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From the Survey: Luxottica Group
Luxottica Group S.p.A. (LUX), together with its subsidiaries, provides luxury and sports eyewear worldwide through a global wholesale network involving approximately 7,000 retail stores in more than 130 countries. The company has an expansive, well-balanced brand portfolio consisting of many world-class labels, which has solidified Luxottica as the preeminent retailer of eyewear worldwide.
The company operates in two segments, the first of which is the Manufacturing and Wholesale Distribution. This segment engages in the design, manufacture, wholesale distribution, and marketing of several proprietary brands, which account for more than 60% of all units sold, and over 20 licensed brands, including some of the most prestigious names in fashion worldwide. Depending on the particular business, Luxottica’s operations can support the manufacture of numerous lines of prescription frames and sunglasses, as well as sports eyewear products, men’s and women’s apparel, footwear and accessories. Luxottica’s brand portfolio is one of the largest in the industry and is anchored by strong, timeless brands, such as Ray-Ban and Oakley. While these brands are the foundation of the portfolio, the company does have exposure to other niches in the eyewear market. Brands like Persol and Oliver Peoples are at the high end of the market, while REVO (sports market), and Vogue (fashion market) exhibit just how far-reaching the list of proprietary brands in the portfolio is. Luxottica also manufactures eyewear under licensing agreements with many high-end brands, such as Tiffany & Co. (TIF), Ralph Lauren (RL), and many others. These products are offered to retailers of mid- to premium-priced eyewear, as well as individual optometrists and department stores.
Luxottica’s second operating segment is Retail Distribution. The company operates many optical retail stores including, but not limited to, LensCrafters and Pearle Vision, as well as the optical departments of Sears (SHLD) and Target (TGT). Furthermore, the company also owns several sun-eyewear specific outlets, such as the Sunglass Hut. Since the acquisition of the Sunglass Hut in 2001, Luxottica has become the worldwide leader in the sun retail business.
Through its ownership of EyeMed Vision Care, Luxottica also has a hand in eye care services in the U.S. EyeMed, the second-largest vision benefits company in the country as of 2012, plays an important role in ensuring Luxottica remains atop the eyewear industry. As a provider of vision care, the company offers benefit plans and discounts on eyecare services and eyewear to more than 35 million members through a nationwide network. Individuals with vision programs with this provider have the opportunity to use their benefits at Luxottica’s U.S. retail brand locations, as well as at thousands of independent doctors. Nearly 9,000 companies, membership organizations, and government entities offer EyeMed programs.
Relentless expansion of product and service offerings, as well as geographic locales, have, and will continue to be Luxottica’s strategy for future growth. The company is fully operational in all facets of eyewear manufacture and sale – in fact, Luxottica holds dominant positions throughout the entire eyewear supply chain – from design to production, eye-examination to sale. The company is also stretched out across emerging markets in the Middle East, Asia, and Latin America – strong recent performance supports continued emphases on these regions as worthy of major investments to drive business forward for Luxottica. Aside from expanding into those foreign geographies with growing middle-class populations, the company continues to add to its brand portfolio. Earlier this year, Luxottica entered into a ten-year license agreement with the Armani Group, a global leader in fashion and luxury goods. We expect the company will continue to survey the globe for new luxury brands to partner with, and envision that this sort of activity ought to remain steady during economic downturns.
Luxottica has a lot of control in terms of pricing power. Given that the company produces frames for such a large number of premier labels, it has earned the ability to act as a price maker. Stores understand the need to pay high prices for Luxottica’s merchandise, as a store devoid of the wide range of frames that Luxottica manufactures simply could not survive in a market in which demand is so high for those products.
However, some brands have emerged in order to cater to the needs of the consumer in 2013, namely for a less expensive frame. Shifting away from the brick and mortar model, companies like Warby Parker offer a completely unique experience – highlighted by virtual showrooms, free in-home try-ons, and ultimately prescription glasses for a fraction of the cost of traditional retail prices. There is a chance that with continued success, these companies may exert pricing pressure on Luxottica, which may need to accept slightly lower margins in order to continue thriving in a post-recession economy where consumers are bargain hunting for highly discretionary products.
Those investors interested in a more detailed analysis of the Luxottica Group should browse our full-page report in the Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.