Luxottica Group, S.p.A. (LUX)

Comparison of the year ended December 31, 2005 to the year ended December 31, 2004

Net Sales. Net sales increased 30.0 percent to Euro 4,134.3 million during 2005 as compared to Euro 3,179.6 million for 2004. Net sales in the retail segment, through LensCrafters, Sunglass Hut, OPSM and Cole, increased by 34.8 percent to Euro 3,061.7 million for 2005 from Euro 2,271.0 million for 2004. This increase was primarily due to the inclusion of Cole sales from the date of acquisition on October 4, 2004, which amounted to Euro 761.5 million for the full fiscal year 2005 compared to Euro 164.8 million for the three-month period following the acquisition in 2004.

Net sales to third parties in the manufacturing and wholesale segment increased by 18.3 percent to Euro 1,075.0 million for 2005 as compared to Euro 908.6 million in 2004. This increase was mainly attributable to increased sales of our Ray-Ban brand, as well as Prada, Versace, Bulgari and Dolce & Gabbana (which we began distributing in October 2005). Wholesale sales were strong in all geographic areas.

On a geographic basis net of intercompany transactions, operations in North America resulted in net sales of Euro 2,811.9 million during 2005, comprising 68.0 percent of total net sales, an increase of Euro 804.1 million from 2004. This increase was primarily due to the inclusion of Cole sales from the date of acquisition on October 4, 2004, which amounted to Euro 761.5 million for the full fiscal year 2005 compared to Euro 164.8 million for the three-month period following the acquisition in 2004. This sales increase was mostly driven by our focus on selling premium frames and products at both our Sunglass Hut and LensCrafters North American retail outlets. This focus included the remodeling, opening or relocation of over 250 Sunglass Hut outlets. Net sales for operations in “Asia-Pacific,” which consists of Australia, New Zealand, Singapore, Malaysia, Hong Kong, Thailand, China, Japan and Taiwan, were Euro 461.2 million during 2005, comprising 11.2 percent of total net sales, an increase of Euro 26.2 million as compared to 2004. Net sales for the rest of the world accounted for the remaining Euro 861.2 million of net sales during 2005, which represented a 16.9 percent increase as compared to 2004.

During 2005, net sales in the retail segment accounted for approximately 74.0 percent of total net sales, as compared to approximately 71.4 percent of total net sales in 2004 due to the retail acquisition described above.

Cost of Sales. Cost of sales increased by 29.3 percent to Euro 1,316.7 million in 2005 from Euro 1,018.6 million in 2004. Cost of sales in the retail segment increased by Euro 273.5 million, which increase is primarily attributable to the inclusion of Cole in our results of operations for three months in 2004 compared to a full 12 months in 2005. Cost of sales in the manufacturing and wholesale segment increased by Euro 68.6 million due to the increase in net sales. As a percentage of net sales, cost of sales decreased to 31.8 percent from 32.0 percent. This was mostly attributable to the placement of more Luxottica manufactured products in our newly acquired Cole retail locations. Manufacturing labor costs increased by 17.3 percent to Euro 301.3 million in 2005 from Euro 256.9 million in 2004. This increase is attributable to the increase in net sales. As a percentage of net sales, cost of labor decreased to 7.3 percent in 2005 from 8.1 percent in 2004, due to higher productivity in the wholesale division, as well as due to the inclusion of Cole results, since Cole’s cost of labor as a percentage of sales is lower than that of the rest of the Group. For 2005, the average number of frames produced daily in our facilities (including Tristar, our Chinese factory) was approximately 125,000, which was in line with 2004 production.

Gross Profit. For the reasons outlined above, gross profit increased by 30.4 percent to Euro 2,817.6 million in 2005, from Euro 2,161.0 million in 2004. As a percentage of net sales, gross profit increased to 68.2 percent in 2005 from 68.0 percent in 2004.

Operating Expenses. Total operating expenses increased by 33.0 percent to Euro 2,236.2 million in 2005 from Euro 1,681.5 million in 2004. As a percentage of net sales, operating expenses increased to 54.1 percent in 2005 from 52.9 percent in 2004.

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Selling and advertising expenses, including royalty expenses, increased by 32.1 percent to Euro 1,774.2 million during 2005 from Euro 1,343.0 million in 2004. Euro 297.4 million of this increase is attributable to the inclusion of Cole in our results of operations for the full fiscal year in 2005 compared to only the fourth quarter of 2004 (from the date of acquisition). As a percentage of net sales, selling and advertising expenses increased to 42.9 percent in 2005 from 42.2 percent in 2004. This increase as a percentage of sales is primarily attributable to the consolidation of Cole’s results in our results of operations.

General and administrative expenses, including intangible asset amortization, increased by 36.5 percent to Euro 462.0 million in 2005 from Euro 338.5 million in 2004. Euro 81.0 million of this increase is attributable to the inclusion of Cole in our results of operations for the full fiscal year in 2005 compared to only the fourth quarter of 2004 (from the date of acquisition). As a percentage of net sales, general and administrative expenses increased to 11.2 percent in 2005 from 10.6 percent in 2004. This increase was primarily due to the consolidation of Cole results in our results of operations. As we continue the integration of Cole, we expect its operating expenses as a percentage of sales to decrease due to the expected higher efficiency in the fixed cost structure.

Income from Operations. For the reasons outlined above, income from operations for 2005 increased by 21.3 percent to Euro 581.4 million from Euro 479.5 million in 2004. As a percentage of net sales, income from operations decreased to 14.1 percent in 2005 compared to 15.1 percent for 2004.

Operating margin, calculated as income from operations divided by net sales, in the manufacturing and wholesale distribution segment increased to 23.2 percent in 2005 from 21.3 percent in 2004. This increase in operating margin is attributable to higher efficiency in our fixed cost structure driven by increases in net sales and lower sales commissions, partially offset by higher advertising expenses.

Operating margin in the retail segment decreased to 11.6 percent in 2005 from 13.1 percent in 2004, due to the inclusion of the results for Cole, whose operating margin is lower than that of our other retail chains. However, we believe that when the final restructuring of the North American Retail Division is completed by the end of 2006, we will return to our historical operating margins.

Other Income (Expense)-Net. Other income (expense)-net was a net expense of Euro 42.1 million in 2005 as compared to a net expense of Euro 34.9 million in 2004. This increase in other income (expense)-net is mainly attributable to an increase in interest expense of Euro 11.2 million due to the debt incurred for the acquisition of Cole, as well as rising interest rates. We expect an increase in interest expense for 2006 due to the rising interest rate environment.

Net Income from Continuing Operations. Income before taxes increased by 21.3 percent to Euro 539.3 million in 2005 from Euro 444.6 million in 2004. As a percentage of net sales, income before taxes decreased to 13.0 percent in 2005 from 14.0 percent in 2004, mainly due to the integration of the Cole operations. Minority interest increased to Euro (9.3) million in 2005 from Euro (8.6) million in 2004. Our effective tax rate was 37.0 percent in 2005, while it was 35.4 percent in 2004. Net income increased by 18.5 percent to Euro 330.8 million in 2005 from Euro 279.1 million in 2004. Net income from continuing operations as a percentage of net sales decreased to 8.0 percent in 2005 from 8.8 percent in 2004.

Basic earnings per share from continuing operations for 2005 were Euro 0.73, increasing from Euro 0.62 for 2004. Diluted earnings per share  from continuing operations for 2005 were Euro 0.73 increasing from Euro 0.62 for 2004.

Discontinued Operations. Discontinued operations resulted in income of Euro 11.5 million in 2005, as compared to Euro 7.8 million in 2004. The increase was due to the consolidation of the Things Remembered operations only for three months in 2004 because the acquisition date occurred on October 4, 2004.

Net Income. Net income increased by 19.3 percent to Euro 342.3 million in 2005 from Euro 286.9 million in 2004. Net income as a percentage of net sales decreased to 8.3 percent in 2005 from 9.0 percent in 2004.

Basic earning per share for 2005 were Euro 0.76, increasing from Euro 0.64 for 2004. Diluted earnings per share for 2005 were Euro 0.76, increasing from Euro 0.64 for 2004.

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Comparison of the year ended December 31, 2005 to the year ended December 31, 2004

Net Sales. Net sales increased 34.3 percent to Euro 4,370.7 million during 2005 as compared to Euro 3,255.3 million for 2004.Net sales in the retail segment, through LensCrafters, Sunglass Hut, OPSM and Cole, increased by 40.5 percent to Euro 3,298.2 million for 2005 from Euro 2,346.7 million for 2004. This increase was primarily due to the inclusion of Cole sales from the date of acquisition on October 4, 2004, which amounted to Euro 998.0 million for the full fiscal year 2005 compared to Euro 240.5 million for the three-month period following the acquisition in 2004.

Net sales to third parties in the manufacturing and wholesale segment increased by 18.3 percent to Euro 1,075.0 million for 2005 as compared to Euro 908.6 million in 2004. This increase was mainly attributable to increased sales of our Ray-Ban brand, as well as Prada, Versace, Bulgari and Dolce & Gabbana (which we began distributing in October 2005). Wholesale sales were  strong in all geographic areas.

On a geographic basis net of intercompany transactions, operations in North America resulted in net sales of Euro 3,048.3 million during 2005, comprising 69.7 percent of total net sales, an increase of Euro 964.8 million from 2004. This increase was primarily due to the inclusion of Cole sales from the date of acquisition on October 4, 2004, which amounted to Euro 998.0 million for the full fiscal year 2005 compared to Euro 240.5 million for the three-month period following the acquisition in 2004. This sales increase was mostly driven by our focus on selling premium frames and products at both our Sunglass Hut and LensCrafters North American retail outlets. This focus included the remodeling, opening or relocation of over 250 Sunglass Hut outlets. Net sales for operations in “Asia-Pacific,” which consists of Australia, New Zealand, Singapore, Malaysia, Hong Kong, Thailand, China, Japan and Taiwan, were Euro 461.2 million during 2005, comprising 10.6 percent of total net sales, an increase of Euro 26.2 million as compared to 2004. Net sales for the rest of the world accounted for the remaining Euro 861.2 million of net sales during 2005, which represented a 16.9 percent increase as compared to 2004.

During 2005, net sales in the retail segment accounted for approximately 75.4 percent of total net sales, as compared to approximately 72.1 percent of total net sales in 2004 due to the retail acquisition described above.

Cost of Sales. Cost of sales increased by 32.7 percent to Euro 1,380.7 million in 2005 from Euro 1,040.7 million in 2004. Cost of sales in the retail segment increased by Euro 315.4 million, which increase is primarily attributable to the inclusion of Cole in our results of operations for three months in 2004 compared to a full 12 months in 2005. Cost of sales in the manufacturing and wholesale segment increased by Euro 68.6 million due to the increase in net sales. As a percentage of net sales, cost of sales decreased to 31.6 percent from 32.0 percent. This was mostly attributable to the placement of more Luxottica manufactured products in our newly acquired Cole retail locations. Manufacturing labor costs increased by 17.3 percent to Euro 301.4 million in 2005 from Euro 256.9 million in 2004. This increase is attributable to the increase in net sales. As a percentage of net sales, cost of labor decreased to 6.9 percent in 2005 from 7.9 percent in 2004, due to higher productivity in the wholesale division, as well as due to the inclusion of Cole results, since Cole’s cost of labor as a percentage of sales is lower than that of the rest of the Group. For 2005, the average number of frames produced daily in our facilities (including Tristar, our Chinese factory) was approximately 125,000, which was in line with 2004 production.

Gross Profit. For the reasons outlined above, gross profit increased by 35.0 percent to Euro 2,990.1 million in 2005, from Euro 2,214.6 million in 2004. As a percentage of net sales, gross profit increased to 68.4 percent in 2005 from 68.0 percent in 2004.

Operating Expenses. Total operating expenses increased by 38.7 percent to Euro 2,387.5 million in 2005 from Euro 1,721.8 million in 2004. As a percentage of net sales, operating expenses increased to 54.6 percent in 2005 from 52.9 percent in 2004.

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Selling and advertising expenses, including royalty expenses, increased by 38.7 percent to Euro 1,909.7 million during 2005 from Euro 1,376.5 million in 2004. Euro 399.3 million of this increase is attributable to the inclusion of Cole in our results of operations for the full fiscal year in 2005 compared to only the fourth quarter of 2004 (from the date of acquisition). As a percentage of net sales, selling and advertising expenses increased to 43.7 percent in 2005 from 42.3 percent in 2004. This increase as a percentage of sales is primarily attributable to the consolidation of Cole’s results in our results of operations.

General and administrative expenses, including intangible asset amortization, increased by 38.4 percent to Euro 477.8 million in 2005 from Euro 345.2 million in 2004. Euro 90.1 million of this increase is attributable to the inclusion of Cole in our results of operations for the full fiscal year in 2005 compared to only the fourth quarter of 2004 (from the date of acquisition). As a percentage of net sales, general and administrative expenses increased to 10.9 percent in 2005 from 10.6 percent in 2004. This increase was primarily due to the consolidation of Cole results in our results of operations. As we continue the integration of Cole, we expect its operating expenses as a percentage of sales to decrease due to the expected higher efficiency in the fixed cost structure.

Income from Operations. For the reasons outlined above, income from operations for 2005 increased by 22.3 percent to Euro 602.6 million from Euro 492.8 million in 2004. As a percentage of net sales, income from operations decreased to 13.8 percent in 2005 compared to 15.1 percent for 2004.

Operating margin, calculated as income from operations divided by net sales, in the manufacturing and wholesale distribution segment increased to 23.2 percent in 2005 from 21.3 percent in 2004. This increase in operating margin is attributable to higher efficiency in our fixed cost structure driven by increases in net sales and lower sales commissions, partially offset by higher advertising expenses.

Operating margin in the retail segment decreased to 11.5 percent in 2005 from 13.2 percent in 2004, due to the inclusion of the results for Cole, whose operating margin is lower than that of our other retail chains. However, we believe that when the final restructuring of the North American Retail Division is completed by the end of 2006, we will return to our historical operating margins.

Other Income (Expense)-Net. Other income (expense)-net was a net expense of Euro 45.0 million in 2005 as compared to a net expense of Euro 35.7 million in 2004. This increase in other income (expense)-net is mainly attributable to an increase in interest expense of Euro 11.2 million due to the debt incurred for the acquisition of Cole, as well as rising interest rates. We expect an increase in interest expense for 2006 due to the rising interest rate environment.

Net Income. Income before taxes increased by 22.0 percent to Euro 557.6 million in 2005 from Euro 457.2 million in 2004. As a percentage of net sales, income before taxes decreased to 12.8 percent in 2005 from 14.0 percent in 2004, mainly due to the integration of the Cole operations. Minority interest increased to Euro (9.3) million in 2005 from Euro (8.6) million in 2004. Our effective tax rate was 37.0 percent in 2005, while it was 35.4 percent in 2004. Net income increased by 19.3 percent to Euro 342.3 million in 2005 from Euro 286.9 million in 2004. Net income as a percentage of net sales decreased to 7.8 percent in 2005 from 8.8 percent in 2004.

Basic earnings per share for 2005 were Euro 0.76, increasing from Euro 0.64 for 2004. Diluted earnings per share for 2005 were Euro 0.76, increasing from Euro 0.64 for 2004.