital and social media. Considering the positive trends we are also seeing in July, we confirm our outlook for 2018.”
During a conference call with analysts at the end of trading in Milan, where the company is publicly listed, chief financial officer Stefano Grassi said the U.S. dollar showed a 7.5 percent devaluation in the second quarter compared with 13 percent in the first quarter, and that he was expecting a lower headwinds. “If the dollar stays like this, the gap between constant and current exchange rates will diminish,” he said.
He also said there were no plans to raise prices. Grassi said he believed the group will achieve the year-end target, seeing an acceleration in the second half. “We are positioning sales in the low end of the range at constant Forex.”
Regarding the proposed combination between Luxottica and Essilor, the two companies are finalizing discussions with the Chinese competition authority, confident approval will be received by the end of the month. In parallel, the two companies are also finalizing their discussions with the Turkish antitrust authority and evaluating the timing for the closing of the transaction.
In the first half, adjusted operating income, which excluded organizational simplification and restructuring costs for certain business areas as well as non-recurring costs for a total of about 19 million euros, decreased 13.1 percent to 781 million euros. At constant exchange, it was up 0.5 percent.
Reported operating income decreased 12.2 percent to 763 million euros. At constant exchange rates, it was up 1.7 percent.
For the third consecutive quarter, Sunglass Hut grew in its main geographies. Retail brands in China, including Ray-Ban stores, and Australia confirmed a strong increase in sales. In North America, LensCrafters’ sales were back to growth.
Sales from the group’s e-commerce platforms in the second quarter were up by 16 percent at constant exchange rates. Ray-Ban.com confirmed it is the main driver of the group’s digital business, benefiting in the quarter from the exclusive launch online of special collections, such as Ray-Ban Reloaded.
Luxottica sales in the second quarter decreased 4.9 percent to 2.41 billion. At constant exchange, sales rose 1.4 percent.
The retail division was down 2.8 percent to 1.51 billion euros. At constant exchange, sales rose 4.3 percent.
The wholesale division was down 8.2 percent to 901 million euros. At constant exchange, sales decreased 3.1 percent impacted by a temporary slowdown in Europe due to new commercial policies and a later start to sunnier summer weather. On the other hand, North America and Asia-Pacific each reported strong performance following the restructuring of their distribution network.
In the second quarter, Luxottica’s net sales accelerated, driven by the strong performance of the retail division and e-commerce platforms as well as solid growth in North America and Asia-Pacific. There also was record net margin.
In the first half, sales in North America decreased 8.7 percent to 2.56 billion euros, accounting for 56 percent of the total. At constant exchange rates, sales rose 1.8 percent. In the second quarter, North America net sales grew by 3.4 percent at constant exchange rates and accelerated compared to the performance of the first three months of the year in both divisions. Sunglass Hut in the quarter opened about 170 shops-in-shop in Bass Pro and Cabela’s locations, in addition to contributions from Target Optical and ray-ban.com, helping to drive retail sales.
After 12 consecutive quarters of solid growth, Europe was down 5.8 percent to 1.07 billion euros. A decline of 4.5 percent in the second quarter was due to the effect of the new trade policies and the delayed start of the sun season, which led wholesale customers to be more cautious in their orders, offset by an effective retail strategy in the second quarter. Grassi said he expected improvement in the second half of the year in Europe, also in wholesale.
In the first half, Asia-Pacific was down 4 percent to 573 million euros. In the second quarter, Asia-Pacific’s net sales at constant exchange rates were up by 7.5 percent. “We are returning to strong growth in Asia-Pacific and a double-digit increase in China after the restructuring of the distribution channel,” touted Grassi. “We see a new exciting journey and strong growth.” He said he was also “happy to report” on a positive performance in Hong Kong, expressing “confidence in strong growth also in the second half.” Australia confirmed the solid growth of previous quarters, accompanied by positive performances from Japan and India.
Asked about the gray market in China, Grassi said the market was “much cleaner” in the region compared with 12 or 18 months. “You can never say it’s 100 percent clean, but we did a lot of work,” he said, also battling the “sellers of fake products.” He also said there was no price gap between Europe and China and the company already went through a price harmonization. Responding to a question about the possible impact of import duties, Grassi said “we are not the automotive industry. We have the capability to switch production from one place to the other, and we can make it happen in a short time — we are ready to react,” if need be, pointing to existing plants in the U.S.
In the period, Latin America was down 10.1 percent to 259 million euros. In the second quarter, Latin America was up 2.3 percent at constant exchange rates. Brazil contributed to the results thanks to the solid growth of the Óticas Carol franchise business, with 80 openings in the first six months of the year. Mexico posted growing sales, in particular due to the expansion of Sunglass Hut.
Strong free cash flow generation in the first half of the year reached about 400 million euros.
As of June 30, net debt stood at about 900 million euros, down by 19.2 percent compared to the same period last year.