In the last ten years this Italian company's stock has tripled. You see its wares everywhere you go and yet it is rarely mentioned in the financial press. What retail celebrity is behind those sunglasses?
Luxottica Group SpA (NYSE: LUX ) , a manufacturer, retailer, and wholesaler of luxury eye-wear. In the last year alone the stock is up 50% yet there's nary a mention on CNBC and the like.
Despite a market cap of $25.36 billion and its position as the largest eye-wear company globally the name is under-covered (only 2 US analysts) and virtually undiscovered. A stock like this deserves a SWOT analysis.
- The company's main global competitors are three Italian eye-wear companies, but none has revenue of more than $1.55 billion while Luxottica brings in $9.45 billion with net income of $764 million.
- Barrier to entry for new players is high as Luxottica is vertically integrated with a supply and distribution chain it has been building since 1974.
- Such a beautiful moat this company has with almost every designer of note sending their eyewear accessory license business to Luxottica. These include recognizable names such as: Coach (NYSE: COH ) , Ralph Lauren (NYSE: RL ) , Tory Burch, Chanel, Prada, and Versace among over 30 brands. Most recently it garnered the Armani licensewhich was singled out as performing very strongly since its launch.
- The company's house brands include iconic eyewear names Oakley, Ray Ban,Persol, Oliver Peoples, Arnette and Vogue.
- Its Retail Distribution segment operates optical retail stores under the brand names Pearle Vision Centers, Lenscrafters, Sunglass Hut and more for a total of 7,000 stores worldwide.
- Analysts still expect 13.50% five-year EPS growth and 16.90% for the next year.
- The company's free cash flow is strong at 200 million euros in the quarter, up from 180 million euros in the year ago quarter. Net debt/EBITDA is stable at 1.3x as of the second quarter.
- The company also owns EyeMed Vision Care, the fastest growing vision benefits company in the US, with 9,000 companies and organizations using its plans and steering their 35 million members to buy Luxottica's products.
- It broke through the glass ceiling of 2 billion euros in quarterly sales in the second quarter.
- It has a high trailing earnings multiple of 33.60, much higher than its P/E low of 11.90 in the last five yearsand a forward earnings multiple of 25.50.
- The dividend, while raised for the last two years, stands at only 1.10% annually although with a payout ratio of 37% it is easily covered.
- Lenscrafters was the main soft spot for Luxottica in the second quarter with only a 1% comparable same-store sales increase. Sunglass Hut brought in a high single-digit same-store sales increase.
- Gross margin comes in at a large 71.40% which is much higher than the industry average of 44.90%, but trailing net profit margin is only 8.90% although this is still much higher than the industry average of .06%.
- The company is somewhat dependent on the continued popularity of the companies it licenses products from and a company like Coach has been weaker this last year as it trends more mass-market.
- The company depends on the strength of high-end consumers globally. While Europe was unusually strong in the second quarter with sales growth of 14%, retail high-end companies like Coach and Ralph Lauren have been weak in the US.
- The company has grown with frequent small acquisitions, most recently acquiring a French eyewear maker, Alain Mikli. Luxottica's CEO Andrea Guerra is quoted as saying,"We believe in the strategy of taking home two or three purchases a year." CFO Enrico Cavatorta noted recently that the company is 50% bigger than just six years ago.
- Emerging markets are a powerful area of growth for Luxottica, achieving 22% sales growth for the second quarter. These markets provide only 13% of total sales for the company now, as Guerrra said, "We will continue to invest in local retail chains in Latin America, South Asia." (source Seeking Alpha transcript)
- The company could expand its STARS program which maintains fresh inventory for 3,000 of its third party retailers through automatic replenishment of high turnover products.
- The company has three main e-commerce platforms for Sunglass Hut, Ray Ban and Oakley and a small online contact lens service and plans to expand all of these to additional markets.
- New sales channels like department stores and transit retail (airport duty-free, etc) are areas where the company is expanding. In the annual report, it noted "Today, sunglasses have the highest growth rate of all accessories despite the limited space department stores allocate to the category."
- Guerra told The Wall Street Journal that eyewear is a 70 billion euro market and Luxottica is the 7 billion euro player in as he characterized it "a very young industry, growing fast" but the company is always competing for share of wallet on impulse purchases against online eye-wear retailer Warby Parker, Nike and Apple.
- Warby Parker partnered up with Google on Google Glass which would have been quite a get for Luxottica.Increasing popularity of Google Glass could eventually hit Luxottica years down the road. In the meantime Apple could eventually come out with its own glasses and it might go with Luxottica.
- Again, Warby Parker, as the Internet start up with cool $99 glasses, could eat into North American sales as Luxottica brands are much more expensive. The company states their mission as,"Prescription eyewear simply should not cost $300+." The chart below shows better than anything the threat from this eye-wear newbie. As Luxottica also operates some of the biggest eye-wear chains it gets most of the money from that much larger right hand column. Still, Warby Parker will have trouble up against the annual 1,700 plus styles of eye-wear coming from Luxottica against Warby Parker's several dozen.
The Foolish takeaway
As you can clearly see Luxottica has many more strengths and opportunities than weaknesses and threats. The company's vertically integrated business model with a strong moat against competitors makes it an unassailable bargain. And it had to be said, "Their future's so bright, they gotta wear shades."
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