Sunny days on the horizon for Luxottica with Google deal
NOT even my best friend would suggest that I know too much about being 'cool'. But even I know that the first essential accessory for the creation of a 'cool dude' is the possession of a decent pair of 'shades'.
The company we are looking at today is the market leader in making people look super-trendy. It is the Milan-based multinational Group Luxottica SpA, which controls as much as 80pc of the world's eyewear market.
Luxottica designs, manufactures, distributes and markets traditional sun glasses and designer eyeglass frames.
If any reader ever contemplated paying €1,000 for a pair of sunglasses, then the Italian firm would almost certainly have been at the end of that transaction.
Although the name of the company is not one that trips off the tongue of the average investor, it has an extraordinary retail presence globally with 7,000 outlets and employs 70,000 people in 10 manufacturing plants around the world.
Luxottica was founded in Italy in 1961 by an extraordinary young entrepreneur Leonardo Del Vecchio, who appears to have been able to make money from day one.
He is young no longer but has managed to accumulate a personal wealth that's currently north of €20bn. Today, the company not only sells its own products like Ray-Ban and Oakley (beloved by sport fans) but under licence agreements markets well-known brands like Prada, Chanel, Dolce & Gabbana, Ralph Lauren, Armani and many others.
Luxottica sells to the wholesale and retail markets worldwide for sun and prescription glasses. Retail sales dominate, accounting for almost 60pc of group turnover. Its 7,000 shops trade under names like Sunglass Hut, Lenscraft, Pearle Vision and Oakley, among others.
The company had record sales last year, with Europe accounting for close to two-fifths of group business and the USA and emerging markets each with a quarter. However the company anticipates that in the next five years it will bring China into the wonderful world of 'cool'.
Two years ago, it had a presence in 53 cities in China; last year, it was in 300, and it expects to double its sales of €190m within three years, driven of course by sunglasses.
The World Cup in Brazil also presents opportunities for Luxottica. It has had a presence in the largest country in South America for more than 20 years but has now grown by acquisition. It is looking to add another 20pc to its Brazilian business by 2016.
The group has unleashed a fascinating strategy of channelling new market development in a focused way on mega cities. In the last two years it concentrated on Miami and Rio de Janeiro (cities unchallenged under the heading of 'supercool') and concluded that these markets have greater potential than they anticipated.
The programme will be extended to Hong Kong this year and is targeting 50 megacities around the world by 2017. We will all be keen to see when Kilkenny, Limerick and Galway get on the Luxottica list.
However, its recently announced partnership with the internet powerhouse Google has attracted attention. Google Glass costs a cool $1,500 and has limited availability.
So Luxottica has contracted to design innovative, wearable eyewear to make the internet nerdy 'Google Glass' cool. It plans to include its Ray-Ban and Oakley brands in the development of the market, estimated to be worth €20bn.
Luxottica is a strong quality story with record sales last year of €7.3bn. Operating profits were also up from €970m to €1.1bn and its free cash flow was a satisfactory €650m. The share price is €40 just below its recent all-time high of €43, so they are fully priced. The company is valued at €19.5bn, has a very high P/E of 35 and a modest dividend yield of 1.6. Growth this year rests on its main brands Ray-Ban, Oakley and its retail shops.
High single-digit sales growth is in the offing in the current year but the plan is that net income increases will be in the double digit category. The big thing about luxury brands is the fact that people are prepared to pay lots of money for intangible things like style and being able to make people feel good about themselves.
A nice branded pair of 'shades' can often do the trick. Ask Bono.
Nothing published in this section should be taken as a recommendation, either implicit or explicit, to buy or sell any of the shares mentioned.