30 May 2008
Europe/Italy
Equity Research
Luxury Goods / OVERWEIGHT
Italian eyewear players
Research Analysts
Melania Grippo
39 02 8855 0120
melania.grippo@credit-suisse.com
Rogerio Fujimori
44 20 7888 0889
rogerio.fujimori@credit-suisse.com
INITIATION
In the frame
■ Event: We are initiating coverage of the two main Italian eyewear
companies: Luxottica, with an Outperform rating and a target price of €
€ 22.2
per share, and Safilo, with an Underperform rating and a target price of €
€ 1.8.
■ Investment case: We believe Luxottica could prove more attractive to
investors, given its leadership positioning and fast-growing emerging market
exposure, its ability to react quickly in a difficult environment, and what we
view as its lower risk profile compared to Safilo due to its proven track record
in improving profits and the higher visibility on its portfolio of licensed brands.
We think that the main driver of Luxottica’s equity story lies in the Oakley
integration and the company’s ability to improve Oakley’s operating margins,
while growing the brand and continuing to deliver efficiencies from past
acquisitions in retail. Oakley is a leader in the manufacturing of highperformance sunglasses and prescription frames and fits into Luxottica’s
brand portfolio very well. We expect the company to be able to deliver on its
declared cost and revenue synergies of €
€ 100m by 2010, given its track
record in acquiring and restructuring companies (such as Ray-Ban,
Sunglass Hut and Cole National).
■ Safilo’s shares may appear inexpensive, but we think there could be material
downside potential if it were to lose two major licences (PPR group,
including the main Gucci licence, and Dior), representing c35% of revenues
and due to expire in 2010. We also see some added risk in the
implementation of the business plan and its higher retail exposure in the
current environment. Our best-case scenario for Safilo indicates potential
upside of 26%, but our worst-case scenario suggests potential downside of
34%. We believe the scope for rewards is more than counterbalanced by the
significant downside, resulting in a less attractive risk/reward trade-off for the
stock versus Luxottica and other stocks in our coverage (e.g. TOD's), which
in our view offer equally attractive valuation upside (>20%) but with much
lower risk.
■ Catalysts: Catalysts for Safilo will likely be the anticipated renewal of Gucci
and Dior licences, as well as recurring speculation about a possible delisting. Potential catalysts for both stocks include dollar strengthening versus
the euro; an improvement in the macroeconomic environment (especially in
the US); new licence acquisitions; and the acquisition of small retail chains.
H108 results for Luxottica are due 31 July and for Safilo 30 July.
■ Valuation: We value both companies using DCF analysis because we view
it as the best way to capture their cash-flow generation and since they have
no comparable listed peers. Luxottica is currently trading on a 2008E P/E of
15.3x and an EV/EBITDA of 9.2x, and Safilo on a 2008E P/E of 10.5x and
an EV/EBITDA of 6.4x, which we think is justified by the higher risk.
DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S.
Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result,
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should consider this report as only a single factor in making their investment decision. Customers of Credit Suisse in the
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30 May 2008
Table of contents
Investment summary
Valuation summary
Relative valuation
DCF valuation
Sensitivity to the dollar
Share-price performance
Luxottica (LUX.MI)
An impressive sight
Investment case
Wholesale: leveraging on a stronger brand portfolio
Licensed brands: one of the best industry portfolios
Owned brands: more upside potential from the Oakley deal
Retail: US and Asia leadership
Valuation
Risks
Financial forecasts 2007–11E
Q208 release: weak performance priced-in?
Safilo Group (SFLG.MI)
Blurred vision
A restructuring story clouded by risks
Wholesale: the Gucci and Dior issue
Retail: luxury acquisitions to build scale
Valuation
Financial forecasts 2007–11E
Appendix I: the eyewear market
Appendix II: company profiles
Luxottica
Safilo
Appendix III: shareholder structure
Italian eyewear players
3
4
4
6
7
9
10
10
11
12
12
13
18
23
24
25
28
29
29
30
31
34
35
36
39
40
40
40
42
2
30 May 2008
Investment summary
We are initiating coverage on the two main Italian players in eyewear: Luxottica with an
Outperform rating and TP of €
€ 22.2 and Safilo with an Underperform rating and TP of €
€ 1.8.
Luxottica: We believe Luxottica could prove more attractive to investors, given: (i) its
leadership positioning with fast-growing emerging market exposure; (ii) its ability to react
quickly in a difficult environment; (iii) its proven track record in profitability improvement;
and (iv) the higher visibility on its portfolio of licensed brands.
We believe that the main driver of Luxottica’s equity story lies in the Oakley integration and
the company’s ability to improve Oakley’s operating margins, while growing the brand and
continuing to deliver efficiencies from past acquisitions in retail. Oakley is a leader in the
manufacture of high-performance sunglasses and prescription frames and fits very well
into Luxottica’s brand portfolio, which is more exposed to fashion/luxury.
We expect Luxottica to be able to deliver declared cost and revenue synergies of €
€ 100m
by 2010E: this has already been the case with the Ray-Ban deal, since we estimate that
the brand almost doubled sales from 2000 (when 5.5m units were sold) to an estimated
€ 570m last year (and above 14m units sold), achieving above-average group profitability
€
after the restructuring carried out by Luxottica. We therefore see no reason why Oakley’s
profitability could not show the same performance as Ray-Ban’s or very close to it.
In addition, we think there are still potential efficiencies to be extracted from the retail
division thanks to: (i) full integration of various acquisitions (OPSM, Cole National), which
leaves scope for further margin improvement and organic growth; (ii) increasing
penetration in North America and other countries (e.g. China); (iii) a network upgrade
(repositioning of Pearle, Sunglass Hut and LensCrafters store network); (iv) sun retail
stores through different store concepts: Sunglass Hut, Ilori (luxury); (v) streamlining
licensed brands; and (vi) leveraging on AR (non-glare) and Rx sun opportunities.
Safilo: Safilo’s shares may look inexpensive, but we think there could be material
downside potential if it were to lose two of its major licences (PPR group, including the
main Gucci licence, and Dior), representing an estimated 35% of revenues and expiring in
2010E. Our best-case scenario for Safilo indicates potential upside of 26%, but our worstcase scenario suggests potential downside of 34%.
We believe that the Safilo equity story is clouded by: (i) execution risk on the
implementation of its recently presented business plan; (ii) an increasing focus on retail,
which could represent a threat to short-term profitability, given the longer break-even time
for stores; and (iii) licensing risk, since two major licences (mainly Gucci and Dior) are set
to expire at the end of 2010.
We believe that the scope for rewards is more than counterbalanced by the significant
downside, resulting in a less attractive risk/reward trade-off for the stock relative to
Luxottica and other stocks in our coverage (e.g. TOD's), which offer equally attractive
valuation upside (>20%) but with much lower risk.
Catalysts: For Safilo, catalysts will likely be the anticipated renewal of Gucci and Dior
licences, along with recurring speculation about a possible delisting (denied by its major
shareholder in a press release on 16 April 2008). Potential catalysts for both stocks
include the dollar strengthening versus the euro; an improvement in the macroeconomic
environment (especially in the US); new licence acquisitions; and the acquisition of small
retail chains. H108 results for Luxottica are due on 31 July, and for Safilo on 30 July.
Valuation: We value both companies using DCF analysis, since it is the best way to
capture the cash-flow generation of the two companies and also because there are no
comparable listed peers. Luxottica is currently trading on a 2008E P/E of 15.3x and an
EV/EBITDA of 9.2x and Safilo on a 2008E P/E of 10.5x and an EV/EBITDA of 6.4x.
Luxottica also has a 2008E FCF yield of around 6%.
Italian eyewear players
3
30 May 2008
Valuation summary
Relative valuation
Purely for illustrative purposes, we present a comparison with other players in the eyewear
industry. However, we believe that this has little significance, given the following:
■
Several players in eyewear manufacturing or retail have been acquired or de-listed
(GrandVison, Oakley, De Rigo, OPSM, Cole National) or are too small to be
comparable with Luxottica and Safilo (e.g. Marcolin).
■
Eyewear players such as Fielmann (the market leader in Germany and Europe's
largest optician) and Essilor either do not have significant wholesale operations or are
active in a different product category (ophthalmic lenses vs. frames).
■
Luxottica is a world leader and has developed a unique business model, starting as a
manufacturer and distributor and then also becoming a retailer. Safilo is pursuing a
similar strategy to Luxottica, having started from being a pure wholesaler and
gradually increasing its presence in retail; however, its retail sales still represent a
small portion of its overall revenues (10% in 2008E).
Figure 1: Luxottica and Safilo: Comparison with other eyewear players
Company
Curr. Closing price
Market cap
(US$bn)
Fielmann
Essilor
Luxottica
Safilo
€€
€€
€
€
€
€
47.6
39.8
17.3
1.8
3.1
13.2
12.6
0.8
Average
P/E
2008E
P/E
2009E
EV/EBITDA
2008E
EV/EBITDA
2009E
20.3x
21.3x
15.3x
10.5x
18.2x
19.1x
12.6x
8.7x
10.4x
11.1x
9.2x
6.4x
9.3x
9.9x
7.9x
5.7x
16.9x
14.7x
9.3x
8.2x
Source: Credit Suisse estimates for Luxottica and Safilo, © Datastream International Limited ALL RIGHTS RESERVED for Fielmann and Essilor
Figure 2: Luxottica and Safilo: Comparison with other eyewear players (2007)
€€ in millions, unless otherwise stated
Luxottica
Sales
Sales growth
EBITDA
EBITDA margin
Net income
4,966
6.2%
1,066
21.5%
492.2
Essilor
Fielmann
Safilo
2,908
8.1%
642.0
22.1%
366.7
839.2
5.7%
164.8
19.6%
82.0
1,190
6.1%
175.2
14.7%
51.0
Source: Company data
Italian eyewear players
4
30 May 2008
Figure 3: Other eyewear manufacturers, sales, owned brands and key licence agreements
€€ in millions, unless otherwise stated
Allison
Charmant
De Rigo
Marchon
Marcolin
2007 sales*
Key licences
100
Alessandro Dell'Acqua
Byblos
Dirk Bikkembergs
Extè
Frankie Morello
Ferré
Iceberg
John Richmond
Missoni
Moschino
Sisley
Trudi
Benetton
Vivienne Westwood
Mercedes-Benz
Cerruti
Dunhill
167
Elle
Lacoste
Christian Roth
Esprit
Puma
660
Celine
Chopard
Ermenegildo Zegna
Escada
Etro
Furla
Givenchy
Jean Paul Gautier
Loewe
Pirelli Pzero
Tous
500 (USD)
Calvin Klein
Coach
Emilio Pucci
Fendi
Nike
Karl Lagerfeld
Disney
Michael Kors
Nautica
Sean John
Jil Sander
182
Tom Ford
Roberto Cavalli
Just Cavalli
Mont Blanc
Ferrari
Web
Kenneth Cole
Miss Sixty
Reply
Timberland
Cover Girl
Roger Vivier
Dsquared2
Key own brands
TRY
Desil
Charmant
Aristar
Valmax
Police
Lozza
Sting
Marchon
Flexon
Marcolin
Cébé
* Calculated from data provided on company websites
Source: Credit Suisse research
A comparison with the luxury goods players could be more relevant, especially for
Luxottica, since we think the company can be considered as the only worldwide producer
of glasses to have luxury goods player status despite the fact that most of its luxury brands
are not owned and that not all of them are in the upper end of the category. We believe
this is due to good cash-flow generation (free cash-flow yield of 6.0%) and its level of
profitability (EBITDA margin at 21.5% in 2007).
Figure 4: Safilo and Luxottica vs. Luxury Goods peers
Company
Curr.
Closing price
Market Cap
(US$bn)
P/E
2008E
P/E
2009E
EV/EBITDA
2008E
EV/EBITDA
2009E
LVMH
Hermes
Burberry
Bulgari
Tod's
Luxottica
Safilo
Richemont
Tiffany
Swatch
€€
€€
GBP
€
€
€
€
€
€
€
€
SFr
USD
SFr
72.5
104.4
507.0
7.3
39.0
17.3
1.8
64.0
46.6
282.5
55.9
17.4
4.3
3.5
1.9
12.6
0.8
32.4
5.9
8.7
15.7x
37.1x
15.1x
14.x
14.4x
15.3x
10.5x
13.9x
17.6x
14.2x
14.x
33.1x
13.1x
13.x
13.x
12.6x
8.7x
12.9x
15.8x
12.6x
9.x
21.1x
9.5x
10.5x
7.1x
9.2x
6.4x
8.3x
8.3x
8.7x
8.x
19.x
8.4x
9.3x
6.4x
7.9x
5.7x
7.6x
7.7x
7.7x
16.8x
14.9x
9.8x
8.8x
Average
Source: Credit Suisse estimates. © Datastream International Limited ALL RIGHTS RESERVED for Burberry and Richemont
Having previously traded at a premium to the luxury goods sector, Luxottica is currently
trading at a 9% discount (Figure 6).
Italian eyewear players
5
30 May 2008
Figure 5: Luxottica: Absolute 12-month forward P/E (x)
Figure 6: Luxottica: P/E relative to Luxury Goods sector
130
30.0
125
120
25.0
22.6
20.0
19.1
115
110
104.2
105
15.6
15.0
100
95
90
10.0
85
5.0
4/19/2001
4/19/2002
4/19/2003
4/19/2004
4/19/2005
4/19/2006
4/19/2007
4/19/2008
Source: © Datastream International Limited ALL RIGHTS
RESERVED, Credit Suisse research
80
5/23/2003
5/23/2004
5/23/2005
5/23/2006
5/23/2007
5/23/2008
Note: Sector Index is an unweighted average of LVMH, Dior, Hermès,
Burberry, Swatch, Richemont, PPR, Bulgari, Tod’s, Luxottica.
Source: © Datastream International Limited ALL RIGHTS
RESERVED, Credit Suisse research
We also point out that both Luxottica and Safilo are trading below their respective
historical averages of 19.1x and 16.3x on a 12-month rolling P/E basis, as shown in Figure
5 and Figure 8.
Figure 7: Luxottica: P/E relative to MSCI Europe
Figure 8: Safilo: Absolute 12-month forward P/E (x)
180
25.0
170
160
20.3
20.0
150
142.7
140
16.3
15.0
130
12.3
120
10.0
110
100
5.0
90
80
5/23/2003
5/23/2004
5/23/2005
5/23/2006
5/23/2007
5/23/2008
Source: © Datastream International Limited ALL RIGHTS
RESERVED, Credit Suisse research
0.0
2/16/2006
8/16/2006
2/16/2007
8/16/2007
2/16/2008
Source: © Datastream International Limited ALL RIGHTS
RESERVED, Credit Suisse research
DCF valuation
Our preferred valuation methodology for both companies is the discounted cash flow
model, since we believe that this better reflects the potential of both companies in terms of
top-line growth, margin improvement and FCF generation.
In the following table, we list the main assumptions in our DCF models for Luxottica and
Safilo.
Figure 9: Luxottica: DCF assumptions
€
€ in millions, unless otherwise stated
Sales growth
EBIT Margin
Free Cash Flow growth
Rolling WACC
Perpetuity
Fair Value
2008–12E
2013–17E
6.1%
16.5–19.1%
12.4%
7.6–8.3% range
2.0%
22.2
3.0%
19.1%
4.1%
8.3%
Source: Credit Suisse estimates
Italian eyewear players
6
30 May 2008
Figure 10: Safilo: Different valuation scenarios
€€ per share
Fair Value: 2.3
4.9
3.4
Main assumptions: The company keeps both the PPR and Dior
licenses
Sales CAGR: 4.8% over 2007-2012E and 3% over 2013E-2017E
EBITDA: passing from 14.7% in 2007 to 15.8% in 2012E
Rolling WACC (8.3%-8.7%), perpetuity 2.0%
Potential Upside: +26%
Factors supporting the assumptions:
-The company holds main Gucci license since 1988, was awarded
Balenciaga in 2007 (PPR group) and holds Dior 1996
- Recent reassuring interview to Mr Mark Lee on Gucci renewal
- Cheap Valuation on 10.5x P/E 08
1.8
Fair Value: 1.2
1.0
Main assumptions: The company looses both the PPR and Dior
licenses, but it is able to restore profitability (EBITDA margin of 15.8%)
in 2012E.
Rolling WACC (8.3%-8.4%), perpetuity at 2%
Potential Downside: -34%
Factors supporting the assumptions:
- Negative track record on license renewal (e.g. Polo Ralph Lauren
license)
- Low bargaining power
- Concerns on credit rating and financing
Source: Company data, Credit Suisse estimates
Our target price of €
€ 22.2 for Luxottica implies a 2009E EV/EBIT of 12.2x and a 2009E P/E
of 16.2x, still lower than the company’s past average at 19.1x.
Our target price of €€1.8 for Safilo is a combined average of the two valuations we get in a
best-case scenario and a worst-case scenario, averaged by a 50/50 probability that the
two licences are renewed.
The main risks to our target price for both companies are: a global macroeconomic
slowdown; terrorist attacks or epidemics; currency weaknesses (mainly the dollar and
yen); pressure on margins due to a deteriorating environment and store openings; the loss
of relevant licences agreements; business plan implementation (mainly for Safilo); and the
integration of recently acquired companies (mainly Oakley for Luxottica).
Upside potential could come from an improved macroeconomic environment; new licence
agreements; a quicker-than-expected implementation of Safilo’s business plan and
anticipated renewal of its two licences expiring in 2010; and higher-than-expected
synergies from the Oakley deal for Luxottica.
Sensitivity to the dollar
Both stocks are quite sensitive to fluctuations in the €€/US$ exchange rate since a high
portion of their sales is in dollars: around 60% for Luxottica and 40% for Safilo.
As such, we have run a sensitivity analysis of the impact of a stronger/weaker US$ on
their EPS.
Italian eyewear players
7
30 May 2008
Figure 11: Potential impact on EPS of a strengthening/weakening in €
€ /US$
Luxottica
Safilo
1.40
1.45
1.50
1.55
1.60
7.1%
4.0%
3.4%
2.0%
-
-3.2%
-2.0%
-6.3%
-4.0%
Source: Credit Suisse estimates
The main industry risks relate to sensitivity to the macroeconomic cycle (mainly for
sunglasses); dependence on external licences; increasing royalty rates or advance
payments in order to obtain/retain licensed brands; and use of laser surgery as well as
contact lenses. In retail, we see the consolidation of the US optical retail market as a
potential threat for smaller chains.
Italian eyewear players
8
30 May 2008
Share-price performance
Over the last year, Luxottica’s share price (-30.5% in past 12 months) has been affected
by: (i) high exposure to the US$ (around 60% of revenues); (ii) exposure to the US
consumer market; and (iii) a lack of short-term catalysts.
Safilo’s share price has also been significantly weak (-62%) as a result of: (i) high
exposure to the US and dollar-denominated currencies (40% of revenues); (ii) weakerthan-expected FY 2007 results; and, more recently, (iii) the loss of the Stella McCartney
licence (belonging to PPR), which has also raised doubts about a possible loss of its main
Gucci licence, which expires in 2010. On the other hand, we highlight that its share price
has been supported by press speculation about a possible delisting (denied by its major
shareholder in a press release on 16 April 2008).
Figure 12: Relative performance to the Italian market
Figure 13: Relative performance to MSCI World Cons Disc
1.20
1.20
1.00
1.00
0.80
0.80
0.60
0.60
0.40
0.40
0.20
0.20
0.00
5/23/2007
7/23/2007
9/23/2007
Luxottica
11/23/2007
Safilo
1/23/2008
3/23/2008
5/23/2008
0.00
5/23/2007
7/23/2007
9/23/2007
Luxottica
Milan Comit Global
Source: © Datastream International Limited ALL RIGHTS RESERVED
11/23/2007
Safilo
1/23/2008
3/23/2008
5/23/2008
MSCI World Cons Discr
Source: © Datastream International Limited ALL RIGHTS RESERVED
In the following tables we have highlighted the key events for the two companies and their
share-price performance since listing on the Italian market for Luxottica (the company’s
ADRs also trade on the NYSE) and, for Safilo, since its re-listing following the 2001
buyout.
Figure 14: Luxottica: Share-price performance and key
Figure 15: Safilo: Share-price performance and key events
events
Oakley acquisition
Signs Balenciaga
license
6
30
Appointment of
new CEO
Signs Tiffany license
5
25
Loss of Armani license
Cole National acquisition
20
4
OPSM
acquisition
15
3
Signs RL license
10
5
0
Dec-00
Signs Prada license
1
Signs Versace license
Aug-01
Signs Banana
Republic license
Acquisition of two
retail chains
2
Appointed new CEO
SGH Acquisition
Loss of RL
license
Signs Jimmy
Choo license
Apr-02
Dec-02
Aug-03
Apr-04
Dec-04
Aug-05
Apr-06
Dec-06
Source: © Datastream International Limited ALL RIGHTS
RESERVED, Credit Suisse research
Italian eyewear players
Aug-07
Apr-08
0
12/8/2005
4/8/2006
8/8/2006
12/8/2006
4/8/2007
8/8/2007
12/8/2007
4/8/2008
Source: © Datastream International Limited ALL RIGHTS
RESERVED, Credit Suisse research
9
30 May 2008
Europe / Italy
Luxottica (LUX.MI)
Rating
Price (27 May 08, Eu)
Target Price (Eu)
Market cap. (Eu m)
Enterprise value (Eu m)
OUTPERFORM*
17.28
22.20¹
7,998.00
10,935.1
*Stock ratings are relative to the coverage universe in each
analyst's or each team's respective sector.
¹Target price is for 12 months.
Research Analysts
Melania Grippo
39 02 8855 0120
melania.grippo@credit-suisse.com
Rogerio Fujimori
44 20 7888 0889
rogerio.fujimori@credit-suisse.com
INITIATION
An impressive sight
■ Event: We are initiating coverage of Luxottica with an Outperform rating and
a target price of €
€ 22.2.
■ View: Luxottica could prove attractive to investors, given its: (i) leadership
positioning with fast-growing emerging market exposure; (ii) its ability to
react quickly in a difficult environment; (iii) its proven track record in
profitability improvement; and the (iv) higher visibility on its portfolio of
licensed brands.
■ We believe the main driver of Luxottica’s equity story lies in the Oakley
integration and the company’s ability to improve Oakley’s operating margins,
while growing the brand and continuing to deliver efficiencies from past
acquisitions in retail. We expect Luxottica to be able to deliver the declared
cost and revenue synergies of €
€ 100m by 2010E: this has already been the
case with the Ray-Ban deal, since we estimate that the brand doubled sales
from 2000 (when 5.5m units were sold) to an estimated €
€ 570m last year
(and above 14m units sold), achieving above-average group profitability after
the restructuring carried out by Luxottica. We therefore we see no reason
why Oakley’s profitability could not reach the same level as Ray-Ban’s or
very close to it.
■ Catalysts: Dollar strengthening vs. the euro, an improvement in the
macroeconomic environment (especially in the US), new licence acquisitions,
the acquisition of small retail chains and achieving synergies at Oakley more
quickly than expected. H108 results are due on 31 July.
■ Valuation: Our target price indicates 28% upside potential at current levels.
The company is trading at a 2008E P/E of 15.3x and an EV/EBITDA of 9.2x,
or at a discount of around 9% on 2008E P/E versus the other luxury goods
companies.
Share price performance
29
24
19
14
Jun-06
Oct-06
Feb-07 Jun-07
Oct-07
Price
Feb-08
Price relative
The price relative chart measures performance against the
Europe Dow Jones Stoxx index which closed at 357.82 on
27/05/08
On 27/05/08 the spot exchange rate was Eu 0.64 /US$1
Performance
Absolute (%)
Relative (%)
1M
-1.8
-0.2
3M
-8.7
-5.9
12M
-30.6
-15.8
Financial and valuation metrics
Year
Revenue (Eu m)
EBITDA (Eu m)
Net Income (Eu m)
CS adj. EPS (Eu)
ROIC (%)
P/E (adj., x)
P/E rel. (%)
EV/EBITDA
Dividend (2008E, Eu)
Dividend yield (%)
Net debt (12/08E, Eu m)
Net debt/equity (12/08E, %)
BV/share (12/08E, Eu)
12/07A
4,966.1
1,066.13
492.2
1.08
9.1
16.00
132.2
10.4
0.51
3.0
2,724.4
100.6
5.8
12/08E
12/09E
5,461.6
5,931.1
1,187.37
1,357.97
514.1
622.6
1.13
1.37
9.5
11.1
15.30
12.63
138.3
126.1
9.2
7.9
IC (12/07A, Eu m)
EV/IC
Current WACC
Free float (%)
Number of shares (m)
12/10E
6,404.0
1,478.02
696.5
1.53
12.1
11.29
90.5
7.0
6,021.7
1.8
7.6
25.0
462.90
Source: FTI, Company data, Datastream, Credit Suisse Securities (EUROPE) LTD. Estimates.
Italian eyewear players
10
30 May 2008
Investment case
Luxottica is the industry leader in eyewear manufacturing with a well-balanced portfolio of
licensed and owned brands. Thanks to the successful acquisition strategy carried out
since 1995 (LensCrafters, Sunglass Hut, Cole National, DOC Optics), the company is also
a leader in North American retail with an estimated market share (source: Jobson Optical)
in the US of 20% and in Canada of approximately above 10% (in units).
In addition, the company has also expanded into Australia retail (through the OPSM
acquisition) and Asia by the acquisition of three optical chains in China. It has also
implemented small-scale acquisitions in selected countries (e.g. South Africa), and we
expect such acquisitions to continue in coming years as the company pursues a
leadership position outside North America and Asia-Pacific.
Luxottica also owns Ray-Ban (acquired in 1999 from Bausch & Lomb together with Revo,
Arnette and Killer Loop), the world’s leading eyewear brands. More recently it has
acquired Oakley, a leading manufacturer of sports-performance eyewear.
We expect the current year to be one of transition due to the ongoing integration with
Oakley, a difficult consumer environment in the US and the dollar’s weakness. In particular,
we point out that, as a result of one-time charges relating to the Oakley acquisition and
other effects (e.g. different seasonality compared to Oakley, an exit from the watch
business), the synergies from the merger will be visible only from 2009 onward.
■
Following the Oakley merger, we believe that the investment case for Luxottica lies in
the company’s ability to improve Oakley’s operating margins and achieve a
considerable level of synergies thanks to cross-selling opportunities with its retail
division along with wholesale distribution (especially in Europe and emerging
markets): this has already been the case with the Ray-Ban acquisition, since we
estimate that the brand doubled sales from 2000 (when 5.5m units were sold) to an
estimated €
€ 570m last year (and above 14m units sold), achieving above-average
group profitability after the restructuring carried out by Luxottica. We therefore see no
reason why Oakley’s profitability could not reach the same level or very close to that.
■
Furthermore, we expect the wholesale division to continue to benefit from the
development of recently acquired licences (Burberry, Ralph Lauren and Tiffany) along
with the full potential of existing agreements (especially luxury collections), a more
efficient distribution approach and a better-focused marketing organisation.
■
In addition, we believe that there are still potential efficiencies to be extracted from the
retail division: (i) the full integration of the various acquisitions (OPSM, Cole National)
still leaves scope for further margin improvement and organic growth; (ii) increasing
penetration in North America and other countries (e.g. China); (iii) network upgrades
(repositioning of Pearle, Sunglass Hut and LensCrafters store network); (iv) sun retail
through different store concepts: Sunglass Hut, Ilori (luxury); (v) the streamlining of
licensed brands; and the (vi) leveraging of AR (non-glare) and Rx sun opportunities.
Catalysts: Dollar strengthening versus the euro; an improvement in the macroeconomic
environment (especially in the US); new licence acquisitions; the acquisition of small retail
chains; and achieving synergies at Oakley more quickly than expected. H108 results are
due on 31 July.
Valuation: Our target price indicates 28% upside potential at current levels. The company
is trading at a 2008E P/E of 15.3x and an EV/EBITDA of 9.2x, or at a discount of around
9% on 2008E P/E versus the other luxury goods companies.
Italian eyewear players
11
30 May 2008
Wholesale: leveraging on a stronger
brand portfolio
Established in 1961 as a third-party supplier of parts for frames, Luxottica has become a
world leader in the design, production and distribution of prescription frames and
sunglasses in the mid- and premium-priced segment.
Most of frame production is mainly carried out in six facilities located in Italy (highly
specialised and focused on luxury and fashion products), with around 25% of total
production produced in two plants in China (Guangdong) along with one in India, mainly
devoted to the Indian market.
The plants in China are mostly used for selected brands (lifestyle/fashion, traditional), with
part of the production of private labels having been outsourced to third parties.
Following the acquisition of Oakley, the company also has two additional manufacturing
and assembling sites: one in Foothill Ranch, California, and a second one in Dayton,
Nevada.
Luxottica’s wholesale division has enjoyed double-digit growth in sales over the last three
years (CAGR of 22%) and its level of profitability has also increased (EBIT margin passing
from 21.3% in 2004 to 26.5% in 2007) thanks to: (i) the acquisition of new licences; (ii) a
strengthening of the portfolio in various segments (e.g. the introduction of brands with a
higher percentage of prescription glasses and increasing the percentage of
menswear/womenswear); (iii) a higher focus on owned brands whose potential is not fully
developed (e.g. Persol, Vogue); (iv) entrance into and the strengthening of positions in
emerging markets (Eastern Europe, Russia, Middle East, China, India, South America and
Turkey), in which Luxottica is seeking a leadership position and can enjoy ‘first-mover
advantage’ (we estimate that these emerging markets represent around 15% of sales to
third parties); and (v) further margin development from entering new market segments.
Licensed brands: one of the best industry portfolios
Following the loss of the Armani licence in 2003, the company has carried out a
substantial evolution of its brand portfolio, segmenting the various brands into four
categories (luxury, premium fashion, fashion and lifestyle) and geography (less Europeanoriented than in the past) and implementing the following actions:
(i)
the addition of several key licences (such as Versace, Dolce & Gabbana,
Prada, Ralph Lauren, Donna Karan, Burberry and, more recently, Tiffany);
(ii)
the reduction of the relative weight of each licence (no one licence
accounts for more than 5% of sales), thus minimising the impact of an
eventual loss;
(iii)
an increase in the average expiry of licences to around 10 years compared
to four to five years in the past;
(iv)
phasing out the production of non-strategic brands, which increased
complexity while having a negligible contribution on margins;
(v)
evolution in its distribution approach, such as the identification of real
trendsetter independents, the strengthening of its sales organisation through
central teams—“key department accounts”—a more selective approach for
top-tier brands, tackling new distribution channels (travel retail and
department stores) and implementing specific projects (e.g. STARS); and
(vi)
a more focused marketing organisation (brand management, increased
PR activity and VIP endorsement).
Italian eyewear players
12
30 May 2008
Figure 16: Luxottica: Evolution in distribution approach
Figure 17: Luxottica: Distribution strategy by brand
Source: Company information
Source: Company data
In the table below, we list the main licence agreements in Luxottica’s portfolio and their
respective expiry dates. Most of Luxottica’s licences have an option for renewal, and there
are no major licences expiring before 2010 when the Bulgari licence expires (however, it
accounts for less than 3% of consolidated revenues and has been renewed already
several times).
Figure 18: Luxottica: Main licence expiry
Licensed brand
Expiry Date
Adrienne Vittadini
Anne Klein
Brooks Brothers
Bulgari
Burberry
Chanel
Dolce & Gabbana, D&G
Donna Karan, DKNY
Fox Racing
Dec-09
Dec-09
Dec-09
Dec-10
Dec-15
Mar-11
Dec-10
Dec-09
Dec-08
Gianni Versace, Versace, Versace Sport, Versus
Paul Smith
Ralph Lauren, Ralph Lauren Purple Label, Polo, Ralph, Chaps(*)
Prada, Miu Miu
Salvatore Ferragamo, Ferragamo
Stella McCartney
Tiffany & Co.
Dec-12
Feb-14
Mar-17
Dec-13
Dec-08
Dec-15
Dec-17
Renewable Option
Renewable until Mar-14
Renewable until Mar-15
Renewable until Dec-14
Renewable for additional three-year terms, expiring Dec-11
and Dec-14
Renewable until Dec-22
Renewable until Dec-18
Renewable until Dec-13
Renewable until Dec-20
Source: Company data. (*) USA, Canada, Mexico and Japan only
Owned brands: more upside potential from the
Oakley deal
Thanks to the recent Oakley acquisition, Luxottica has strengthened its own brand
portfolio, adding a company leader in the production of high-performance sunglasses.
Oakley was acquired at the end June 2007, in a US$2.2bn deal (or $29.3 per share),
corresponding to 11.4x EV/EBITDA 2008E (pre-synergies) or 7.8x EV/EBITDA 2008E
post-synergies (estimated by the company at €
€ 100m).
Italian eyewear players
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30 May 2008
Figure 19: Oakley: Growth phases
Figure 20: Oakley: Revenue breakdown by product (2007)
Other
7%
AFA
19%
Optics
74%
Source: Company information
Source: Company data
Following the Oakley merger, we believe the investment case for Luxottica lies in the
company’s ability to improve Oakley’s operating margins (currently in the low double-digits,
on our estimates) and achieve a considerable level of synergies thanks to cross-selling
opportunities with its retail division along with wholesale distribution (especially in Europe
and emerging markets): this has already been the case with the Ray-Ban acquisition,
since we estimate that the brand doubled sales from 2000 (when 5.5m units were sold) to
an estimated €
€ 570m last year (and above 14m units sold), achieving above-average group
profitability after the restructuring carried out by Luxottica.
Although we acknowledge that the profile of the Oakley brand is different, we see no
reason why it cannot reach the same level of profitability as Ray-Ban—or very close.
Figure 21: Oakley: Revenue split by channel (2007)
Retail
15%
Figure 22: Oakley: Revenue split by geography (2007)
Direct
4%
International
41%
US
59%
Wholesale
81%
Source: Company data
Source: Company data
Luxottica has estimated that synergies between the two companies should generate
around €
€ 100m within three years: revenue synergies should provide for around €
€ 70m of
additional sales, while cost savings should account for around €
€ 30m.
Italian eyewear players
14
30 May 2008
Figure 23: Oakley sales, EBIT margin evolution
Figure 24: Luxottica: Oakley synergies by year
€€ in millions, unless otherwise stated
(2002–07E)
US$ in millions, unless otherwise stated
16.0%
1,200.0
14.0%
1,000.0
12.0%
800.0
10.0%
8.0%
600.0
6.0%
400.0
4.0%
200.0
2.0%
0.0%
0.0
2002
2003
2004
Sales
2005
2006*
2007E**
EBIT margin
Source: Company data, Credit Suisse estimates. (*) Includes the
acquisition of Oliver People. (**) Includes the acquisition of ESS and
Bright Eyes Group
Source: Company data
We believe that the two companies can leverage on their respective strengths: for
example, Luxottica’s global reach could improve Oakley’s distribution and presence
worldwide, and enhance Oakley’s development of luxury brands (Oliver People) or
category strengthening (e.g. Rx sun, womenswear).
Luxottica could also exploit Oakley’s expertise in sports-performance products to develop
and manage some of its owned brands (e.g. Revo, Arnette).
Figure 25: Luxottica: Oakley brands positioning
Source: Luxottica Group presentation
Italian eyewear players
15
30 May 2008
We also note that although Sunglass Hut already carries a sizeable percentage of Oakley
products (around 20%), the brand was not sold in LensCrafters. The company plans to
gradually introduce it throughout the year (currently in 300 LensCrafter stores, which by
year-end should reach approximately 500 stores).
In order to select the priorities for the Oakley merger, Luxottica has put in place two waves
of projects (Figure 26 and Figure 27). It has almost completed the first wave of them.
Figure 26: Luxottica and Oakley integration
Projects wave 1
% accomplishment
Europe
60%
- Excellent work done: already in the transition period
Emerging markets
75%
- Already up an running: strong integrated planning for the Olympic Games
Retail Optimisation
60%
- Sunglass Icon infrastructure already integrated
- Cross-selling opportunities: moving fast in LC and SGH with strong achievement and discoveries. Good start in all
regions
- Retail brand positioning: working on potential active/performance retail concept
Sourcing
- All plans finalised: by year-end, the project will be complete
- Sun lenses strategy almost finalised
Revo
60%
75%
60%
- Foothill Ranch team in full leadership: collection launch in December 2008
Source: Company data, Credit Suisse estimates
Figure 27: Luxottica and Oakley integration
Projects wave 2
Other key country
- Mission and organisation (Australia, UK)
Global supply chain & IT
- Choosing mid-term optimal model and quick wins
- Plan to balance costs, service level, IT needs
Oliver People
- Deep understand of opportunities
Channel Management
- A number of tests under way
Source: Company data, Credit Suisse estimates
Figure 28: Luxottica: Wholesale division sales and EBIT evolution (2007–11E)
€
€ in millions, unless otherwise stated
2007
Sales
% growth
EBIT
EBIT margin (%)
1,992.7
528.0
26.5%
2008E
2009E
2010E
2011E
2,743.1
37.7%
649.1
23.7%
3,035.9
10.7%
754.2
24.8%
3,330.3
9.7%
846.7
25.4%
3,611.9
8.5%
941.6
26.1%
Source: Company data, Credit Suisse estimates
Italian eyewear players
16
30 May 2008
Figure 29: Luxottica: Owned brands
Owned brands
Comment
Ray-Ban
Created in 1937, Ray-Ban is the brand leader in the eyewear market based on sales, bringing together renowned
sunglass lenses. Estimated sales, €
€ 570m
Oakley
The brand was founded in 1975 in South California. Key features: strong, iconic brand, leader in eyewear technology
Oliver Peoples
Founded in 1986, Oliver Peoples helped to establish the luxury eyewear market
Persol
Created in 1917 and acquired by Luxottica in 1995, the Persol brand is popular among movie stars
Vogue
Acquired in 1990, the Vogue brand is trendy, modern, glamorous, for fashion-oriented young people
Arnette
Sports product line targeted to young consumers
Revo
The Revo line is known for its high-quality lenses which are treated with a specialised coating process. The company
gave these numbers. Estimated revenues are €
€ 40m, but potential up to €
€ 100m
Luxottica
The line targets a broad mix of consumers of eyewear
Sferoflex
This product line, which in 1981 became the first brand name acquired by Luxottica, includes prescription frames
characterised by a classic and comfortable style, with flexible hinges that allow the frame to adapt to the unique face
shape of each wearer
Killer Loop
Created in 1989 as a sun and sports eyewear brand that combines design and quality, this brand has evolved
throughout the years from exclusively sports eyewear to also include leisure eyewear. It has been selected as the
entry Luxottica brand for emerging markets
Dragon
The brand is focused on sports, art, youth-influenced music and street culture
ESS (Eye Safety System) Eye protection systems for military, fire fighting and law enforcement professionals. Leading supplier of protective
eyewear to the US military and fire fighting markets
Mosley Tribes
Modern brand fusing fashion and urban lifestyles
Source: Company data, Credit Suisse research
Italian eyewear players
17
30 May 2008
Retail: US and Asia leadership
Luxottica’s retail division has been growing through acquisition, the first being
LensCrafters (1995), which has given to the company market leadership in North America
(Figure 30 and Figure 31) with a share of around 20% (source: Jobson Optical).
Later on, Luxottica acquired the sun retail chain Sunglass Hut (2001), as well as OPSM
(2003) and Cole National (2004), in addition to smaller-scale acquisitions in China (three
over 2005–06), South Africa and DOC Optics (in 2006). In general, the company says its
strategy is to enter direct retail in countries where it would not lose its wholesale market
share.
Figure 30: Revenues of top US optical retailers (2007)
Figure 31: Stores of top US optical retailers (2007)
US$ in millions, unless otherwise stated
3,000
3,500
2,680
2,500
3,000
2,000
2,500
1,335
1,500
2,942
2,918
2,000
1,500
1,000
405
1,000
95
94
90
503
473
-
374
158
140
106
75
Hi
gh
Hi
g
521
500
xo
ttic
aR
Re
eta
fr a
il
cO
ma
rk
pti
ca
Vi
sio
lG
nH
ro
up
old
*
ing
/R
eta
il g
ro
up
Na
tio
na
lV
isi
on
Co
s tc
oW
ho
les
ale
Em
er
Fo
gin
rE
gV
ye
isi
s/I
on
ns
i gh
tO
p ti
c
Co
al
he
Mf
n's
g*
Fa
sh
ion
Op
tic
al
Ey
eM
ar
tE
xp
re
ss
*
116
Lu
xo
tti
ca
re
ta
W
hm
il*
al
ar
M
k
a
Vi
rt
si
st
on
or
es
H
ol
*
di
ng
/R
et
ai
Co
l..
st
.
co
W
ho
le
sa
N
le
at
io
na
Re
lV
f ra
isi
on
c
O
*
pt
ic
C
al
oh
G
en
ro
's
up
Fa
*
sh
io
n
O
pt
Ey
ic
Fo
al
eM
rE
ar
tE
ye
s/
x
pr
In
es
si
gh
s*
tO
pt
ic
al
M
Em
fg
*
er
gi
ng
Vi
si
on
-
s to
re
s
185
Lu
458
W
al Ma
rt
588
500
Source: Vision Monday’s 2008 Top 50 US Optical Retailers. (*)=VM
estimate
Source: Vision Monday’s 2008 Top 50 US Optical Retailers. (*)=VM
estimate
Figure 32: Leading mass merchant with optical departments
Rank
Mass Merchant
(operator)
2007 Retail Sales
(US$m)
(units)
2007
Class
1
Wal-Mart
1,356*
2,701*
MM
2
3
Wal-Mart Corp.
National Vision
Costco Wholesale
Sam's Club
1,215*
141*
458.4
120*
2,472*
229
374
470*
WC
WC
4
5
Wal-Mart Corp.
ShopKo Stores
Target/Super Target
80*
56.4*
131
296
MM
MM
6
Luxottica Retail
BJ's wholesale(**)
36*
156
WC
7
Luxottica Retail
Fred Meyer
9.7*
32
MM
National Vision
Source: Vision Monday’s 2008 Top 50 US Optical Retailers. (*) VM estimate. MM= Mass Merchant WC=
Warehouse Club. (**) Former Luxottica retail since the agreement has been terminated in 2007.
On acquiring retail chains and turning them into successes, Luxottica has generally had
little trouble since it focuses on reducing corporate costs, increasing purchasing power
with suppliers, and boosting its share of products sold to the acquired retailer (Figure
33)—as a consequence, raising its wholesale revenues.
In addition, it could grant a new licensor a certain level of turnover and visibility in its own
stores, which we believe has been one of the key factors in winning most of its new
licences in fashion/luxury.
Italian eyewear players
18
30 May 2008
Figure 33: Luxottica: % of units sold produced internally
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2001
2002
2003
LensCrafters
2004
Sunglass Hut
OPSM
2005
2006
Cole
Source: Company data, Credit Suisse estimates
Following the Cole acquisition, the division has gone through a reorganisation which has
led to a new, increasingly upscale store format for several of its chains; the securing of
better and more prestigious locations; the upgrading/differentiating of in-store product mix;
and the leveraging on lab networks to offer a better service and increase sales of specific
products. In addition, the managed vision care business has been strengthened (following
the merger with Cole—number two in the USA) and has helped to drive sales.
Luxottica’s retail chain includes the following.
■
LensCrafters: The company operates with 951 stores throughout North America.
Most LensCrafters stores are located in high-end malls, have an independent licensed
optometrist on site and include a laboratory that also provides one-hour service on
frames and lenses selected by the client. More recently, Luxottica has launched a new
store format, LensCrafter Optique, in which there is no laboratory, but such a format
tends to be only in selected locations (e.g. Manhattan). Additional revenue growth and
margin improvement could derive from: (i) the addition of new brands (e.g. the recent
introduction of the Oakley brand); (ii) a rise in the percentage of AR (non-glare) lenses
(still low compared to Pearle), which also have a higher margin; and (iii) the partial
internalisation to the group’s lab network of jobs that were previously outsourced, with
considerable cost savings and an increase in efficiencies.
■
Sunglass Hut: In order to seize an estimated US$2bn sun market (as estimated by
Vision Monday), Luxottica has repositioned the chain over the years, adopting a new
store format, increasing fashion content and introducing pricier products. This has also
implied a shift in its presence in the US to the coastal and sunbelt states, closing
nearly all its mid-US stores. As such, the chain’s focus has been moved from sport
and men into fashion and becoming more female-oriented. The chain has most of its
stores in the US (1,710 stores), Asia-Pacific (220 stores) and Europe (88 stores).
However, thanks to agreements with and the selected acquisition of premium sun
retail chains, it is also present in the Middle East and South Africa (with 68 stores).
■
Pearle Vision and Pearle Vision franchising: In contrast with LensCrafters, which is
centred on service and fashion, Pearle is focused on eye-care and health. Three goals
have been put in place to drive Pearle’s expansion: (i) building on its heritage (e.g. the
latest technology for eye exams, OptoMap); (ii) online access to book appointments;
and (iii) increased patient flow thanks to managed vision care (currently this provides
Italian eyewear players
19
30 May 2008
for less than 50% of patients, while at a typical eye doctor two-thirds of patients come
from managed vision care).
■
Licensed brands: There are only two brands left, Sears and Target Opticals, since BJ
was recently closed. Stores are located at Sears and Targets premises and the
product offering is more skewed to women and children, along with private labels and
some fashion brands. They are both focused on price-conscious customers.
■
Ilori: This is the latest niche store concept targeting sophisticated consumers, with
prices for sunglasses starting at US$200 up to US$25,000. Currently, around 50–60%
of products are provided by Luxottica; however, the company also plans to start
distributing Safilo brands in the chain. An estimated 30 stores are expected by the
company by year-end.
■
The company has targeted Australia and New Zealand more aggressively following
the acquisition of OPSM, which operates with three different concept stores tackling a
clear positioning for each brand: OPSM for fashion and convenience; Laubman &
Pank, well-known for its superior service and eyecare; and Budget Eyewear, which is
high-traffic value-oriented. In addition, since the acquisition, a substantial store
restyling has been carried out; this has been repaid by the high growth rates achieved
in the region over the last years (comp sales growth was 3.7% in 2006, and 6.3% in
2007). Currently, the company is looking for expansion through franchising in rural
areas. In Australia, Luxottica also operates Sunglass Hut and, following the acquisition
of Oakley, a small number of “Bright Eyes” stores focused on sports and performance
sunglasses.
■
Following the acquisition of three retail chains and a re-branding, Luxottica currently
operates in China mainly through the LensCrafters brand and the Ming Long brand in
the Guangdong region only. China is considered one of the markets with the highest
potential by the company, where it has said it aims to have 1,000 stores over the next
five years from a current base of 241. According to an article in the Wall Street
Journal, “The country ranks as one of the world’s most myopic nations since 70% of its
16- to 18-years olds are nearsighted, according to state media. If current trends
persist, researchers say 700m Chinese will be nearsighted by 2045” (article dated 05
February 2008).
■
After the acquisition of Oakley, Luxottica has also acquired a number of retail chains.
These are: Sunglass Icon, focused on sport brands; the Optical Shop of Aspen,
which we think could become the “Ilori” for optical frames; the “O stores”, which we
expect the company to increase to help build Oakley as a ‘lifestyle brand’; and, finally,
Oliver Peoples (only six stores) and Bright Eyes (Australia-based).
Figure 34: Luxottica: Retail North America
No. of stores in Q1
08
Store Classification
Key Focus
LensCrafters
Sunglass Hut
Pearle Vision
Cole Licensed brands Sunglass Icon
951
1,710
875
1,185
143
P&S
Fashion and service
Sunglasses
Fashion-conscious
consumer
P&S
Personalised doctor
experience, trusted
eyecare
€€300m
7.0%
P&S
Fashion and traffic
Sunglasses
Sport, fashion and
active lifestyle brands
€€340m
8.5%
-
€ 1.3bn
Estimated revenues €
Estimated profitability 16.0%
€€750m
13.0%
Source: Company data, Credit Suisse estimates. P= prescription, S=sunglasses
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30 May 2008
Figure 35: Luxottica: Retail North America
No. of stores in Q1
08
Store Classification
Key Focus
Optical Shop of Aspen
ILORI
O Stores
Oliver Peoples
20
7
122
6
Prescription
Fashion and luxury optics
Sunglasses
Sophisticated customer and
luxury sunglasses
Sunglasses and other
Offering a wide selection of
Oakley branded products
P&S
Oliver Peoples eyewear only
Source: Company data, Credit Suisse estimates.
Figure 36: Luxottica: Retail Asia-Pacific
OPSM
Sunglass Hut
Bright Eyes
China
No. of stores in Q1 08
Store Classification
Key Focus
546
P&S
Style and fashion
220
Sunglasses
Fashion-conscious
consumer
141
Sunglasses
Sunglasses, more sport and
performance driven
Estimated revenues
Estimated profitability
€€400m
12%
-
-
241
P&S
Main presence through the
LensCrafters brand as well
as local a brand (Ming Long)
-
Source: Company data, Credit Suisse estimates. P= prescription, S=sunglasses
Figure 37: Luxottica: Retail in Europe, Middle East and South Africa
Sunglass Hut
No. of stores(*)
183
Store Classification
Key Focus
Sunglasses
Fashion-conscious consumer
Source: Company data, Credit Suisse research. (*) 27 stores in the Middle East are franchised locations
Finally, we think managed vision care and the labs network are two tools on which the
company can still leverage to increase its positioning in the US and improve margins.
■
Managed vision care (EyeMed) was set up from scratch in 1999 and currently ranks
#2 in the US Managed Vision Care market (Figure 38). Luxottica has said it intends to
expand the business and make it more attractive to America’s leading corporations,
offering a wider product range and enlarging its addressable market. In 2007,
LensCrafters sales driven by EyeMed represented 25–30% of optical sales in North
America.
Figure 38: Managed Vision Care market (2004)
USD in millions, unless otherwise stated
Market share
Revenues
Funded lives
VSP
44%
2,060
38
EyeMed
Davis
Spectera (*)
Block
Superior
Avensis
Other
17%
11%
8%
3%
1%
1%
15%
670
300
251
60
35
4
700
16.5
14.6
8.2
4.3
1
1.5
13
(*) In 2007 the company had 17m funded lives and a 12.5% market share
Source: UnitedHealth Group.
■
Luxottica has also taken action to optimise the potential of its labs network: Pearle
labs have been closed and the network has been opened to the franchising network.
Currently, Luxottica operates eight central labs and 905 LensCrafters in-store labs.
The main actions taken include: reducing outsourcing costs with increased internal
Italian eyewear players
21
30 May 2008
capacity (boosted by +45% since 2005), especially in AR lenses; cost and service
improvement through the standardisation of processes and procedures; and the
introduction of new technologies to improve productivity. All of this should translate
into savings of US$50m over the next two to three years, according to Luxottica.
Figure 39: US Wholesale labs* by Rx sales
US$ in millions, unless otherwise stated
Total Revenues
Rx Revenues
N. Rx jobs per day
N. of locations
820
210
130
210
51
29.2
31.5
78.8
25
28.6
738
200
117
92.4
50
31.7
30.6
28.6
25
24.9
56,000
11,500
10,000
6,350
3,200
2,121
1,900
2,579
1,600
1,600
110
19
15
33
2
1
1
10
1
2
Essilor Laboratories of America
Hoya Vision Care
Carl Zeiss Vision Laboratories
Walmann Optical Company
VSP Optical Laboratories**
Pech Optical
Luzerne Optical
Nassau Vision Group Laboratories
Empire Optical of California
Inerstate Optical
(*) Labs operated by optical retail chains are not included. (**) Does not include contract labs
Source: Vision Monday’s Top Labs, 2007
The current environment in the US could represent a threat for the performance of the
division in the short term (Figure 40): comp sales reported in Q1 were down by around 4%
in North America. However, we note that:
■
Luxottica is outperforming most of the other retailers in North America (Figure 41);
■
it has already implemented a contingency plan (lower costs, a streamlining process) in
order to face the tough environment and become more effective/efficient;
■
in terms of units sold at the group level, an estimated 40% are prescription, which
could prove more resilient in the current environment; and
■
historically, comp sales have been negative only in 2002 (-0.6%) and 2003 (-1.1%).
Figure 40: Correlation between US GDP growth and
Figure 41: Comparable store sales of major US retailers
Luxottica comp sales in North America (1997–2002)
y = 1.4628x - 0.0156
2
R = 0.6907
8.0%
7.0%
30.0%
25.0%
20.0%
6.0%
15.0%
5.0%
10.0%
4.0%
5.0%
3.0%
0.0%
2.0%
-5.0%
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
-10.0%
1.0%
-15.0%
0.0%
-1.0%0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
-20.0%
Saks
Source: IMF, Credit Suisse research
Neiman Marcus*
Nordstrom
JC Penney
Kohl's
Dillard
Source: Company data. (*) Specialty retail only
Figure 42: Luxottica: Retail sales and EBIT evolution (2007–11E)
€
€ in millions, unless otherwise stated
2007
Sales
% growth
EBIT
EBIT margin (%)
3,233.8
361.8
11.2%
2008E
2009E
2010E
2011E
3,149.0
-2.6%
344.7
10.9%
3,324.0
5.6%
382.5
11.5%
3,497.0
5.2%
415.2
11.9%
3,674.0
5.1%
449.8
12.2%
Source: Company data, Credit Suisse estimates
Italian eyewear players
22
30 May 2008
Valuation
Our target price of €
€ 22.2 implies 28% upside potential at current prices, supporting our
Outperform rating on the company.
Our valuation is based on a DCF model using the following assumptions beyond our
explicit forecast period (2008–2012E):
■
terminal growth of 2.0% and a rolling WACC between 7.6% and 8.3%; and
■
FCF growth per year of 6.5%.
We calculate our equity fair value by deducting our estimates for net debt, pensions and
minority interests from the enterprise value derived from our DCF model. We have also
run a sensitivity analysis of our target price to changes in the WACC and terminal growth.
Figure 43: Luxottica: DCF model
€€ in millions, unless otherwise stated
Explicit Forecast Period
Net Sales
2009
2010
2011
2012
2013
2014
2015
2016
2017
5,462
5,931
6,404
6,873
7,335
7,759
8,135
8,451
8,700
8,874
8.6%
8.0%
7.3%
6.7%
5.8%
4.8%
3.9%
2.9%
2.0%
Y-o-Y Change
Clean EBIT
Margin
Tax
Tax rate
NOPAT
Depreciation & Amortisation
Transition Period
2008
902
1,070
1,181
1,294
1,402
1,483
1,555
1,615
1,663
1,696
16.5%
18.0%
18.4%
18.8%
19.1%
19.1%
19.1%
19.1%
19.1%
19.1%
(329)
(391)
(431)
(472)
(512)
(541)
(567)
(590)
(607)
(619)
37%
37%
37%
37%
37%
37%
37%
37%
37%
37%
572.8
679.4
750.0
822.0
890.2
941.7
987.3
1,025.7
1,055.9
1,077.0
285
288
297
317
338
358
375
390
401
409
5.2%
4.9%
4.6%
4.6%
4.6%
4.6%
4.6%
4.6%
4.6%
4.6%
Working Capital Change
(82)
(77)
(78)
(77)
(76)
(80)
(84)
(88)
(90)
(92)
Operating Cash Flow
777
As % of Sales
Y-o-Y Change
890
969
1,062
1,153
1,219
1,278
1,328
1,367
1,394
15%
9%
10%
9%
6%
5%
4%
3%
2%
Capex & Other Operating Investments
(284)
(297)
(320)
(344)
(367)
(382)
(394)
(403)
(408)
(409)
As % of Sales
5.2%
5.0%
5.0%
5.0%
5.0%
4.9%
4.8%
4.8%
4.7%
4.6%
Free Cash Flow
493
Y-o-Y Change
594
649
719
786
837
884
925
959
985
21%
9%
11%
9%
6.5%
5.6%
4.6%
3.7%
2.7%
Discounted Free Cash Flow
493
568
575
587
589
580
565
546
523
496
WACC
7.6%
7.7%
7.9%
8.1%
8.3%
8.3%
8.3%
8.3%
8.3%
8.3%
2009e-2017e FCF
Terminal Value
5,028
8,014
Enterprise Value
13,043
Net Debt end 2008
(2,724)
Retirement Funds end 2008
Minorities at market value end 2008
Equity Value
# of Shares in Issue (million)
Equity Value per Share (EUR)
(63)
(150)
10,106
455.2
22.2
Implied P/E 2009e
16.2x
Implied EV/EBIT 2009e
12.2x
Source: Credit Suisse estimates
Italian eyewear players
23
30 May 2008
Our target price of €
€ 22.2 implies a 2009E EV/EBIT of 12.2x and a 2009E P/E of 16.2x, still
lower than the company’s historical average of 19.1x.
Risks
The main risks we see to our target price include: a global macroeconomic slowdown;
terrorist attacks or epidemics; currency weakness (mainly US$); pressure on margins due
to a deteriorating environment and store openings; a longer-than-expect time for the
Oakley integration; and increasing competition in the US optical retail sector.
Upside potential to the share price could come from new licence agreements and higherthan-expected synergies delivered from the Oakley deal and internal efficiencies.
Italian eyewear players
24
30 May 2008
Financial forecasts 2007–11E
We factor-in a total revenue CAGR of 8.5% over the 2007–11E period, rising from €
€ 5.0bn
to €
€ 6.9bn. This trend should be supported by the following.
■
Wholesale revenues growing from €
€ 2.0bn in 2007 to €
€ 3.6bn in 2011E (CAGR of 16%),
driven by: (i) the consolidation of Oakley which should account for around €
€ 560m in
2008E; (ii) the organic growth of existing licences; (iii) the roll-out of recently
introduced licences (Burberry, Ralph Lauren, Tiffany); and (iv) a more efficient
distribution approach;
■
Retail sales growing at 3.2% CAGR from €
€ 3.2bn in 2007 to €
€ 3.7bn in 2011E, which
factors in a 2.6% decline in revenues for 2008E, mainly due to negative currency
effects and negative comp sales (only in 2008E) for LensCrafters (-2%), Pearle (-2%)
and Sunglass Hut (-1.5%). We also assume the company will open around 120 stores
in 2008 and afterwards.
Figure 44: Luxottica: Group sales and EBIT margin
Figure 45: Luxottica: Quarterly trend in comp sales
evolution
revenues
8,000
25.0%
7,000
20.0%
6,000
10.0%
8.0%
6.0%
5,000
15.0%
4.0%
2001
2002
2003
2004
2005
Sales
2006
2007
2008E
EBIT margin
Source: Company data, Credit Suisse estimates
2009E
2010E
2011E
00
7
00
7
00
6
00
6
00
5
00
8
Q1
2
Q3
2
Q1
2
Q3
2
Q1
2
00
5
Q1
2
Q3
2
00
4
00
3
00
4
Q3
2
Q1
2
00
2
00
3
Q1
2
Q3
2
Q1
2
0.0%
-
00
2
00
1
0.0%
-2.0%
Q3
2
5.0%
1,000
2.0%
00
1
2,000
Q1
2
10.0%
3,000
Q3
2
4,000
-4.0%
-6.0%
Source: Company data
We estimate an 11.6% EBIT CAGR from €
€ 781m to €
€ 1.3bn, with margins improving from
16.8% to 18.8% as a result of the following.
■
An improvement in the wholesale division’s EBIT margin from 23.7% in 2008E (versus
pro-forma 2007 of 23%) to 26.1% in 2011E. Luxottica’s wholesale division margin has
been much higher in the past (26.5% in 2007), but the effect of the Oakley
consolidation will likely weigh on 2008 accounts (since Oakley profitability is lower
than Luxottica’s average, and there are also some one-off restructuring charges in
2008 accounts). However, given the company’s proven track record in profitability
improvement we think Luxottica should be able to improve Oakley profitability and
restore the overall profitability of the wholesale division.
■
2008E Retail EBIT should be less affected by the Oakley consolidation; as such we
are factoring in a level of profitability (EBIT margin at 10.9%) similar to that reached in
2007 (EBIT margin at 11.2%). Going forward, though, we are assuming a 5.6% EBIT
CAGR and the EBIT margin to move from 10.9% to 12.2% in 2008E.
■
We also assume inter-segment adjustments at the EBIT level to account for an
average 7.1% of total EBIT (vs. an average of around 9.6% in the last five years).
As such, we estimate that net income should progress at an 11.9% CAGR from €
€ 492m in
2007 to €
€ 772m in 2011, assuming a 36.5% tax rate.
Italian eyewear players
25
30 May 2008
Figure 46: Wholesale sales and profitability
Figure 47: Retail sales and profitability
€€ in millions, unless otherwise stated
€€ in millions, unless otherwise stated
4,000.0
28.0%
4,000.0
16.0%
3,500.0
26.0%
3,500.0
15.0%
3,000.0
24.0%
3,000.0
14.0%
2,500.0
13.0%
2,000.0
12.0%
1,500.0
11.0%
1,000.0
10.0%
22.0%
2,500.0
20.0%
2,000.0
18.0%
1,500.0
16.0%
1,000.0
14.0%
500.0
12.0%
500.0
-
10.0%
-
2001
2002
2003
2004
2005
2006
Wholesale sales
2007
2008E
2009E
2010E
2011E
9.0%
8.0%
2001
2002
2003
2004
2005
Retail sales
Wholesale EBIT margin
Source: Company data, Credit Suisse estimates
2006
2007
2008E
2009E
2010E
2011E
Retail EBIT margin
Source: Company data, Credit Suisse estimates
Figure 48: Luxottica: P&L (2007–11E)
€€ in millions, unless otherwise stated
Net Sales
yoy % change
Cost of Sales
Gross Profit
% of Sales
Selling and Advertising
General and Administrative
Income from Operations
% of Sales
Interest Income (Expense)
Other—Net
Income Before Taxes
% of Sales
Taxes
Minority Interests
Net Income
% of Sales
2007
2008E
2009E
2010E
2011E
4,966.1
5,461.6
5,931.1
6,404.0
6,872.8
6.2%
-1,575.6
3,390.4
68.3%
-2,069.3
-487.8
833.3
16.8%
-72.4
19.8
780.7
15.7%
-273.5
-15.0
492.2
9.9%
10.0%
-1,732.9
3,728.8
68.3%
-2,275.8
-551.0
902.0
16.5%
-67.7
0.0
834.3
15.3%
-304.5
-15.6
514.1
9.4%
8.6%
-1,858.1
4,073.0
68.7%
-2,435.8
-567.3
1,069.9
18.0%
-59.6
0.0
1,010.2
17.0%
-368.7
-18.9
622.6
10.5%
8.0%
-1,993.4
4,410.6
68.9%
-2,630.0
-599.4
1,181.2
18.4%
-51.0
0.0
1,130.2
17.6%
-412.5
-21.2
696.5
10.9%
7.3%
-2,125.6
4,747.2
69.1%
-2,822.5
-630.2
1,294.4
18.8%
-41.3
0.0
1,253.1
18.2%
-457.4
-23.5
772.2
11.2%
Source: Company data, Credit Suisse estimates
Excluding the impact of further acquisitions, net debt should decline from €€2.9bn in 2007
(debt/equity at 1.2x, and net debt/EBITDA at 2.7x) to €
€ 1.9bn in 2011E (net debt/EBITDA at
1.1x). We are factoring-in capex at around 5% of revenues, as recently guided by the
company, and a payout ratio of 45.4%, in line with last year.
Italian eyewear players
26
30 May 2008
Figure 49: Luxottica: Balance sheet (2007–11E)
€€ in millions, unless otherwise stated
2007
2008E
2009E
2010E
2011E
P, P&E
Intangible fixed assets
Other fixed assets
Total fixed assets
Accounts receivable
Inventories
Accounts payable
Operating working capital
Other current assets
Other current liabilities
Net working capital
Net invested capital
1,057.8
3,908.0
280.9
5,246.7
665.2
575.0
-423.4
816.8
367.5
-487.6
696.7
5,943.3
1,095.5
3,868.9
280.9
5,245.3
731.6
632.4
-465.7
898.3
404.2
-526.1
776.4
6,021.7
1,139.1
3,833.8
280.9
5,253.8
794.4
686.8
-505.7
975.5
438.9
-571.3
843.1
6,096.9
1,191.5
3,804.7
280.9
5,277.1
857.8
741.5
-546.0
1,053.3
473.9
-616.9
910.3
6,187.5
1,247.3
3,775.2
280.9
5,303.4
920.6
795.8
-586.0
1,130.4
508.6
-662.0
977.0
6,280.4
Shareholders' equity
Minorities
Employees' termination liabilities
Other long-term liabilities
Net financial debt
Total sources of finance
2,495.2
41.1
56.9
478.3
2,871.8
5,943.3
2,658.9
49.6
62.6
526.1
2,724.4
6,021.7
2,942.0
60.0
68.0
571.3
2,455.6
6,096.9
3,258.7
71.6
73.4
616.9
2,166.9
6,187.5
3,609.9
84.4
78.8
662.0
1,845.4
6,280.4
Source: Company data, Credit Suisse estimates
Figure 50: Luxottica: Cash-flow statement (2007–11E)
€€ in millions, unless otherwise stated
2007
EBIT
2008E
2009E
2010E
2011E
833.3
902.0
1,069.9
1,181.2
1,294.4
232.8
1,066.1
285.4
1,187.4
288.1
1,358.0
296.9
1,478.0
317.3
1,611.8
-231.7
44.4
-72.4
4.8
-273.5
130.6
-208.0
460.2
-81.5
53.4
-67.7
-15.6
-304.5
0.0
1.8
773.2
-77.2
50.6
-59.6
-18.9
-368.7
0.0
10.5
894.5
-77.8
51.0
-51.0
-21.2
-412.5
0.0
10.6
977.1
-77.1
50.5
-41.3
-23.5
-457.4
0.0
10.5
1073.4
Fixed Asset Investments
Others
Cash Flow from Investments
-1886.4
-95.0
-1981.4
-284.0
0.0
-284.0
-296.6
0.0
-296.6
-320.2
0.0
-320.2
-343.6
0.0
-343.6
Dividend paid
Change in net worth
Net Cash Flow
-190.2
-12.0
-1723.3
-233.3
-108.5
147.4
-282.5
-46.7
268.8
-316.0
-52.2
288.7
-350.4
-57.9
321.5
D&A
EBITDA
Change in net working capital
Change in funds
Interests expenses
Interest from associates & others
Taxes paid
Deferred taxes
Other changes
Cash Flow from Operations
Source: Company data, Credit Suisse estimates
Our estimates are in line with consensus for 2008 and above consensus in 2009 (Figure
51). We factor-in a €
€ /US$ exchange rate of 1.50, while Luxottica has guided for sales of
€€5.6bn–5.75bn in 2008 and EPS in a range €
€ 1.11–1.14 (at a €
€ /US$ exchange rate of
1.45).
Figure 51: Credit Suisse estimates vs. consensus
€
€ in millions, unless otherwise stated
Credit Suisse 08E Consensus 08E*
% diff Credit Suisse 09E Consensus 09E*
Sales
EBIT
EPS
-0.6%
-1.5%
0.9%
5,461.6
902.0
1.13
5,492.0
916.0
1.12
5,931.1
1,069.9
1.37
5,930.0
1,048.0
1.29
% diff
0.0%
2.1%
6.2%
Source: Credit Suisse estimates. (*) Consensus as of 27/05/2008. © Datastream International Limited ALL RIGHTS RESERVED
Italian eyewear players
27
30 May 2008
Q208 release: weak performance priced-in?
Luxottica’s Q108 results were affected by the weakening of the dollar, the slowdown of the
North American market and the integration with Oakley, which has different seasonality vs.
Luxottica. We believe that Q2 could show a similar trend, although we think the market
should be aware of this since it has been anticipated by the company on several
occasions. Conversely, H208 should show a more positive trend (Figure 52).
Most recently, the CEO said in an interview reported by Reuters News Service on 13 May
2008: “The first quarter was as forecast. Certainly, the first part of the year is a lot more
difficult than the second part will be, costs and investments were higher than benefits... but
there are elements which give us hope that the year will be in line with guidance”.
Figure 52: Luxottica: main factors impacting North America retail profitability through
2008E
H1
H2
H108 Unfavourable
H208 Favourable
- Closing as of the end of 1Q of all remaining watchonly stores
- Oakley one-time restructuring charges
- Expenses commitment (i.e. A&P)
H107 Favourable
- Effects of cost-reduction projects (i.e. store labs,
manufacturing and supply chains, G&A)
- Oakley integration synergies
-Optimal level of marketing spending
-53rd week
-Postponement of capex and new store openings
H207 Unfavourable
- Recognition of revenues relating to the expiration of - Sudden sales slowdown in the last 40 days (-3%
retail warranty programmes sold in previous years
comp sales in 4Q)
- Oakley one-time restructuring charges
Source: Company data
Italian eyewear players
28
30 May 2008
Europe / Italy
Safilo Group (SFLG.MI)
Rating
Price (27 May 08, Eu)
Target Price (Eu)
Market cap. (Eu m)
Enterprise value (Eu m)
UNDERPERFORM*
1.83
1.80¹
522.27
1,107.5
*Stock ratings are relative to the coverage universe in each
analyst's or each team's respective sector.
¹Target price is for 12 months.
Research Analysts
INITIATION
Blurred vision
■
Event: We are initiating coverage of Safilo with an Underperform rating and
a target price of €
€ 1.8 per share.
■
View: Safilo’s performance since its IPO at the end of 2005 has been quite
disappointing (-63.2%) due to a series of negative events (loss of the Ralph
Lauren licence, a negative track record in achieving previously stated
targets) that have weakened investor confidence in the stock.
■
Safilo’s shares may look inexpensive, but we believe there could be
material downside potential if it were to lose its major licences (PPR group,
where the main licence agreement here is Gucci, and Dior), representing
some 35% of revenues and expiring in 2010E. Some minor PPR licences
(Boucheron, Bottega Veneta and Alexander McQueen) are due to expire at
the end of 2008; we would expect some news on their possible renewal to
be released in the short term.
■
We also see additional risks in the implementation of Safilo’s business plan
and its higher retail exposure in the current environment. Our best-case
scenario for Safilo indicates potential upside of 26%, but our worst-case
scenario suggests potential downside of 34%. We believe that the scope for
rewards is more than counterbalanced by the significant downside, resulting
in a less attractive risk/reward trade-off for the stock relative to Luxottica
and other stocks in our coverage (e.g. TOD's), which offer equally attractive
valuation upside (>20%) but with much lower risk.
■
Catalysts: Renewal of the main Gucci and Dior licences; bolt-on
acquisitions; an improvement in profitability; recurring press speculation
about a possible delisting; and currency weakness (dollar and yen). H1 08
results are due to be released on 30 July.
■
Valuation: Safilo is trading at a 2008E EV/EBITDA of 6.4x and a P/E of
10.5x, on our estimates. Although the shares may look relatively
inexpensive, we remain cautious and still see potential risks.
Melania Grippo
39 02 8855 0120
melania.grippo@credit-suisse.com
Rogerio Fujimori
44 20 7888 0889
rogerio.fujimori@credit-suisse.com
Share price performance
5
4
3
2
1
Jun-06
Oct-06
Feb-07 Jun-07
Oct-07
Price
Feb-08
Price relative
The price relative chart measures performance against the
Europe Dow Jones Stoxx index which closed at 357.82 on
27/05/08
On 27/05/08 the spot exchange rate was Eu 0.64 /US$1
Performance
Absolute (%)
Relative (%)
1M
2.3
4.0
3M
-17.7
-15.2
12M
-61.9
-53.7
Financial and valuation metrics
Year
Revenue (Eu m)
EBITDA (Eu m)
Net Income (Eu m)
CS adj. EPS (Eu)
ROIC (%)
P/E (adj., x)
P/E rel. (%)
EV/EBITDA
Dividend (2008E, Eu)
Dividend yield (%)
Net debt (12/08E, Eu m)
Net debt/equity (12/08E, %)
BV/share (12/08E, Eu)
12/07A
1,190.4
175.23
51.0
0.18
5.6
10.24
84.6
6.5
0.08
4.5
540.9
34.8
3.0
12/08E
12/09E
1,206.7
1,279.2
172.79
193.11
49.8
60.3
0.17
0.21
5.5
6.0
10.48
8.67
94.8
86.5
6.4
5.7
IC (12/07A, Eu m)
EV/IC
Current WACC
Free float (%)
Number of shares (m)
12/10E
1,353.8
212.31
70.5
0.25
6.6
7.41
59.3
5.2
1,481.4
0.75
8.3
41.9
285.39
Source: FTI, Company data, Datastream, Credit Suisse Securities (EUROPE) LTD. Estimates.
Italian eyewear players
29
30 May 2008
A restructuring story clouded by
risks
With total sales of €
€ 1.2bn, Safilo is the world’s #2 (after Luxottica) player in eyewear
manufacturing by turnover, while it is a market leader in the production of frames in the
high-end and luxury segments.
Safilo’s performance since its IPO at the end of 2005 has been quite disappointing
(-63.2%) due to a series of negative events (loss of the Ralph Lauren licence, a negative
track record in achieving previously stated targets) that have weakened investor
confidence in the stock.
As a result of this, the stock seems to be trading at cheap multiples compared to its main
competitor, Luxottica, as well as other luxury goods players. However, we view Safilo as a
restructuring story clouded by risks.
Following the LBO in 2002, Safilo has undergone financial restructuring, which led to the
flotation at the end of 2005. As such, its high debt/equity ratio (1.73x in 2002), was
reduced to 0.58x in 2005. The company still has a €
€ 195m bond that is due to expire in
2013. The decline in debt and the cost of financing has allowed management to increase
its focus on operating performance. We think the main growth drivers for sales will be: (i)
increasing penetration into new markets (e.g. Asia and emerging countries); (ii) increasing
its retail presence; (iii) higher penetration in existing ones (e.g. the Solstice project in the
US); (iv) a higher focus on owned brands; and (v) the development of newly acquired
licences.
We believe that the main risks on Safilo are as follows:
■
Implementation of the new business plan presented to the financial community this
past February.
■
We view the move into retail as positive, but the impact on short-term
profitability could be negative, since in the current environment stores could take
longer to reach break-even.
■
The expiration of the PPR group and Dior licences: We estimate that the PPR
group and Dior licences account for 35% of total revenues (PPR group includes
several brands, YSL, Boucheron, Bottega Veneta, Alexander McQueen, Balenciaga
and Gucci, which is the most important), some of which are already due to expire at
the end of 2008 (Boucheron, Bottega Veneta and Alexander McQueen). We expect
some news on the small licenses expiring in 2008 in coming weeks. Recently, the
Stella McCartney licensing agreement (now with Luxottica) also expiring in 2008 and
belonging to PPR was not renewed: this triggered some concerns about the possible
loss of the main Gucci licence. In an interview published by Milano Finanza on 14 May
2008, Gucci CEO Mark Lee confirmed that Gucci has an established and long-term
relationship with Safilo, that they are working on the renewal of such licences and that
they see no reason why Gucci should terminate its relationship with Safilo. However,
we believe the visibility on the renewal is still low.
Catalysts: News on the main Gucci and Dior licences; bolt-on acquisitions; an
improvement in profitability; recurring press speculation about a possible delisting (despite
a denial by the company’s main shareholder in a press release on 16 April 2008); and
currency weakness (US$ and yen). H108 results are due to be released on 30 July.
Valuation: Safilo is trading at a 2008E EV/EBITDA of 6.4x and at a P/E of 10.5x. Although
we concede that the shares look relatively inexpensive and that implementation of the
business plan could drive potential upside, we remain cautious on the shares.
Italian eyewear players
30
30 May 2008
Wholesale: the Gucci and Dior issue
Safilo is recognised in the industry as a leader in design and technical innovation (it
usually registers a number of patents each year); this, together with the company’s
exclusive and selective distribution approach, has helped create an impressive portfolio of
licensed brands. In 2007, around 80% of the wholesale division’s sales came from these,
the main ones being Dior, Gucci and Armani whose contribution is around 50% of
consolidated turnover.
The company also owns five brands (Safilo, Carrera, Oxydo, Smith and Blue Bay), which
represent the remaining 20% of wholesale sales. Carrera and Smith are two leading sport
brands: the former is targeted to a male and performance-driven market, while the latter is
among the top three brands in sport optics in the US.
Safilo is committed to the full development of its owned brands (mainly Carrera, Smith and
Oxydo), which should show double-digit sales growth over the next few years,
representing up to 30% of the wholesale division’s revenues by 2012 (from 20% currently).
Figure 53: Wholesale mix: House brands increasing their
Figure 54: Wholesale represents most of company
share of total wholesale revenues
revenues, but retail should be 20% or more by 2012E
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0%
2007
2008E
House brands
2010E
2012E
2007
2010E
Retail
Licenses
Source: Company data, Credit Suisse estimates
2008E
2012E
Wholesale
Source: Company data, Credit Suisse estimates
We believe that these factors are the main drivers for the division.
■
Expansion in new high-growth potential markets. Safilo aims at expanding further
into emerging markets (e.g. Latin America, representing together with Mexico only
2.5% of Safilo’s business, and the Far East, including China, which has become the
company’s #1 market in Asia, as well as India and Korea). The Far East had a 2001–
07 sales CAGR of 17.5% and has seen a doubling of its proportion of total sales to
12.6%.
■
Further penetration in mature markets. Safilo plans to open new subsidiaries in
Eastern Europe and pursue further opportunities in the US, widening its product range
(e.g. an increased focus on sunglasses and menswear) and introducing owned brands
(Carrera and Oxydo).
■
Development of newly acquired licences. During the last two years, the company
has added a total of six new licences (Hugo Boss, Marc by Marc Jacobs, Balenciaga,
Banana Republic, Jimmy Choo and Armani A/X), with an estimated contribution in the
range of €
€ 80m–90m in 2008.
■
New plant in China expected to grant higher flexibility and production capacity
while lowering production costs. Safilo currently produces 50% of its products in
Italy. However, a new plant is being built near Shanghai (30,000 sqm) which should be
fully operative by year-end. The plant will produce some metal components which
were previously made in Italy. Overall COGS savings should be €
€ 40m–50m by 2012E.
Italian eyewear players
31
30 May 2008
Figure 55: Safilo: Expected savings from Chinese plant
Figure 56: Safilo: Expected savings from top priorities
€€ in millions, unless otherwise stated
€€ in millions, unless otherwise stated
Source: Company data
Source: Company data
Figure 57: Safilo: Production facilities
Plant
Country
Surface Area (sqm)
Martignacco
Italy
4,460
Santa Maria di Sala
Italy
53,869
Precenicco
Italy
13,000
Ormoz
Slovenia
16,630
Longarone
Italy
61,736
Division
Product Specialisation
Plastics and semi-finished
products
Plastics and semi-finished
products
Plastics and semi-finished
products
Plastics and semi-finished
products
Metals
Components and
accessories
Finished products
Finishing, assembly and
vanishing
Semi finished products, optyl
and injected plastics
Finished products
Source: Company data, Credit Suisse research
■
Rationalisation of portfolio. We believe that one of the main drags on Safilo’s
profitability is reflected in the high number of brands and therefore models in its
portfolio (currently 31 in addition to five owned brands), which has increased the
overall number of models and production complexity. We expect the group to
streamline the number of models, focusing on the best-selling ones, reducing the
inventory of slow-moving items and increasing integration with key accounts. These
actions should provide for cumulated savings of around €
€ 30m–40m by 2012E.
■
Cost savings should be visible already in 2008E gross margins, but we see a
risk on business plan implementation. Apart from the savings coming form the
plant in China, Safilo has said it expects around 50–60bps of improvement in its gross
margin already in 2008, thanks to the reduction in costs and the time of product
creation. We note that the company in the past has already taken some action to
improve profitability (e.g. its “lean manufacturing project” and the closure of three
plants). However, these measures appear to have been offset somewhat by higher
costs related to the loss of the Ralph Lauren licence.
We believe the main issue in relation to Safilo’s product portfolio is represented by the
renewal of the PPR and Dior licences. We point out that these account for an estimated
35% of total revenues and include various important and popular brands under the PPR
group umbrella (Gucci, YSL, Boucheron, Bottega Veneta, Alexander McQueen and
Balenciaga), some of which are due to expire at the end of 2008. We expect some news
on the small licences included in the PPR agreement to emerge in coming weeks.
Recently, the Stella McCartney licensing agreement (now with Luxottica) also expiring in
2008 and belonging to PPR was not renewed: this triggered some concerns about the
possible loss of the main Gucci licence. In an interview published by Milano Finanza on 14
May 2008, Gucci CEO Mark Lee confirmed that Gucci has an established and long-term
relationship with Safilo, that they are working on the renewal of such licences and they see
no reason why Gucci should terminate the relationship with Safilo. However, we believe
the visibility on the renewal is still low.
Italian eyewear players
32
30 May 2008
Figure 58: Safilo: Main licence expiry dates
Licensed brand
Expiry date
Territory
Alexander McQueen
Giorgio Armani, Emporio Armani, A/X Armani
Balenciaga
Banana Republic
Bottega Veneta
Boucheron
Diesel, 55DSL
Dior
Fossil
Gucci
Hugo Boss, Boss
J. Lopez
Jimmy Choo
Juicy Couture
Liz Claiborne, Claiborne
Marc Jacobs, Marc by Marc Jacobs
Max Mara, Max & Co.
Nine West
Pierre Cardin
Valentino
Yves Saint Laurent
2008
2012
2012
2012
2008
2008
2010
2010
2008
2010
2013
2008
2015
2008
2012
2010
2013
2008
2010
2011
2010
Worldwide
Worldwide
Worldwide
Worldwide
Worldwide
Worldwide
Worldwide
Worldwide
USA and Canada
Worldwide
Worldwide
Worldwide
USA, Canada, UK
USA and Canada
USA
Worldwide
Worldwide
USA, Canada, Mexico and China
Worldwide (except USA, Canada, Virgin Islands, Brazil, Taiwan and China)
Worldwide
Worldwide
Source: Company data
Figure 59: Safilo: portfolio of owned brands
Owned brands
Comment
Blue Bay
Introduced during the 1990s, the brand is targeted at teenagers with both sunglasses and prescription frames with
an easy-chic look. It is mainly sold in Europe (Italy, Spain, France, Germany).
The brand was acquired in 1996, and it is a well-known brand in the eyewear and ski-mask categories. It is mainly
targeted at a male and performance-driven market. The brand has had good success in the past few years following
the launch of its vintage collections. Average price range is €
€ 90–120.
The brand was introduced during the mid-1990s and is focused on the casual-sport sunglass segment. The target
market is in the 18–35 age range.
The collection is being strengthened thanks to advertising campaigns that feature several collections (Safilo Design,
Safilo Glamour and Safilo Seventh Street) with "diva inspired" shapes and decorations in Swarovski crystals.
Acquired in 1996, the brand is dedicated to sport sunglasses (for various sports such as surfing and mountain
biking) and ski masks. It is a well-known brand in the US, where it is among the top three sport brands for eyewear
and distributed in 50 countries. Main developments entail a strengthening in the European market.
Carrera
Oxydo
Safilo
Smith
Source: Company data
Italian eyewear players
33
30 May 2008
Retail: luxury acquisitions to build
scale
Following the acquisition of the Solstice chain in 2002, Safilo has been changing its
business model from a pure wholesaler into a more vertical player focusing on high-end
retail.
Though the retail division’s overall contribution to the top line is still small (10% in 2008E),
we expect this to accelerate and represent up to 20% of sales in 2012E, thanks to the
development of the division into two separate “retail concepts”: one for sunglasses only
(mainly through the Solstice chain) and another one for sunglasses/prescription.
Figure 60: Safilo: Solstice store number evolution
Figure 61: Safilo: Retail sales evolution (2002–07)
120
70
100
60
50
80
40
60
30
40
20
20
10
0
0
2002
2003
2004
2005
2006
2002
2007
Source: Company data
2003
2004
2005
2006
2007
Source: Company data
The division has been developed mainly through external acquisitions (Loop Vision in
Spain, Sunglass Island in Mexico and Just Spectacles in Australia) as well as store
openings in relevant areas for expansion and the strengthening of its retail structure
through the addition of personnel in key areas (Europe, Asia and the US).
In addition, the company is also finalising a new optical retail concept, designed by the
well-known Italian architect, Antonio Citterio.
In our estimates, we assume around 60 new stores per year from the existing chains, the
bulk of which will be focused on Solstice. In its business plan, Safilo has said it expects to
have 700–800 stores by 2012 (the company assumes 100 store openings/acquisitions per
year) from a current base of 268 through openings as well as small chain acquisitions.
Figure 62: Safilo: Retail chains
N. Stores Q108
Store Classification
% owned
Estimated revenues
Estimated profitability
Expected openings pa
Solstice
Loop Vision
Sunglass Island
Just Spectacles
125
Sunglasses
100%
€
€ 60m
3-5%
30
66
P&S
100%
€
€ 24m
Breakeven
5-10
45
P&S
60%
€€19m
13-14%
10
32 (*)
P&S
100%
€
€ 13m
10%
10
Source: Company data, Credit Suisse estimates. P= prescription, S=sunglasses. (*) on addition to 12 franchised stores
Figure 63: Safilo: Acquisition multiples of optical retail chains
€
€ in millions, unless otherwise stated
Acquisition Date
Solstice
Loop Vision
Sunglass Island
Just Spectacles
Consideration paid(*)
EV/Sales
(USD) 5.4
23
15
13
0.7
1.0
1.3
0.9
2002
2006
2008
2008
Source: Credit Suisse estimates. (*) Assuming no debt.
Italian eyewear players
34
30 May 2008
Valuation
In order to value Safilo, given the low visibility on the licences expiring in 2010, we have
run two scenarios summarised in Figure 64.
In the first, we assume that both licences (PPR group and Dior) will be renewed and that
the company reaches a certain level of profitability and sales growth (our estimates are
below company guidance, as explained in the following section). In the second scenario,
we assume that both licences are lost and that the company will be able to restore a
certain level of profitability.
Although in a best-case scenario we see potential upside of 26% from current share-price
levels, we believe that a loss of both the Gucci and Dior licences could have negative
implications that are not fully priced in at current levels, with potential downside of 34%.
Figure 64: Safilo: Different valuation scenarios
€€ per share
Fair Value: 2.3
4.9
3.4
Main assumptions: The company keeps both the PPR and Dior
licenses
Sales CAGR: 4.8% over 2007-2012E and 3% over 2013E-2017E
EBITDA: passing from 14.7% in 2007 to 15.8% in 2012E
Rolling WACC (8.3%-8.7%), perpetuity 2.0%
Potential Upside: +26%
Factors supporting the assumptions:
-The company holds main Gucci license since 1988, was awarded
Balenciaga in 2007 (PPR group) and holds Dior 1996
- Recent reassuring interview to Mr Mark Lee on Gucci renewal
- Cheap Valuation on 10.5x P/E 08
1.8
Fair Value: 1.2
1.0
Main assumptions: The company looses both the PPR and Dior
licenses, but it is able to restore profitability (EBITDA margin of 15.8%)
in 2012E.
Rolling WACC (8.3%-8.4%), perpetuity at 2%
Potential Downside: -34%
Factors supporting the assumptions:
- Negative track record on license renewal (e.g. Polo Ralph Lauren
license)
- Low bargaining power
- Concerns on credit rating and financing
Source: Credit Suisse estimates
Our target price of €€1.8 is a combined average of the valuations we get in a best-case and
worst-case scenario, averaged by a 50/50 probability that the two licences are renewed.
The main risks to our target price are: a global macroeconomic slowdown, terrorist attacks
or epidemics, currency weakness (mainly the dollar and yen), pressure on margins due to
a deteriorating environment and store openings, the loss/renewal of licences (mainly Gucci
and Dior), the company’s business plan implementation, and recurring speculation about a
possible delisting.
Italian eyewear players
35
30 May 2008
Financial forecasts 2007–11E
We believe that the two main issues relating to the company are its:
■
ability to deliver higher operating margins—since its IPO in 2005, margins have
remained flat (partially due to the loss of the Ralph Lauren licence); and
■
capacity to attract/retain licences, given the limited contribution of its owned brands.
As such, we take a cautious approach to the business plan the company recently
presented to the financial community. Although we see potential to increase operating
margins from current levels, we prefer to be more cautious than company guidance.
In the business plan, the company presented this past February to the financial
community, Safilo management gave the following guidance.
■
2008: Sales growth between 4–5% (or 7–8% currency neutral), an EBITDA margin in
the range of 15%, net income between 4.5–5% and net debt/EBITDA ≤3x (company
guidance was at a €
€ /US$ exchange rate of 1.47).
■
Mid-term objectives (including potential acquisitions): Sales growth between 7–
8%, an EBITDA margin of 17–18%, financial leverage ≤2x and capex around €
€ 300m–
400m.
Our estimates are below management guidance, given that: (i) we do not factor in
acquisitions, but organic growth only; (ii) we are using a €
€ /US$ of 1.50 (versus company
guidance of 1.47); and (iii) past financial results were often below management guidance,
therefore we have decided to adopt a more cautious stance.
We factor-in a CAGR of 4.7% on revenues over the 2007–11E period, from €
€ 1,190m in
2007 to €
€ 1,429m, mainly driven by the retail division (+29.8% CAGR), while the wholesale
division should post revenues of €
€ 1,230m by 2011E.
We expect Safilo’s EBITDA to grow at a 6.6% CAGR from €
€ 175.2m in 2007 to €
€ 226.4m in
2011E, increasing its margin to 15.9% from the 14.7% reported in 2007 thanks to an
improvement in gross margins (58.6% reported in 2007 to 61.4% in 2011E as a result of
the expected savings from the Chinese plant and other cost-cutting initiatives). However,
we expect that only part of this will be reflected in EBITDA margin improvement due to the
higher rental costs involved in store openings.
We estimate net financial charges at €€40m–45m. We point out that the company has a
high-yield bond (residual amount of €
€ 195m) on which it pays a 9.625% interest rate and is
callable from May 2008. Should the company decide to recall the bond earlier, it would
have to pay additional charges of €
€ 15m, which are not factored into our 2008 estimates.
Figure 65: Credit ratings
Corporate Senior Notes 2013
Standard & Poor's
Moody's
Fitch Ratings
BBBA3
BB-
BBB2
BB-
Outlook
Date
Stable
Stable
Stable
18-Apr-06
02-Aug-07
31-Mar-06
Source: Company data
We assume the tax rate declines from the 41.7% recorded in 2007 to 38% in 2011E.
Italian eyewear players
36
30 May 2008
Figure 66: Safilo: P&L (2007–11E)
€€ in millions, unless otherwise stated
Net sales
yoy % change
Cost of sales
Gross industrial profit
% Sales
Marketing and sales expenses
G&A
Other
Operating income
% Sales
Profits(losses) from associates
Net financial charges
Pre tax profit
% Sales
Income taxes
Net income
% Sales
Minority interests
Net income
Tax rate %
D&A
EBITDA
% Sales
2007
2008E
2009E
2010E
2011E
1,190.4
1,206.7
1,279.2
1,353.8
1,428.5
6.1%
-492.6
697.8
58.6%
-439.6
-122.4
1.4
137.2
11.5%
1.8
-45.4
93.6
7.9%
-39.0
54.5
4.6%
-3.5
51.0
41.7%
38.0
175.2
14.7%
1.4%
-495.0
711.7
59.0%
-450.5
-131.2
1.4
131.4
10.9%
2.9
-48.3
85.9
7.1%
-32.6
53.3
4.4%
-3.4
49.8
38.0%
41.4
172.8
14.3%
6.0%
-514.8
764.4
59.8%
-477.6
-140.1
1.5
148.2
11.6%
3.0
-47.3
103.9
8.1%
-39.5
64.4
5.0%
-4.2
60.3
38.0%
45.0
193.1
15.1%
5.8%
-533.9
819.9
60.6%
-507.1
-149.6
1.5
164.8
12.2%
3.2
-46.3
121.6
9.0%
-46.2
75.4
5.6%
-4.9
70.5
38.0%
47.5
212.3
15.7%
5.5%
-551.7
876.8
61.4%
-541.2
-160.2
1.6
177.0
12.4%
3.3
-44.3
136.0
9.5%
-51.7
84.3
5.9%
-5.5
78.9
38.0%
49.4
226.4
15.9%
Source: Company data, Credit Suisse estimates
We expect the company to see capex to 2011 of between €
€ 50m–60m per year, of which
around €
€ 20m would be for maintenance, €
€ 30m for openings and €
€ 20m–25m for the new
Chinese plant.
Our operating working capital is in the range of 29–30% of revenues (almost in line with
2007).
Finally, the company has increased its payout ratio to 47.6% in 2007 from 14.4% in 2006,
and we expect this to remain stable going forward.
Figure 67: Safilo: Balance sheet (2007–11E)
€
€ in millions, unless otherwise stated
2007
2008E
2009E
2010E
2011E
Tangible fixed assets
Intangible assets
Goodwill
Other non-current assets
Total non-current assets
Working capital
Total Invested Capital
201.9
23.5
754.9
100.5
1,080.8
344.5
1,425.3
217.7
25.4
754.9
130.5
1,128.5
352.9
1,481.4
231.3
27.0
754.9
130.5
1,143.6
377.9
1,521.6
237.3
27.7
754.9
130.5
1,150.3
404.0
1,554.3
237.8
27.7
754.9
130.5
1,150.9
430.6
1,581.5
Provisions for risks and employee termination
Net debt position
Group shareholders' equity
Minority interests
Total Invested Capital
69.7
514.7
836.0
4.9
1,425.3
72.1
540.9
861.6
6.8
1,481.4
73.8
541.1
898.1
8.6
1,521.6
75.5
528.1
940.0
10.8
1,554.3
77.3
505.6
985.3
13.3
1,581.5
Source: Company data, Credit Suisse estimates
Italian eyewear players
37
30 May 2008
Figure 68: Safilo: Cash-flow statement (2007–11E)
€€ in millions, unless otherwise stated
2007
2008E
2009E
2010E
2011E
EBIT
D&A
EBITDA
Change in net working capital
Change in funds
Interests expenses
Interest from associates & others
Taxes paid
Deferred taxes
Other changes
Cash Flow from Operations
137.2
38.0
175.2
-33.1
-0.8
-45.4
-1.8
-39.0
4.4
1.1
60.6
131.4
41.4
172.8
-9.0
2.4
-48.3
-0.6
-32.6
0.0
-29.3
55.3
148.2
45.0
193.1
-28.1
1.7
-47.3
-1.2
-39.5
0.0
3.1
81.8
164.8
47.5
212.3
-29.3
1.7
-46.3
-1.7
-46.2
0.0
3.2
93.6
177.0
49.4
226.4
-29.8
1.8
-44.3
-2.1
-51.7
0.0
3.2
103.5
Fixed Asset Investments
Others
Cash Flow from Investments
-39.2
50.0
10.8
-59.1
0.0
-59.1
-60.1
0.0
-60.1
-54.2
0.0
-54.2
-50.0
0.0
-50.0
Dividend paid
Change in net worth
Net Cash Flow
-7.9
-46.3
17.2
-24.3
1.8
-26.2
-23.7
1.8
-0.2
-28.7
2.2
13.0
-33.5
2.6
22.5
Source: Company data, Credit Suisse estimates
Figure 69: Safilo: Sales and profitability evolution
Figure 70: Safilo: Net debt and capex evolution
€€ in millions, unless otherwise stated
€€ in millions, unless otherwise stated
1,600
17.0%
1,400
16.0%
1,200
560
7.0%
540
6.0%
15.0%
5.0%
520
1,000
14.0%
800
13.0%
4.0%
500
3.0%
600
12.0%
480
200
11.0%
460
0
10.0%
400
2005
2006
2007
Sales
2008E
2009E
2010E
2011E
2.0%
1.0%
0.0%
440
2005
EBItDA margin
2006
2007
Net debt
Source: Company data, Credit Suisse estimates
2008E
2009E
2010E
2011E
Capex as % of sales
Source: Company data, Credit Suisse estimates
Figure 71: Credit Suisse estimates vs. consensus
€
€ in millions, unless otherwise stated
Credit Suisse 08E Consensus 08E*
Sales
EBITDA
EPS
1,206.7
1,219.0
172.8
0.17
178.0
0.18
% Diff Credit Suisse 09E Consensus 09E*
% Diff
-1.0%
-2.9%
-5.6%
-1.2%
-0.5%
0.0%
1,279.2
1,295.0
193.1
0.21
194.0
0.21
Source: Company data, Credit Suisse estimates. (*) Consensus as of 27/05/2008. © Datastream International Limited ALL RIGHTS RESERVED
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Appendix I: the eyewear market
According to Luxottica, the size of the total market for eyecare (e.g. frames, lenses,
contact lenses) is estimated at $64bn, with the US accounting for around $28.5bn (source:
VisionWatch). Apart from consumer spending power, the main market drivers are the
following.
■
Aging population: Elderly people are among the largest user of eyewear products:
for example, in the US, people 55 years old and over represent 36.5% of total
eyeglass wearers (source: VisionWatch). In addition, the proportion of the population
over 60 years old is expected to double by 2015 (22% from 11% currently).
■
Change in the image of eyeglasses: Eyeglasses used to be seen mainly as an aid to
vision problems, whereas they are increasingly seen now as a ‘fashion accessory’
since they tend to be one of the more accessible accessories in luxury goods and an
increasing number of brands have entered the category through licence agreements
(e.g. Tom Ford, Tiffany).
■
Shift in consumer behaviour: There is a shorter replacement cycle compared to the
past (from three to five years to 1.5 years), an increasing level of computer usage and
TV viewing and increased awareness of the importance of health and sun protection.
■
Increasing penetration rates in emerging markets: The penetration rates of glasses
in each market differ quite substantially, with the highest in the US (average 67%),
followed by Europe (35%) and the Asia-Pacific (< 20%).
Figure 72: Proportion of world population aged 60 or
Figure 73: Total vision care market in the US (2006–07)
over: 1950–2050
US$ in millions, unless otherwise stated
25%
USD 28,603.1
USD 28,577.8
12ME Dec 2006
12ME Dec 2007
100.0%
22%
80.0%
20%
60.0%
15%
11%
10%
40.0%
8%
20.0%
5%
0.0%
0%
1950
2007
2050
Frames
Lenses
Contact Lenses
Sunglasses
Readers
Refractive surgery
Exams
Source: World Population Aging 2007, Copyright © United Nations 2007
Source: VisionWatch
Figure 74: US frame market (retail structure)
Figure 75: Sunglass market in the US (retail structure)
US$ in millions, unless otherwise stated
USD 7,707.2
USD 8,037.0
US$ in millions, unless otherwise stated
USD 1,911.7
USD 8,071.2
100.0%
100.0%
80.0%
80.0%
60.0%
60.0%
40.0%
40.0%
20.0%
20.0%
0.0%
USD 2,161.6
USD 2,196.5
0.0%
12ME Dec 2006
Independents
Source: VisionWatch
Italian eyewear players
12ME Dec 2006
Chains
Mass merchants
12ME Dec 2007
Optical Center in Depratment stores
Other
12ME Dec 2006
Independents
Chains
12ME Dec 2006
Grocery/drug/convenience/variety/mass merchant
12ME Dec 2007
Department Stores
Other
Source: VisionWatch
39
30 May 2008
Appendix II: company profiles
Luxottica
Luxottica is worldwide leader in frame production in the mid- to premium-priced segment
and thanks to various acquisitions (LensCrafters, Sunglass Hut, Cole National and OPSM),
it is also a leading optical retailer in North America with a market share of around 20%.
The company has around 6,200 stores worldwide.
Through its manufacturing and wholesale activities (around 34% of 2007 sales), the
company is engaged in the design, manufacturing, wholesale distribution and marketing of
owned (including Ray-Ban, Oakley, Vogue, Arnette, Killer Loop, Persol, Oliver Peoples)
and licensed designer lines (including Chanel, Versace, Prada, D&G, Bulgari) for
prescription frames and sunglasses.
Figure 76: Luxottica: Sales breakdown by area (2007)
Figure 77: Luxottica: Sales breakdown by channel (2007)
Asia-Pacific
12%
Wholesale
34%
RoW
27%
North America
61%
Source: Company data
Retail
66%
Source: Company data
Figure 78: Luxottica: SWOT analysis
Strengths
Weaknesses
World leader in frame manufacturing and distribution
Balanced portfolio of owned and licensed brands
Vertically integrated business model
Manufacturing facilities located in Italy and China to grant flexibility
Leadership in retail in the US and Asia-Pacific
Track record of profitability improvement
Strong management team
Good cash-flow generation
Exposure to US$ (>60% of revenues)
Manufacturing: 1/3 of revenues in US$, while most of production costs in €
€
Sensitivity to macroeconomic cycles for sunglasses
Dependence on external licences
Limited free float
Opportunities
Threats
Development of recently signed licences (Tiffany, Ralph Lauren)
Synergies from the Oakley integration
Increasing % of Luxottica products into Cole and OPSM
Retail network upgrade (LensCrafters, SGH, Pearle)
Expansion into emerging markets
Acquisition of new retail chains
Increase in royalty rates in the industry
Higher competition from mid-low retail chains (e.g. Wal-Mart)
Sustained slowdown in US economy could hamper short-term growth
Increasing use of laser surgery and contact lenses
Intangibles (including goodwill) represent around 55% of total assets
Source: Credit Suisse research
Safilo
Headquartered in Padua, Italy, the company was founded in 1934, when Mr Guglielmo
Tabacchi acquired the first Italian complex for the manufacture of lenses and frames in
Calalzo di Cadore (BL). During the following years, it opened new plants in the area, while
establishing commercial branches across Europe, the US and the Far East.
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Safilo designs, manufactures and distributes eyewear in the following categories:
sunglasses, prescription frames and sports glasses. Its brand portfolio is divided into
owned brands (Safilo, Oxydo, Carrera, Smith and Blue Bay), accounting for an estimated
20% of sales and licensed brands.
Finally, the company sells its products mainly through the wholesale channel (94%),
though retail should become more significant going forward thanks to organic growth and
possible acquisitions.
Figure 79: Safilo: Sales breakdown by region (2007)
Asia Pacific
13%
Other
4%
The Americas
35%
Figure 80: Safilo: Sales breakdown by product (2007)
Sport Products
6%
Italy
14%
Prescription frames
38%
Sunglasses
54%
Europe (excl.Italy)
34%
Source: Company data
Other
2%
Source: Company data
Figure 81: Safilo: SWOT analysis
Strengths
Weaknesses
Leading positioning in high-end eyewear thanks to a good portfolio
of licensed brands (Dior, Armani, Gucci)
Leading supplier of independent optical retailers in the US
Increasing direct presence in key markets (US, Spain, Australia,
LatAm)
Recognised product quality and innovation capability
High dependence on external licences (top three licences make up around
50% of revenues)
Above 40% of sales are in US$ and US$-denominated currencies
Low brand awareness of owned brands
Opportunities
Threats
Development of recently acquired licences
Bolt-on acquisitions in retail
Strengthen presence in emerging markets
Production plant in China to increase flexibility and provide for
higher savings
Two key licences (Gucci and Dior) set to expire by 2010
Risks connected to the implementation of the new business plan
Consolidation of US optical retail market
Intangibles (including goodwill) represent 44% of total assets
High financial charges due to high yield bond expiring in 2013
Low cash-flow generation
Sensitivity to macroeconomic cycles for sunglasses
Increase in royalty rates in the industry
Increasing use of laser surgery and contact lenses
Source: Credit Suisse research
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30 May 2008
Appendix III: shareholder structure
Luxottica’s founder, Mr Del Vecchio, is the company’s main shareholder with a 68% stake,
followed by Mr Armani with a stake of around 5%.
Safilo is also controlled by the founding Tabacchi family. The company was previously
listed on the Milan Stock Exchange in 1987. However, in 2001, due to divergent strategic
views, Mr Vittorio Tabacchi, one of the founder’s three sons, acquired the stakes held by
his two brothers and launched a bid for the company delisting. In December 2005, Safilo
was floated again and the Tabacchi family currently retains a 37.9% stake.
Figure 82: Luxottica: Main shareholders
Harris Associates
2%
Figure 83: Safilo: Main shareholders
Giorgio Armani
5%
Leonardo Del Vecchio
68%
Source: Consob website
Italian eyewear players
Tabacchi family
38%
Free Float
49%
Free Float
25%
Fidelity Limited
8%
GS AM
5%
Source: Consob website
42
30 May 2008
Italian eyewear players
43
30 May 2008
Companies Mentioned (Price as of 27 May 08)
BJ's Wholesale Club Inc. (BJ, $37.94, NEUTRAL, TP $35.00)
Bulgari (BULG.MI, Eu7.32, NEUTRAL, TP Eu8.50, OVERWEIGHT)
Burberry Group (BRBY.L, 507.00 p)
Costco Wholesale Corporation (COST, $72.59, NEUTRAL, TP $69.00)
Dillard's Inc. (DDS, $15.33, NEUTRAL [V], TP $16.00)
Essilor (ESSI.PA, Eu 39.8)
Fielmann (FIEG.F, Eu47.55)
Hermes International (HRMS.PA, Eu104.40, UNDERPERFORM, TP Eu72.00, OVERWEIGHT)
Hoya Corp. (7741, ¥2,830, NEUTRAL, TP ¥3,000, MARKET WEIGHT)
Hugo Boss (BOSG_p.F, Eu32.50, OUTPERFORM, TP Eu53.00, OVERWEIGHT)
JC Penney (JCP, $40.50, NEUTRAL, TP $40.00)
Kohl's Corporation (KSS, $43.99, NEUTRAL, TP $44.00)
Liz Claiborne, Inc. (LIZ, $17.05, OUTPERFORM, TP $25.00)
Luxottica (LUX.MI, Eu17.28, OUTPERFORM, TP Eu22.2, OVERWEIGHT)
LVMH (LVMH.PA, Eu72.51, OUTPERFORM, TP Eu92.00, OVERWEIGHT)
Marcolin (MCL.MI, Eu 1.74)
Nordstrom (JWN, $33.42, OUTPERFORM, TP $40.00)
Polo Ralph Lauren (RL, $61.75, OUTPERFORM, TP $80.00)
PPR (PRTP.PA, Eu81.74, NEUTRAL, TP Eu80.00, UNDERWEIGHT)
*Richemont Secs (JSE) (RCHJ.J, R48.50, OUTPERFORM, TP R65.00)
Safilo Group (SFLG.MI, Eu1.83, UNDERPERFORM, TP Eu1.8, OVERWEIGHT)
Saks Incorporated (SKS, $12.65, NEUTRAL, TP $15.00)
Swatch Group (UHR.VX, SFr282.50, OUTPERFORM, TP SFr385.00, OVERWEIGHT)
Target Corporation (TGT, $52.15, OUTPERFORM, TP $60.00)
Tiffany & Co. (TIF, $46.55, NEUTRAL, TP $34.00)
Tod's (TOD.MI, Eu39.08, OUTPERFORM, TP Eu48.00, OVERWEIGHT)
Wal-Mart Stores, Inc. (WMT, $56.40, OUTPERFORM, TP $60.00)
*Denotes a Credit Suisse Standard Securities covered company, a joint venture involving Credit Suisse. For information
regarding companies covered by CSSS, full research reports, definitions of analysts’ stock ratings, and disclosure information,
please refer to: www.researchandanalytics.com.
Italian eyewear players
44
30 May 2008
Disclosure Appendix
Important Global Disclosures
The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views
expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her
compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
See the Companies Mentioned section for full company names.
3-Year Price, Target Price and Rating Change History Chart for LUX.MI
LUX.MI
Date
24-Jan-07
29-Jan-07
10-Apr-07
Closing
Price
(EUR)
23.82
24.36
Target
Price
Initiation/
(EUR) Rating Assumption
20.3
U
X
NC
28
26
24
NC
U
22
20.3
20
18
16
29-Jan-07
30
-M
a
y-0
30 5
-Ju
l30 05
-S
ep
30 05
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5
30
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n-0
6
30
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30 06
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30 6
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30 06
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30
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7
30
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30
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-0
30 7
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7
30
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-0
7
30
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-0
7
30
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n0
8
30
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ar
-0
8
EUR 14
Closing Price
Target Price
Initiation/Assumption
Rating
O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered
3-Year Price, Target Price and Rating Change History Chart for SFLG.MI
SFLG.MI
Date
24-Jan-07
29-Jan-07
08-Feb-07
08-Mar-07
10-Apr-07
Closing
Price
(EUR)
4.395
4.788
4.399
4.381
Target
Price
Initiation/
(EUR) Rating Assumption
5
O
X
R
O
NC
5
5
4.5
R
O
O NC
4
3.5
3
2.5
2
1.5
29-Jan-07
30
-M
a
y-0
30 5
-Ju
l30 05
-S
ep
30 05
-N
ov
-0
5
30
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n-0
6
30
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30 06
-M
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-0
30 6
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l30 06
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30 06
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n0
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30
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30
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30 7
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7
30
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-0
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30
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-0
7
30
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n0
8
30
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ar
-0
8
EUR 1
Closing Price
Target Price
Initiation/Assumption
Rating
O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total
revenues, a portion of which are generated by Credit Suisse's investment banking activities.
Analysts’ stock ratings are defined as follows***:
Outperform (O): The stock’s total return is expected to exceed the industry average* by at least 10-15% (or more, depending on perceived risk)
over the next 12 months.
Neutral (N): The stock’s total return is expected to be in line with the industry average* (range of ±10%) over the next 12 months.
Underperform (U)**: The stock’s total return is expected to underperform the industry average* by 10-15% or more over the next 12 months.
*The industry average refers to the average total return of the relevant country or regional index (except with respect to Europe, where stock
ratings are relative to the analyst’s industry coverage universe).
**In an effort to achieve a more balanced distribution of stock ratings, the Firm has requested that analysts maintain at least 15% of their rated
coverage universe as Underperform. This guideline is subject to change depending on several factors, including general market conditions.
***For Australian and New Zealand stocks a 7.5% threshold replaces the 10% level in all three rating definitions, with a required equity return
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Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications,
including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other
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Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24
months or the analyst expects significant volatility going forward.
Italian eyewear players
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30 May 2008
Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expected
performance of an analyst’s coverage universe* versus the relevant broad market benchmark**:
Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months.
Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months.
Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months.
*An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector.
**The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months.
Credit Suisse’s distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Outperform/Buy*
45%
(56% banking clients)
Neutral/Hold*
41%
(56% banking clients)
Underperform/Sell*
12%
(51% banking clients)
Restricted
2%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy,
Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's
decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
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market that may have a material impact on the research views or opinions stated herein.
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit
Suisse's
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See the Companies Mentioned section for full company names.
Price Target: (12 months) for (LUX.MI)
Method: Our target price is based on a DCF model. Our DCF valuation is based on: (a) FCF growth per year of 6.5% over the 2009E-2017E period;
(b) Terminal growth of 2.0%, (c) Rolling WACC between 7.6%-8.3%. We then calculated our equity fair value by deducting our estimates for net
debt, pensions and minority interest at estimated market value from the enterprise value derived from our DCF model.
Risks: Key risks to our target price include: (a) marked slowdown in global economic, (b) external factors such as wars, terrorism, epidemics like
SARS hurting tourism flows and consumer spending, (c) currency weakness (mainly USD), (d) loss of relevant license agreements, (e) pressure on
margins due to store openings and a deteriorating environment, (f) longer time for the integration with Oakley, (g) increasing competition from midlow retails chains; (h) increasing use of laser surgery and contact lenses
Price Target: (12 months) for (SFLG.MI)
Method: Our target price is a combined average of the two valuations we get in a best-case and worst-case scenario, averaged by a 50% probability
each. Main assumptions of the best case scenario: (a) Rolling WACC (8.3%-8.7%); (b) perpetuity at 2.0%; EBITDA margin passing from 14.7% in
2007 to 15.8% in 2012E. Main assumptions of the worst case scenario: (a) loss of two relevant license agreements in 2010E; (b) Rolling WACC
(8.3%-8.4%); (c) perpetuity at 2.0%; (d) the company is able to restore profitability to 15.8% in 2012E.
Risks: Key risks to our target price include: (a) marked slowdown in global economic, (b) external factors such as wars, terrorism, epidemics like
SARS hurting tourism flows, (c) currency weakness (USD and USD-related currencies and YPY), (d) potential loss of key license agreements, (e)
failure to implement the recently presented business plan, (f) pressure on margins due to the deterioration of economic environment and store
openings; (g) consolidation of the US optical retail market; (f) increasing use of laser surgery and contact lenses; (h) better-than-expected
performance in sales and margins.
See the Companies Mentioned section for full company names.
The subject company (LUX.MI, SFLG.MI) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of
Credit Suisse.
Credit Suisse provided investment banking services to the subject company (LUX.MI, SFLG.MI) within the past 12 months.
Credit Suisse provided non-investment banking services, which may include Sales and Trading services, to the subject company (LUX.MI) within the
past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (SFLG.MI) within the past 12 months.
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (LUX.MI, SFLG.MI) within
the next 3 months.
Credit Suisse Standard Securities (Proprietary) Limited (“CSSS”) is the name provided to the Joint Venture created by Credit Suisse and The Standard
Bank of South Africa Limited. This report includes references to CSSS research recommendations. For published CSSS research reports in their entirety
and corresponding disclosures, please visit the website at: http://www.credit-suisse.com/researchandanalytics.
Important Regional Disclosures
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (LUX.MI, SFLG.MI) within the
past 12 months.
Italian eyewear players
46
30 May 2008
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Italian eyewear players
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30 May 2008
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