Since its foundation in 1961, Luxottica Group S.P.A. (LUX) has grown to become the world´s largest eyewear company. It designs, manufactures and distributes house and designer lines of middle to premium priced sunglasses, prescription frames, and performance optic products. The firm is also one of the largest vision-care operators through Eyemed. And it´s the second largest lens finisher through its labs and more than 900 on-site labs at its Lenscrafters stores. Its huge sales network includes over 7,000 corporate-owned retail locations around the world and more than 143 wholesale distributors in 130 countries. Luxottica owns numerous famous brands like Ray-Ban, Oakley, Vogue, Persol, Oliver Peoples, Arnette and REVO.
The firm´s vertically integrated business model allows it to have strict control over the quality of its products and the ownership of its designs. This has enabled the company to sign a large number of licensing agreements with fashion houses such as Bvlgari, Burberry, Chanel, Dolce & Gabbana, Donna Karan, Polo Ralph Lauren, Paul Smith, Prada, Salvatore Ferragamo, Stella McCartney, Tiffany, Tory Burch and Versace.
The huge scale of its business, the high quality of its products and its impressive brand portfolio give it a narrow economic moat. Thus, the company represents a significant share of the high-end eyewear market, and its premium prices allow it to post mid-60% gross margins.
A Hard-to-Match Giant
Luxottica´s manufacturing, distribution and sales boast great cost and service advantages. Its scale production is supported by favorable pricing from suppliers and efficient lead times that allow better market responsiveness than its competitors. Moreover, the multiplicity of products it continuously delivers through a huge distribution network represents an advantage for inventory efficiency and customer service. The company´s global distribution network and its colossal retail store base reach such proportions that any rival would need to use its channels to reach the scale needed to compete.
Strong Growth Overcomes Currency Fluctuations
Based in Italy, Luxottica expanded its business around the world consolidating a strong presence in North America, Asia Pacific and Europe. The company also extended its operations to new markets such as Central Asia, South America and South Africa. Weather conditions in these regions are expected to deliver high sunglass-penetration rates. Also, fast developing economies like Brazil and China, which have increased consumers' access to health care and consumption, anticipate continuous growth in the prescription market.
The downside of its global operations resides in the impact of negative currency fluctuations on the company´s margins. In fact, sales results from several luxury groups such as Moet Hennessy Louis Vuitton SA (LVMH) and Kering (PPRUY) were affected by these currency headwinds. Luxottica, its retail segment, which represents 60% of its total revenue, was the most affected. A weak dollar and fewer calendar shopping days in North America hurt Luxottica's annual sales, yet its solid performance in the wholesale segment and in emerging markets allowed positive results. Thus, the firm´s preliminary net sales grew around 3% at current exchange rates compared with the previous year, to $9.97 billion.
A Long-Term Investment
Luxottica is the largest eyewear manufacturer and retailer in the world. The scale of its business and its broad and exclusive brand portfolio give the company competitive advantages that can´t be achieved by its opponents. This allows the firm to make consistent high returns on capital. In fact, its operations rendered positive margins, even in economies affected by crisis and currency fluctuations. Luxottica´s shares trade at 31.3 times its trailing earnings compared to the 18.20 industry average. Although expensive, the company´s solid present and future growth perspectives are worth the asking price. Its return on equity shows a high 13.6 compared to the industry median of 9.1. And return on capital amounts to 68.9 compared to the much lower 19.10 industry average. All in all, I feel Luxottica´s shares are an excellent investment to keep for the long term.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.