Luxottica

Stock price: €18.8
Conclusion: We reiterate that Luxottica looks fairly valued. Earnings recovery seems to be priced in. We upgrade our valuation range to €21-€22 per share to account for the positive impact of a higher dollar.

2009 results: sales down 2% to €5bn, down 3.8% like for like. Earnings down 17% to €0.69 per share. Guidance 2010: mid single digit growth in sales, more than proportionate increase in margins.

-Mid single digit growth looks great considering its geographic exposure.
Luxottica remains heavily exposed to mature markets which should continue to expand at a moderate pace. Emerging markets account for only 7% of group sales (15% of the wholesale division), while mature markets account for the bulk of revenues. Nevertheless, Luxottica started the year with improved sales momentum in its US retail business, with Lenscrafter comparable sales up 7% in the first two months. We expect Luxottica’s own brands, Oakley and Ray Ban, to outperform its portfolio of licensed luxury brands which are more cyclical.

-Margins could rebound to 12.2% in 2010 and 13.3% in 2011.
We expect operating margins to benefit from positive leverage. However the improvement should be held back by the negative impact of continuing downtrading in developed markets. In addition, management confirmed that marketing expenses will start to rebound in 2010, while IT expenses attached to SAP extension will impact earnings until 2012.
We expect earnings to increase by almost 18% to €0.81 per share.

Luxottica trades at 23xP/E and 11.5xEV/EBITDA based on our 2010 estimates. Our DCF based valuation points to €23 per share. Luxottica’s premium looks justified by its leadership position in eyewear, its brand portfolio and its vertical integration.

Luxottica

Stock price: €18.9
Conclusion: Modest turn around in eyewear sales in Q4 . We upgrade our valuation range up to €20-€21 per share to account for the re-rating of the luxury sector. Nevertheless, we feel that Luxottica looks fairly valued.

Q4 sales: down 6.4% to €1,157m, up 2% like for like. FY down 2% to €5,094m, down 3.8% like for like. Earnings to be reported early March. Guidance 2010: return to growth in sales, margins and reduced net debt..

Luxottica reported a slight improvement in Q4 (+2%), more pronounced in November and December, up 4.7% like for like.
The stability of the wholesale division, slightly disappointing given the easier comparison, results from a negative mix impact which has offset a 6% rise in volumes. Retail sales performed better, returning to 3.4% growth like for like. The optical prescription business in North America posted 1.6% increase in comparable store sales, helped by positive growth for LensCrafter and double digit increase for Sears Optical and Target Optical.
Sunglass Hut, the group’s sun specialty chain posted stable comparable store sales.

Following a 20% decline in the first 9 months, we expect EBIT to decrease 16% for the full year, implying a slight increase in earnings in Q4. Net earnings could fall by 15% to €324m.
Although we expect sale to resume growth by almost 5% , we forecast margins in 2010 to remain lower than in 2008. Downtrading continued in Q4 and wholesale might continue to be impacted by weak demand for the premium luxury segment. In addition, a weaker dollar should impact profitability. Last, marketing expenses could start to increase again this year. All in all we project EPS to bounce back 22% in 2010 to €0,87.

Luxottica trades at 21.7xP/E and 11.5xEV/EBITDA based on 2010 estimates, implying a 15% premium to the sector. Luxottica’s global leadership in eyewear, its unique porfolio combining licensed names and proprietary brands (Ray Ban, Oakley.) coupled with vertical integration seem largely priced in. In addition, 2010 top line growth could suffer from the comparison with peers in the luxury sector which are more exposed to booming sales in emerging markets.

Luxottica

Stock price: €17.8
Conclusion: Luxottica shares (up 40% YTD) anticipate a stong turnaround in profits next year. We think it might take longer than expected. Valuation stands above our target range of €15-17 per share.

Following two years of declining earnings (-20% in 2008 and -13% projected in 2009), we look for “only” 10% increase in net profit next year.

-We estimate that around 55% of Luxottica sales are related to the dollar. Based on current spot rates, the dollar should decline by more than 5% next year, which should impact reported growth.
-Emerging market exposure remains limited, representing less then 20% of sales on our estimates.
-Growth in the US should continue to be held back by consumer deleveraging.
-Pricing pressure in discretionary items is not going to stop.
-Cost control has been excellent but how long can Luxottica afford to cut marketing expenses ?

Longer term, we remain positive on Luxottica’s business model, its vertical integration from manufacturing to retail, the strength of its brand portfolio and its excellent management.
However, we feel that 22x P/E and 12.6x EV/EBITDA based on our F10 estimates, does not leave much upside for the next 12 months.

Luxottica

Stock Price: € 15,5
Conclusion: Great management but we will wait for a better entry price.

2009 Q1 results: sales down 11,6% like for like, 6,2% reported. EBIT down 24%. Net earnings down 22,5%. No guidance, but management noted “positive signals”.

The eyewear market continued to decline in Q1 as a result of lower consumer demand and reduction in inventories. Wholesale collapsed (down 19,8%) while revenues in the retail division decreased by 5%. Comparable store sales went down by 5% in Q1 due to reduced traffic and lower mix, notably in the US. However, March and April were better leading to sales YTD down by 3% vs 6% at the end of March. According to management, 80% of the trade de-stocking is now completed. We assume that sales could stabilise in H2 which would lead to 1% reported decline for the year (-5% like for like). Profitability will remain under pressure, but we expect Luxottica to benefit from administrative savings, lower advertising spending and manufacturing efficiencies. Margins could decrease by 170 bp in 2009 vs 290bp in Q1 and net earnings fall by 10%.
The good news came from FCF of €80m in a quarter which is traditionally negative thanks to excellent working capital management. We project FCF to exceed €500m this year and net debt to fall to €2,4bn (2,8x EBITDA).

Luxottica is up 23% YTD in line with peers (up 26% on average). We do not see any short term upside potential as Luxottica trades at a 30% premium to the sector (20,7x and 17x based on 2009 and 2010 estimates). Despite a poor environment, we think the premium looks sustainable as long as management delivers on cost savings and cash flow generation. In addition, any improvement in consumer sentiment in the US (North America accounted for 64% of sales last year) would certainly help to boost the stock price. Last, our DCF based valuation suggests further upside (€18-19 per share).