Morningstar | EssilorLuxottica's Results in Line With Expectations, Synergies in Execution Mode; FVE Maintained
We are maintaining our wide moat rating and EUR 119 fair value estimate for EssilorLuxottica as the company reported first-quarter sales that were largely in line with our full-year expectations. Revenue at constant exchange rates was up 3.7% versus the 3.8% that we expect for the full year and management's 3.5%-5% guidance. Guidance for 3.5%-5% revenue growth and adjusted operating profit growth of 0.8-1.2 times sales was maintained.Essilor’s revenue was up 4.3% at constant exchange rates and Luxottica’s revenue was up 3.2%. Optical instruments continued solid performance with 4.6% growth, of which 3.6% was like for like, with fast-growing countries in Latin America and China delivering close to 10% like-for-like growth. Readers growth was more muted at 1.7% at constant exchange rates, with lackluster performance in the United States. Equipment sales rose 4.9% on top of a rather unchallenging comparison base in the first quarter of 2018 (down 3.1%). Wholesale was up a lackluster 0.9% at constant exchange rates for Luxottica despite the unchallenging comparison (down 4.2% in the first quarter of 2018); management attributed this negative surprise to unseasonable weather conditions in some parts of the U.S. and third-party e-commerce sales declines due to the timing of shipments between quarters. Retail division results were strong, up 4.7% at constant exchange rates, manifesting signs of performance improvement at Lenscrafters and strong performance in Europe (17.8% growth at constant exchange rates). Comparable sales that don’t include e-commerce were up 1.7% in the quarter (including 2.6% for Lenscrafters).
The company mentioned being in execution mode for its outlined synergies without addressing the governance issues. We continue to believe that the management spat could have the biggest negative impact on the timing and realization of synergies (versus core business disruption). We believe much of those synergies are not priced in, given the recent share price declines (our fair value for the combined entity excluding synergies is around EUR 100 versus the EUR 106 current share price).
Essilor International (Compagnie Generale d'Optique) designs, manufactures and sells ophthalmic lenses, ophthalmic optical instruments and equipment. Co.'s activities are divided into three segments: Lenses and Optical Instruments (Co. designs, manufactures and customizes corrective lenses such as: Varilux (progressive lenses); anti-reflective, smudge-proof and anti-static lenses (Crizal); Nikon lenses, Transitions variable-tint lenses and Kodak lenses under agreements; polarized lenses (Xperio) and fog-proof lenses (Optifog)), Equipment (Co. produces, distributes and sells equipment and consumables used by prescription laboratories) and Readers (Co. designs and sells reading glasses).
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