Morningstar | Essilor and Luxottica See Improving Performance in 3Q; FVE Maintained
We retain our wide moat rating and fair value estimate of EUR 127 per share for EssilorLuxottica, as the companies have reported third-quarter results broadly in line with expectations and confirmed full-year guidance. The call was given for the Essilor business only, as the merger process is under way, while the joint EssilorLuxottica shareholders' meeting, with an update on integration and common goals, is expected on Nov. 29.At Essilor, performance accelerated in the third quarter, resulting in 5% like-for-like growth (versus 3.6% in the first half of the year and around 4% annual target), helped specifically by strength in Latin America and Asia-Pacific, where China saw double-digit growth, as well as double-digit growth in the sunglasses and readers division. Essilor’s performance in Latin America, with notable high-single-digit growth in Brazil, contrasted with the contraction of Luxottica's Brazilian wholesale business in the third quarter.
Essilor's management team noted that the market for myopic and presbyopic solutions is accelerating globally from 2%-3% to 3%-4%, with midtier solutions in emerging markets specifically leading the acceleration. We believe that through its early entry in the developing markets, Essilor is well positioned to capture the growth coming from these countries' increasing purchasing power as the percentage of vision correction increases and as people shift to more premium solutions.
Luxottica’s third quarter also came as an improvement to the first half of the year, with constant-currency growth at 3.5% (versus 2% annual expectations and 0.3% in the first half of the year). Results came on top of an easy comparison base, as third-quarter 2017 was affected by the hurricanes in the U.S., especially hitting Lenscrafters performance. North America, Europe, and Asia-Pacific grew by low to midsingle digits, but Latin America contracted.
The online businesses of both companies grew at a midteens rate at constant exchange rates.
Luxottica Group S.p.A. is a holding company. The Company is engaged in the design, manufacture and distribution of fashion, luxury, sport and performance eyewear. The Company operates through two segments: manufacturing and wholesale distribution, and retail distribution. Through its manufacturing and wholesale distribution operations, the Company is engaged in design, manufacturing, wholesale distribution and marketing of brands and designer lines of prescription frames and sunglasses, as well as of performance optics products. The Company operates its retail segment principally through its retail brands, which include LensCrafters, Sunglass Hut, Pearle Vision, ILORI, The Optical Shop of Aspen, GMO, OPSM, Laubman & Pank, Oakley O Stores and Vaults, David Clulow, and its retail licensed brands, Sears Optical and Target Optical. The Company's wholesale distribution network covers over 150 countries across five continents and has approximately 50 commercial subsidiaries.
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