Luxottica Group, S.p.A. 20-F 2009
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission file number 1-10421
LUXOTTICA GROUP S.p.A.
(Exact name of Registrant as specified in its charter)
(Translation of Registrants name into English)
REPUBLIC OF ITALY
(Jurisdiction of incorporation or organization)
VIA C. CANTÙ 2, MILAN 20123, ITALY
(Address of principal executive offices)
A. Boxer, Esq.
44 Harbor Park Drive
Washington, NY 11050
Securities registered or to be registered pursuant to Section 12(b) of the Act.
* Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report.
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the Registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
If this report is an
annual or transition report, indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
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Item 17 o Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x
Throughout this annual report, management has made certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which are considered prospective. These statements are made based on managements current expectations and beliefs and are identified by the use of forward-looking words and phrases such as plans, estimates, believes or belief, expects or other similar words or phrases.
Such statements involve risks, uncertainties and other factors that could cause actual results to differ materially from those which are anticipated. Such risks and uncertainties include, but are not limited to, the ability to manage the effect of the poor current global economic conditions on our business, the ability to successfully acquire new businesses and integrate their operations, the ability to predict future economic conditions and changes in consumer preferences, the ability to successfully introduce and market new products, the ability to maintain an efficient distribution network, the ability to achieve and manage growth, the ability to negotiate and maintain favorable license arrangements, the availability of correction alternatives to prescription eyeglasses, fluctuations in exchange rates, as well as other political, economic and technological factors and other risks and uncertainties described in our filings with the U.S. Securities and Exchange Commission, or the SEC. These forward-looking statements are made as of the date hereof, and we do not assume any obligation to update them.
Throughout this annual report, when we use the terms Luxottica, Company, Group, we, us and our, unless otherwise indicated or the context otherwise requires, we are referring to Luxottica Group S.p.A. and its consolidated subsidiaries. References to Luxottica, Company, Group, we, us and our, for periods prior to our acquisition of Oakley, Inc. (Oakley) on November 14, 2007, are to Luxottica Group S.p.A. and its consolidated subsidiaries, excluding Oakley and its subsidiaries, unless otherwise indicated or the context otherwise requires. References to Oakley for periods prior to the acquisition refer to Oakley and its consolidated subsidiaries, unless otherwise indicated or the context otherwise requires.
Our house brands and designer line prescription frames and sunglasses that are referred to in this annual report, and certain of our other products, are sold under names that are subject to registered trademarks held by us or, in certain instances, our licensors. These trademarks may not be used by any person without our prior written consent or the consent of our licensors, as applicable.
The following tables set forth selected consolidated financial data for the periods indicated and are qualified by reference to, and should be read in conjunction with, our consolidated financial statements, the related notes thereto, and Item 5Operating and Financial Review and Prospects contained elsewhere herein. We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The selected consolidated income statement data for the years ended December 31, 2008, 2007 and 2006, and the selected consolidated balance sheet data as of December 31, 2008 and 2007, are derived from the audited Consolidated Financial Statements included in Item 18. The selected consolidated income statement data for the years ended December 31, 2005 and 2004, and the selected consolidated balance sheet data as of December 31, 2006, 2005 and 2004, are derived from audited consolidated financial statements which are not included in this Form 20-F.
[TABLES APPEAR ON THE FOLLOWING PAGE]
We are required to pay an annual dividend on our ordinary shares if such dividend has been approved by a majority of our stockholders at the ordinary meeting of stockholders. Before we may pay any dividends with respect to any fiscal year, we are required, as necessary, to set aside an amount equal to five percent of our statutory net income for such year in our legal reserve unless and until the reserve, including amounts remaining from prior years, is at least equal to one-fifth of the nominal value of our then issued share capital. Each year thereafter, such legal reserve requirement remains fulfilled so long as the reserve equals at least one-fifth of the nominal value of our issued share capital for each such year.
At our ordinary meeting of stockholders on April 29, 2009, our stockholders voted to allocate net income for 2008 to our extraordinary reserve, thereby suspending for the time being the payment of dividends to further strengthen our equity structure.
The table below sets forth the cash dividends declared and paid on each ordinary share in each year indicated.
Exchange Rate Information
The following tables set forth, for each of the periods indicated, certain information regarding the Noon Buying Rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York, which we refer to as the Noon Buying Rate, expressed in U.S.$ per Euro 1.00:
(1) The average of the Noon Buying Rates in effect on the last business day of each month during the period. When the Company consolidates its profit and loss statement, it translates U.S. dollar denominated amounts into Euro using an average U.S. dollar/Euro exchange rate of each business day during the applicable period.
On June 19, 2009, the Noon Buying Rate was U.S.$ 1.3998 per Euro 1.00.
Unless otherwise indicated, all convenience translations included in this annual report of amounts expressed in Euro into U.S. dollars for the relevant period or date have been made using the Noon Buying Rate in effect as of the end of such period or date, as appropriate.
In this annual report, unless otherwise stated or the context otherwise requires, references to $, U.S.$, dollars or U.S. dollars are to United States dollars, references to Euro or are to the Common European Currency, the Euro, references to GBP are to the British Pound Sterling, references to Rs are to Indian rupees, and references to AUD or A$ are to Australian dollars.
Our future operating results and financial condition may be affected by various factors, including those set forth below.
Current economic conditions may adversely impact demand for our products, reduce access to credit and cause our customers and others with which we do business to suffer financial hardship, all of which could adversely impact our business, results of operations, financial condition and cash flows.
Worldwide economic conditions have deteriorated significantly over the past year in many countries and regions in which we do business and may remain depressed for the foreseeable future. Due to the nature of our products, our sales, especially in our retail stores, are affected by the discretionary spending of consumers. Discretionary spending is affected by many factors, including general business conditions, inflation, interest rates, consumer debt levels, unemployment rates, the availability of consumer credit, currency exchange rates and other matters that influence consumer confidence. Many of these factors are outside our control. Our customers purchases of discretionary items could decline during periods in which disposable income is lower or prices have increased in response to rising costs or in periods of actual or perceived unfavorable economic conditions. If this occurs or if unfavorable economic conditions continue to challenge the consumer environment, our business, results of operations, financial condition and cash flows could be materially adversely affected.
In addition, in economic conditions where there is decreased access to credit, increased financial difficulties may lead to restructurings, bankruptcies, liquidations and other unfavorable events for our consumers, customers, vendors, suppliers, logistics providers, other service providers and the financial institutions which are counterparties to our credit facilities and other derivative transactions. The likelihood that such third parties will be unable to overcome these financial difficulties may increase. If the third parties on which we rely for goods and services are unable to overcome financial difficulties resulting from the deterioration of the worldwide economic conditions or if the counterparties to our credit facilities or our derivative transactions do not perform their obligations, our business, results of operations, financial condition and cash flows could be materially adversely affected.
If we are not successful in completing and integrating strategic acquisitions to expand or complement our business, our future profitability and growth will be at risk.
As part of our growth strategy, we have made, and may continue to make, strategic business acquisitions to expand or complement our business. Our acquisition activities, however, can be disrupted by overtures from competitors for the targeted candidates, governmental regulation and rapid developments in our industry. We may face additional risks and uncertainties following an acquisition, including: (i) difficulty in integrating the newly-acquired business and operations in an efficient and effective manner; (ii) inability to achieve strategic objectives, cost savings and other benefits from the acquisition; (iii) the lack of success by the acquired business in its markets; (iv) the loss of key employees of the acquired business; (v) the diversion of the attention of senior management from our operations; (vi) difficulty integrating human resources systems, operating systems, inventory management systems and assortment planning systems of the acquired business with our systems; (vii) the cultural differences between our organization and that of the acquired business; and (viii) liabilities that were not known at the time of acquisition or the need to address tax or accounting issues.
If we fail to timely recognize or address these matters or to devote adequate resources to them, we may fail to achieve our growth strategy or otherwise realize the intended benefits of any acquisition. Even if we are able to integrate our business operations successfully, the integration may not result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that may be possible from the integration or in the achievement of such benefits within the forecasted period of time.
If we do not correctly predict future economic conditions and changes in consumer preferences, our sales of premium products and profitability will suffer.
The fashion and consumer products industries in which we operate are cyclical. Downturns in general economic conditions or uncertainties regarding future economic prospects, which affect consumer disposable income, have historically adversely affected consumer spending habits in our principal markets and thus made the growth in sales and profitability of premium-priced product categories difficult during such downturns. Therefore, future economic downturns or uncertainties could have a material adverse effect on our business, results of operations and financial condition, including sales of our designer and other premium brands.
The industry is also subject to rapidly changing consumer preferences, and future sales may suffer if the fashion and consumer products industries do not continue to grow or if consumer preferences shift away from our products. Changes in fashion could also affect the popularity and, therefore, the value of the fashion licenses granted to us by designers. Any event or circumstance resulting in reduced market acceptance of one or more of these designers could reduce our sales and the value of our inventory of models from that designer. Unanticipated shifts in consumer preferences may also result in excess inventory and underutilized manufacturing capacity. In addition, our success depends, in large part, on our ability to anticipate and react to changing fashion trends in a timely manner. Any sustained failure to identify and respond to such trends would adversely affect our business, results of operations and financial condition and may result in the write-down of excess inventory and idle manufacturing facilities.
If we are unable to successfully introduce new products, our future sales and operating performance will suffer.
The mid- and premium-price categories of the prescription frame and sunglasses markets in which we compete are particularly vulnerable to changes in fashion trends and consumer preferences. Our historical success is attributable, in part, to our introduction of innovative products which are perceived to represent an improvement over products otherwise available in the market. Our future success will depend on our continued ability to develop and introduce such innovative products. If we are unable to continue to do so, our future sales could decline, inventory levels could rise, leading to additional costs for storage and potential writedowns relating to the value of excess inventory, and production costs would be negatively impacted since fixed costs would represent a larger portion of total production costs due to the decline in quantities produced.
If we fail to maintain an efficient distribution network in our highly competitive markets, our business, results of operations and financial condition could suffer.
The mid- and premium-price categories of the prescription frame and sunglasses markets in which we operate are highly competitive. We believe that, in addition to successfully introducing new products, responding to changes in the market environment and maintaining superior production capabilities, our ability to remain competitive is highly dependent on our success in maintaining an efficient distribution network. If we are unable to maintain an efficient distribution network, our sales may decline due to the inability to timely deliver products to customers and our profitability may decline due to an increase in our per unit distribution costs in the affected regions, which may have an adverse impact on our business, results of operations and financial condition.
If we are unable to achieve and manage growth, operating margins will be reduced as a result of decreased efficiency of distribution.
In order to achieve and manage our growth effectively, we are required to increase and streamline production and implement manufacturing efficiencies where possible, while maintaining strict quality control and the ability to deliver products to our customers in a timely and efficient manner. We must also continuously develop new product designs and features, expand our information systems and operations, and train and manage an increasing number of management level and other employees. If we are unable to manage these matters effectively, our efficient distribution process could be at risk and we could lose market share in affected regions.
If we do not continue to negotiate and maintain favorable license arrangements, our sales or cost of sales will suffer.
We have entered into license agreements that enable us to manufacture and distribute prescription frames and sunglasses under certain designer names, including Chanel, Prada, Miu Miu, Dolce & Gabbana, D&G, Bvlgari, Tiffany & Co., Versace, Versus, Salvatore Ferragamo, Burberry, Polo Ralph Lauren, Donna Karan, DKNY, Paul Smith Spectacles, Brooks Brothers, Anne Klein, Stella McCartney and, most recently, Tory Burch. These license agreements typically have terms of between three and ten years and may contain options for renewal for additional periods and require us to make
guaranteed and contingent royalty payments to the licensor. See Item 4Information on the CompanyBusiness OverviewRecent Developments regarding our new license agreement for the Tory Burch name. We believe that our ability to maintain and negotiate favorable license agreements with leading designers in the fashion and luxury goods industries is essential to the branding of our products and, therefore, material to the success of our business. For the years ended December 31, 2008 and 2007, the sales realized through the Prada and Miu Miu trade names together represented approximately 5.5 percent and 6.4 percent of total sales, respectively. For the years ended December 31, 2008 and 2007, the sales realized through the Dolce & Gabbana and D&G trade names together represented approximately 5.1 percent and 5.5 percent of total sales, respectively. Accordingly, if we are unable to negotiate and maintain satisfactory license arrangements with leading designers, our growth prospects and financial results could suffer from a reduction in sales or an increase in advertising costs and royalty payments to designers.
If vision correction alternatives to prescription eyeglasses become more widely available, or consumer preferences for such alternatives increase, our profitability could suffer through a reduction of sales of our prescription eyewear products, including lenses and accessories.
Our business could be negatively impacted by the availability and acceptance of vision correction alternatives to prescription eyeglasses, such as contact lenses and refractive optical surgery. According to industry estimates, over 45 million people wear contact lenses in the United States, and disposable contact lenses is the fastest growing segment of the lens subsector. In addition, the use of refractive optical surgery has grown substantially since it was approved by the U.S. Food and Drug Administration in 1995.
Increased use of vision correction alternatives could result in decreased use of our prescription eyewear products, including a reduction of sales of lenses and accessories sold in our retail outlets, which could have a material adverse impact on our business, results of operations, financial condition and prospects.
If the Euro continues to strengthen relative to certain other currencies, our profitability as a consolidated group will suffer.
Our principal manufacturing facilities are located in Italy. We also maintain manufacturing facilities in China, India and the United States as well as sales and distribution facilities throughout the world. As a result, we are vulnerable to foreign exchange rate fluctuations in two principal areas:
· we incur most of our manufacturing costs in Euro and in Chinese Yuan, and receive a significant part of our revenues in other currencies. Therefore, a strengthening of the Euro or the Chinese Yuan relative to other currencies in which we receive revenues could negatively impact the demand for our products or decrease our profitability in consolidation, thus adversely affecting our business and results of operations; and
· a substantial portion of our assets, liabilities, revenues and costs are denominated in various currencies other than Euro, with most of our revenues and operating expenses being denominated in U.S. dollars. As a result, our operating results, which are reported in Euro, are affected by currency exchange rate fluctuations, particularly between the U.S. dollar and the Euro.
As our international operations grow, future changes in the exchange rate of the Euro against the U.S. dollar and other currencies may negatively impact our reported results.
See Item 11Quantitative and Qualitative Disclosures about Market Risk.
If our international sales suffer due to changing local conditions, our profitability and future growth will be affected.
We currently operate worldwide and have begun to expand our operations in many countries, including certain developing countries in Asia and South America. Therefore, we are subject to various risks inherent in conducting business internationally, including the following:
· exposure to local economic and political conditions;
· export and import restrictions;
· currency exchange rate fluctuations and currency controls;
· disruptions of capital and trading markets;
· accounts receivable collection and longer payment cycles;
· potential hostilities and changes in diplomatic and trade relationships;
· changes in legal or regulatory requirements;
· withholding and other taxes on remittances and other payments by subsidiaries;
· investment restrictions or requirements; and
· local content laws requiring that certain products contain a specified minimum percentage of domestically produced components.
The likelihood of such occurrences and their potential effect on us vary from country to country and are unpredictable, but any such occurrence may result in the loss of sales or increased costs of doing business and may have a significant effect on our business, results of operations, financial condition and prospects.
If we are unable to protect our proprietary rights, our sales might suffer, and we may incur significant costs to defend such rights.
We rely on trade secret, unfair competition, trade dress, trademark, patent and copyright laws to protect our rights to certain aspects of our products and services, including product designs, proprietary manufacturing processes and technologies, product research and concepts and recognized trademarks, all of which we believe are important to the success of our products and services and our competitive position. However, pending trademark or patent applications may not in all instances result in the issuance of a registered trademark or patent, and trademarks or patents granted may not be effective in thwarting competition or be held valid if subsequently challenged. In addition, the actions we take to protect our proprietary rights may be inadequate to prevent imitation of our products and services. Our proprietary information could become known to competitors, and we may not be able to meaningfully protect our rights to proprietary information. Furthermore, other companies may independently develop substantially equivalent or better products or services that do not infringe on our intellectual property rights or could assert rights in, and ownership of, our proprietary rights. Moreover, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States.
Consistent with our strategy of vigorously defending our intellectual property rights, we devote substantial resources to the enforcement of patents issued and trademarks granted to us, to the protection of our trade secrets, trade dress or other intellectual property rights and to the determination of the scope or validity of the proprietary rights of others that might be asserted against us. However, if the level of potentially infringing activities by others were to increase substantially, we might have to significantly increase the resources we devote to protecting our rights. From time to time, third parties may assert patent, copyright, trademark or similar rights against intellectual property that is important to our business. The resolution or compromise of any litigation or other legal process to enforce such alleged third party rights, regardless of its merit or resolution, could be costly and divert the efforts and attention of our management. We may not prevail in any such litigation or other legal process or we may compromise or settle such claims because of the complex technical issues and inherent uncertainties in intellectual property disputes and the significant expense in defending such claims. An adverse determination in any dispute involving our proprietary rights could, among other things, (i) require us to grant licenses to, or obtain licenses from, third parties, (ii) prevent us from manufacturing or selling our products, (iii) require us to discontinue the use of a particular patent, trademark, copyright or trade secret or (iv) subject us to substantial liability. Any of these possibilities could have a material adverse effect on our business including by reducing our future sales or causing us to incur significant costs to defend our rights.
If we are unable to maintain our current operating relationship with Cole Licensed Brands host stores, we could suffer loss of sales and possible impairment of certain intangible assets.
Our sales depend in part on our relationships with the host stores that allow us to operate our Coles Licensed Brands division, including Sears. Our leases and licenses with Sears are terminable upon short notice. If our relationship with Sears were to end, we would suffer a loss of sales and the possible impairment of certain intangible assets. This could have a material adverse effect on our business, results of operations, financial condition and prospects.
If we become subject to adverse judgments or determinations in legal proceedings to which we are, or may become, a party, our future profitability could suffer through a reduction of sales or increased costs.
We are currently a party to certain legal proceedings as described in Item 8Financial InformationLegal Proceedings. In addition, in the ordinary course of our business, we become involved in various other claims, lawsuits, investigations and governmental and administrative proceedings, some of which are significant. Adverse judgments or determinations in one or more of these proceedings could require us to change the way we do business or use substantial resources in adhering to the settlements and could have a material adverse effect on our business, including, among other consequences, by significantly increasing our costs to operate our business.
If we become subject to additional regulation by governmental authorities, our compliance with these regulations could have an adverse effect on our financial condition, including adversely affecting the way we manufacture or distribute our products.
Our operations are subject to regulation by governmental authorities in the United States and other jurisdictions in which we conduct business. Governmental regulations, both in the United States and other jurisdictions, have historically been subject to change. New or revised requirements imposed by governmental regulatory authorities could have an adverse effect on us, including increased costs of compliance. We may also be adversely affected by changes in the interpretation or enforcement of existing laws and regulations by governmental authorities that could affect sales or the way we currently manufacture or distribute our products. Additionally, as a U.S. government contractor through our Oakley and Eye Safety Systems subsidiaries, we must comply with, and are affected by, laws and regulations related to our performance of our government business. These laws and regulations, including requirements to obtain applicable governmental approval, clearances and certain export licenses, may impose additional costs and risks on our business. We may also become subject to audits, reviews and investigations of our compliance with these laws and regulations. See Item 4Information on the CompanyRegulatory Matters and Item 8Financial InformationLegal Proceedings.
Leonardo Del Vecchio, our chairman and principal stockholder, controls 67.83% of our voting power and is in a position to affect our ongoing operations, corporate transactions and any matters submitted to a vote of our stockholders, including the election of directors and a change in corporate control.
As of April 29, 2009, Mr. Leonardo Del Vecchio, the Chairman of our Board of Directors, has the power to vote 314,403,399 Ordinary Shares, or 67.83% of the outstanding Ordinary Shares. See Item 7 Major Shareholders and Related Party Transactions. As a result, Mr. Del Vecchio has the ability to exert significant influence over our corporate affairs and to control the outcome of virtually all matters submitted to a vote of our stockholders, including the election of our directors, the amendment of our Articles of Association or By-laws, and the approval of mergers, consolidations, the sale of all or substantially all of our assets and other significant corporate transactions.
Mr. Del Vecchios interests may conflict with or differ from the interests of our other stockholders. In situations involving a conflict of interest between Mr. Del Vecchio and our other stockholders, Mr. Del Vecchio may exercise his control in a manner that would benefit himself to the potential detriment of other stockholders. Mr. Del Vecchios significant ownership interest could delay, prevent or cause a change in control of our company, any of which may be adverse to the interests of our other stockholders.
If our procedures designed to comply with Section 404 of the Sarbanes-Oxley Act of 2002 cause us to identify material weaknesses in our internal control over financial reporting, the trading price of our securities may be adversely impacted.
Our annual report on Form 20-F includes a report from our management relating to its evaluation of our internal control over financial reporting, as required under Section 404 of the U.S. Sarbanes-Oxley Act of 2002, as amended. There are inherent limitations on the effectiveness of internal controls, including collusion, management override and failure of human judgment. In addition, control procedures are designed to reduce, rather than eliminate, business risks. As a consequence of the systems and procedures we have implemented to comply with these requirements, we may uncover circumstances that we determine, with guidance from our independent auditors, to be material weaknesses, or that otherwise result in disclosable conditions. Although we intend to take prompt measures to remediate any such identified material weaknesses in our internal control structure, measures of this kind may involve significant effort and expense, and any disclosure of such material weaknesses or other disclosable conditions may result in a negative market reaction to our securities.
We are a leader in the design, manufacturing and distribution of fashion, luxury and sports eyewear. We operate in two industry segments: (i) manufacturing and wholesale distribution; and (ii) retail distribution. See Item 18 Financial Statements for additional disclosures about our operating segments. Through our manufacturing and wholesale distribution segment, we are engaged in the design, manufacture, wholesale distribution and marketing of house and designer lines of mid- to premium-priced prescription frames and sunglasses, and with the acquisition of Oakley in November 2007, we became a designer, manufacturer and worldwide distributor of performance optics products. We operate our retail segment principally through our retail brands, which include, among others, LensCrafters, Sunglass Hut, Pearle Vision, ILORI, The Optical Shop of Aspen, OPSM, Laubman & Pank, Budget Eyewear, Bright Eyes, Oakley O Stores and Vaults, David Clulow and our Licensed Brands (Sears Optical and Target Optical).
Our manufacturing activities are carried out through six manufacturing facilities in Italy, two manufacturing facilities in China, one manufacturing facility in India and two manufacturing facilities in the United States. In 2008, we manufactured approximately 50.1 million prescription frames and sunglasses.
We operate our distribution activities through an extensive worldwide wholesale distribution network and a retail distribution network based primarily in North America, Europe, Australia, mainland China and Hong Kong. In 2008, through our wholesale and retail distribution networks, we distributed approximately 23.0 million prescription frames and approximately 34.0 million sunglasses, in approximately 6,100 models. Our products are distributed in over 130 countries worldwide.
Our products are marketed under a variety of well-known brand names. Our house brands include Ray-Ban, Oakley, Persol, Vogue, Arnette, Revo, Luxottica, Sferoflex, K&L (Killer Loop), Eye Safety Systems, Mosley Tribes and Oliver Peoples. Our designer lines include Chanel, Prada, Miu Miu, Dolce & Gabbana, D&G, Bvlgari, Tiffany & Co, Versace, Versus, Salvatore Ferragamo, Burberry, Polo Ralph Lauren, Donna Karan, DKNY, Brooks Brothers, Anne Klein, Paul Smith Spectacles and Puma (distribution license only). Additionally, in the summer of 2009, we will launch the first collection of Stella McCartney eyewear, and in the fall, we will launch the Tory Burch line. Stella McCartney sunglasses will be distributed through premium retail locations. After an initial launch phase during which the new collections will be distributed through Stella McCartney stores and exclusive stores in North America, Japan, Hong Kong and the Middle East, distribution will be broadened to reach all other key global eyewear markets. The new Tory Burch collection will be distributed not only by Tory Burch boutiques and premium American department stores but also in select and independent optical stores and in Luxotticas retail chains. After North America, distribution will be extended next to Europe and then to the rest of the world. Tory Burch, a highly respected brand in the affordable luxury segment, completes our brand portfolio by further strengthening our position in the key North American market and in the continually expanding department store channel.
Our wholesale network is comprised of 43 wholly- or majority-owned subsidiaries operating in principal markets, over 2,000 sales representatives and approximately 100 independent distributors. Our primary wholesale customers include retailers of mid- and premium-priced eyewear such as independent opticians, optical and sunglass chains, optical superstores, sunglass specialty stores, sporting goods and specialty sports stores and duty-free shops. In certain countries, and especially in North America, wholesale customers also include optometrists and ophthalmologists, health maintenance organizations, or HMOs, and department stores.
Our retail network is mainly comprised of the following retail brands: Sunglass Hut, which is operated globally; LensCrafters, which is operated in North America, China and Hong Kong; Pearle Vision, our Licensed Brands (Sears Optical and Target Optical), ILORI, Oakley O Stores and Vaults, Sunglass Icon, The Optical Shop of Aspen and Oliver Peoples and Internet and telesales operations, all of which are operated primarily in North America; OPSM, Laubman & Pank, Budget Eyewear and Bright Eyes, which are operated in Australia, New Zealand and Asia (other than China and Hong Kong); and David Clulow, which is operated in the United Kingdom and Ireland. Our North American retail business is the largest optical retail business in North America based on total sales. See Products and Services below for a more detailed discussion of our business.
In 1961, Leonardo Del Vecchio and others established our original operations in Agordo, near Belluno, in northeastern Italy. Since that time, we have enjoyed significant growth in the scope and size of our operations. We have developed and grown in several phases, each of which is related to a specific business strategy. Throughout most of the
1960s, we manufactured molds, metal-cutting machinery, frame parts and semi-finished products for the optical market. We then progressively expanded our production capabilities to enable us to produce a finished frame product.
In 1969, we launched our first line of Luxottica brand frames and began our transformation from a third-party supplier to an independent manufacturer with a line of branded products.
In the early 1970s, we distributed our products exclusively through wholesalers. In 1974, with the acquisition of the distributor that had marketed the Luxottica product line in Italy since 1971, we took our first step towards vertical integration.
Luxottica Group S.p.A. was organized as a corporation on November 23, 1981 under the laws of the Republic of Italy. During the early 1980s, we continued to pursue vertical integration by acquiring independent optical distributors and forming wholesale subsidiaries in strategic markets. In 1981, with our acquisition of La Meccanoptica Leonardo S.p.A., the owner of the Sferoflex brand and the holder of an important patent for a flexible hinge, we increased our market share in Italy and various key European markets. During the late 1980s, we began to expand our product lines to include the design, manufacture and distribution of designer frames through license agreements with major fashion designers.
In 1990, our ADSs were listed on the New York Stock Exchange. Throughout the 1990s, we expanded into the sunglasses business through various acquisitions. In 1990, we acquired Florence Line S.p.A., the owner of the Vogue brand. In 1995, we became the first frame manufacturer to enter the North American retail market through the acquisition of LensCrafters. In the same year, we also acquired the medium- to high-end brand product line of Persol S.p.A.
Throughout the 1990s, we continued to expand our distribution network by forming new wholesale subsidiaries. In June 1999, we acquired the Global Eyewear Division of Bausch & Lomb Incorporated, which we refer to as our Ray-Ban business. The Ray-Ban acquisition significantly increased our presence in the sunglasses market, strengthened our house brand portfolio and provided us with sunglass crystal lens manufacturing technology, manufacturing facilities and equipment.
In December 2000, our ordinary shares were listed on the Mercato Telematico Azionario della Borsa Italiana S.p.A., which we refer to as the Milan Stock Exchange, or MTA.
Since 2000, we have made a number of key strategic acquisitions to strengthen our business. In April 2001, we acquired Sunglass Hut, a leading retailer of sunglasses worldwide based on sales. In May 2001, we acquired all of the issued and outstanding common stock of First American Health Concepts, Inc., which at that time was a leading provider of managed vision care plans in the United States based on sales.
In August 2003, we acquired 82.57 percent of the outstanding shares of OPSM (we acquired the remaining 17.43 percent interest in March 2005), resulting in our leading position in the prescription business based on sales in the Australian and New Zealand markets, while at the same time presenting us with new growth opportunities in the Asia-Pacific markets. In October 2004, we strengthened and expanded our North American retail and managed vision care business with the acquisition of Cole National Corporation, which, among other things, operates Pearle Vision and the Licensed Brands.
In 2006, we expanded our retail presence in China by acquiring three premium retail chains, Beijing Xueliang Optical Technology Co. Ltd., Ming Long Optical and Modern Sight Optics, to become a leading operator of premium optical stores in China (based on the number of stores) in three of the top premium optical markets in mainland China, as well as Hong Kong, an important market in Asia for luxury goods.
In November 2007, we acquired Oakley, Inc., a worldwide specialist in performance optics with brands including Oakley, Eye Safety Systems, Fox, Mosley Tribes, Oliver Peoples and Paul Smith Spectacles, and retail chains including Oakley O Stores and Vaults, Sunglass Icon, The Optical Shop of Aspen, Oliver Peoples and Bright Eyes.
Our capital expenditures for our continuing operations were Euro 296.4 million for the year ended December 31, 2008 and Euro 44.6 million for the three-month period ended March 31, 2009. We expect 2009 aggregate capital expenditures to be approximately Euro 200million, in addition to investment for any acquisitions. The most significant investments planned are for the remodeling of existing stores for our North American retail operations, at an expected cost of approximately Euro 45 million and for investment in new IT infrastructure worldwide (approximately Euro 50 million). We will fund these future capital expenditures with our current available borrowing capacity and available cash. For a description of capital expenditures for the previous three years, see Item 5Operating and Financial Review and ProspectsLiquidity and Capital ResourcesCash FlowsInvesting Activities.
Our principal executive offices are located at Via C. Cantù 2, Milan, 20123, Italy, and our telephone number at that address is (011) 39-02-863341. We are domiciled in Milan, Italy.
On May 27, 2009, we entered into an agreement to acquire 40% of Multiopticas Internacional S.L., a company that currently owns over 390 eyewear stores operating under the GMO, Econoptics and SunPlanet retail brands in Chile, Peru, Ecuador and Colombia. This transaction, with a fair value of approximately Euro 40 million, is expected to close around the end of June 2009 and marks our entry into the retail business in South America, a region where we already have a solid presence through our wholesale network. Under the agreement, we have a call option for the remaining 60 percent of Multiopticas Internacional S.L. The call option will be exercisable by us between 2012 and 2014 at a price to be determined on the basis of Multiopticass consolidated sales and EBITDA values at the time of the exercise.
On July 31, 2008, we and Ruleplan Limited, a company unaffiliated with us, exchanged all of the ordinary shares in Optika Holdings Limited, or OHL, for ordinary shares of our subsidiary, Sunglass Hut UK Ltd., or SGH UK. The fair value of the OHL shares exchanged was approximately GBP 35 million. Prior to the exchange, OHL was a joint venture owned 50% by us and 50% by Ruleplan Limited. OHL, through its subsidiaries, operated a chain of ophthalmic retail locations throughout the United Kingdom and Ireland under the brand name David Clulow. As a result of this transaction, we own, directly and indirectly, 66% of SGH UK and the former stockholders of OHL own 34% of SGH UK. The former stockholders of OHL received a put option to sell their SGH UK shares to us, while we have a call option on their SGH UK shares.
Ray Ban Indian Holdings Offer
In August 2003, the Securities Appellate Tribunal, or SAT, in India upheld the decision of the Securities Exchange Board of India, or SEBI, to require our wholly-owned indirect subsidiary, Ray Ban Indian Holdings, Inc., to make a public offer in India to acquire up to an additional 20 percent of the outstanding shares of RayBan Sun Optics India Ltd., or RayBan Sun Optics. The Supreme Court of India, on December 12, 2006, directed that a public offer be made within 45 days of the order, using April 28, 1999, as the reference date for calculating the offer price. The Supreme Court also directed that interest be paid at the rate of 10 percent per annum for the period between August 27, 1999, and the closing date to all persons who were shareholders of RayBan Sun Optics throughout such period. In April 2007, pursuant to the Supreme Court order and in compliance with the applicable SEBI regulations, we launched a public offer through Ray Ban Indian Holdings, Inc. to acquire up to 4,895,900 shares, representing approximately 20 percent of the equity share capital of RayBan Sun Optics, which we subsequently increased to up to 7,545,200 shares, representing approximately 31 percent of the equity share capital of RayBan Sun Optics. 6,454,280 shares were tendered in the offer, which closed in May 2007. In June 2007, our stake in RayBan Sun Optics increased to 70.5 percent. We paid total consideration of approximately Euro 13.0 million for the tendered shares.
During 2008, the Company, through Ray Ban Indian Holdings, Inc., announced its intention under SEBI (Delisting of Securities) Guidelines 2003 (the Guidelines) to acquire 7,210,554 equity shares comprising 29.46% of the fully paid-up equity share capital from public stockholders of RayBan Sun Optics in order to delist its shares from the Bombay Stock Exchange, or the BSE. The delisting offer made to the stockholders in accordance with the Guidelines opened on August 18, 2008 and closed successfully on August 22, 2008. From August 28, 2008 to September 11, 2008, Ray Ban Indian Holdings, Inc. accepted shares from the remaining public stockholders holding shares in the form of physical share certificates or in certificated form who either could not participate in the bidding process or whose bids were rejected in the bidding process. Through the offer, Ray Ban Indian Holdings, Inc. purchased 4,335,713 shares from public stockholders for approximately Euro 9.1 million (U.S. $13.4 million, including approximately U.S. $0.5 million in transaction costs). Following the delisting offer, BSE approved the delisting of equity shares of RayBan Sun Optics on October 22, 2008.
For the six months following the date of delisting, in accordance with the Guidelines, Ray Ban Indian Holdings, Inc. provided a final opportunity to the remaining stockholders to tender their shares for a period of six months on the same terms and conditions as the delisting. During such period, which ended April 22, 2009, Ray Ban Indian Holdings, Inc. purchased 1,239,195 shares from public stockholders for approximately Euro 2.9 million. Upon transfer of the remaining tendered shares, Ray Ban Indian Holdings, Inc. will own 93.32% of the equity shares of RayBan Sun Optics.
We acquired our initial interest in RayBan Sun Optics in connection with the purchase of the Ray-Ban eyewear business from Bausch & Lomb in 1999.
On January 28, 2009, we entered into a new six-year licensing agreement, with an option for a four-year extension, with Tory Burch LLC to design, manufacture and globally distribute sun and prescription eyewear collections by Tory Burch and TT, two emerging American fashion and lifestyle brands.
On January 30, 2009, Salvatore Ferragamo Italia S.p.A., which controls Gruppo Ferragamo, agreed to a three-year extension through December 2011, with an option for a further two-year extension, of its licensing agreement with us covering design, manufacturing and global distribution of prescription and sun eyewear under the Salvatore Ferragamo label.
On April 9, 2009, Donna Karan International Inc. agreed to a five-year extension through December 2014, with an option for a further five-year extension, of the license agreement for the design, production and worldwide distribution of prescription frames and sunglasses under the Donna Karan and DKNY brands.
In June 2009, we renegotiated our 18 month Euro 150.0 million unsecured credit facility with Banca Nazionale del Lavoro dated April 9, 2008. The new facility is a 2 year unsecured credit facility that is a revolving loan that provides borrowing availability of up to Euro 150.0 million. Amounts borrowed under the revolving loan can be borrowed and repaid until final maturity. We can select interest periods of one, three or six months.
Products and Services
In our wholesale operations, we manufacture and sell our prescription frames and sunglasses as either house brands or designer lines. House brands consist of eyewear sold under brand names that we own. Designer lines are produced under designer names held by us under license agreements with third parties. Our products, for both house brands and designer lines, consist of a variety of different styles ranging from conventional to contemporary and fashion-forward styling. Each brand is tailored for a specific market segment based on certain characteristics, such as the consumers age, lifestyle and fashion consciousness.
House Brands: Our house brands are sold worldwide under brand names such as Ray-Ban and Oakley. In 2008 we developed approximately 730 distinct new models of frames within our house brands and private labels, of which approximately 490 are optical and 240 are sun. Each style is typically produced in two sizes and five colors. Actual availability of product styles, colors and sizes varies among geographic markets depending upon local demand.
The following is a summary description of each of our most significant house brands:
· Ray-Ban: Created in 1937 and acquired by us in 1999, the Ray-Ban line is the brand leader in the eyewear market based on sales and consumer awareness, bringing together renowned sunglass lenses and a timeless style.
· Oakley: Founded in 1975 and merged into our Group in 2007, Oakley is a market-leading, strong, iconic brand of performance optics products, including premium sunglasses, prescription eyewear, goggles and electronically-enabled eyewear, whose loyal consumers and athletes have helped create a culture and brand that are intertwined.
· Persol: Created in 1917 and acquired by us in 1995, the Persol brand is synonymous with design, elegance, tradition and technical precision. Our Persol line, which includes a wide range of prescription frames and sunglasses, is marketed as a timeless fashion accessory due to the elegance and design of our products.
· Oliver Peoples: Created in 1987 and acquired by us in 2007, Oliver Peoples helped establish the luxury eyewear market. Oliver Peoples classic designs fuse old-world aesthetics with modern-day finesse and are worn by many of the worlds most recognizable celebrities.
· Vogue Eyewear: Created in 1973 and acquired by us in 1990, the Vogue brand is recognized as trendy and innovative and symbolizes a young and dynamic style that stresses attention to detail and fashion.
· Arnette: Created in California in 1992 and acquired by us in 1999, Arnette is an active sport lifestyle brand targeted at young consumers. This sports product line is characterized by a very forward-thinking design and provides outstanding comfort and functionality, ideal for those who enjoy dynamic and extreme sports.
· Revo: Created in 1985 and acquired by us in 1999, Revo is a product line targeted towards sport and leisure wearers. The Revo line is known for its high-quality lenses that are treated with a specialized coating process.
· Luxottica: Luxottica is our original product line, comprised of prescription frames and sunglasses. Luxottica targets a broad mix of eyewear consumers.
· Sferoflex: The Sferoflex product line, which in 1981 became the first brand name acquired by Luxottica Group, is comprised of prescription frames characterized by a classic and comfortable style, with flexible hinges that allow the frame to adapt to the unique face shape of each wearer.
· Killer Loop or K&L: Created in 1989 and acquired by us in 1999, Killer Loop is a sun and sports eyewear brand that combines design and quality and has evolved throughout the years from exclusively sports eyewear to also include leisure eyewear and a more urban style. In 2008, it took on a new name, K&L.
· Mosley Tribes: The Mosley Tribes brand, launched in 2005 and acquired by us in 2007, is a modern brand fusing fashion and urban lifestyles.
· Eye Safety Systems: ESS designs, develops and markets advanced eye protection systems for military, firefighting and law enforcement professionals and is a leading supplier of protective eyewear to the U.S. military and firefighting markets.
Designer Lines: Our designer lines are produced and distributed through license agreements with major fashion houses. Currently, we sell designer lines under the names Chanel, Prada, Miu Miu, Dolce & Gabbana, D&G, Bvlgari, Tiffany & Co., Versace, Versus, Salvatore Ferragamo, Burberry, Polo Ralph Lauren with its six lines (Purple Label, Polo, Ralph Lauren, Ralph, Chaps and Club Monaco), Donna Karan, DKNY, Brooks Brothers, Paul Smith Spectacles and Anne Klein. Additionally, in the summer of 2009, we will launch the first collection of Stella McCartney eyewear, and in the fall, we will launch the Tory Burch line. The license agreements governing these designer lines are exclusive contracts and typically have terms of between three and ten years. See Trademarks, Trade Names, Patents and License AgreementsLicense Agreements. Designer collections are developed through the collaborative efforts of our in-house design staff and the brand designer. Our designer lines presently feature approximately 1,340 different models.
The following is a summary description of our main designer lines:
· Chanel: In 1999, we became the first company licensed to produce Chanel products. The Chanel product line, targeting luxury-oriented consumers, reflects the essential characteristics of the brand: style, elegance and class.
· Prada: The Prada license agreement was signed in 2003. The Prada collections offer a range of optical frames and sunglasses, as well as a series of models created for leisure time, identified by the brands unmistakable red stripe. The Prada collections have always been distinctive not only for their high quality but also for their forward-thinking approach and style, enabling the brand to anticipate and often inspire trends across all sectors.
· Miu Miu: The Miu Miu license comprises both optical frames and sunglasses. This brand addresses a sophisticated clientele particularly attentive to new trends. The Miu Miu brand is urban, young, and refined, an alternative vision, a new classic.
· Dolce & Gabbana: Under license since 2005, the Dolce & Gabbana eyewear collections are an expression of ultimate luxury. They are characterized by modern, fashionable shapes, prestige materials and sumptuous details.
· D&G: Under license since 2005, the D&G eyewear collection has a youthful, innovative and unconventional spirit. The eyewear collection emphasizes the spirit of the brand: innovative, provocative and cosmopolitan.
· Bvlgari: Under license since 1997, Bvlgari eyewear is distinguished by the high quality of its materials, attention to detail and elegant design. This product line addresses a clientele who seeks distinctive and exclusive products.
· Tiffany & Co.: For 169 years, Tiffany & Co. has designed and produced standard-setting jewelry and accessories. The Tiffany & Co. eyewear collection, first launched in early 2008, remains true to the brands high standards.
· Versace: Under license since 2003, Versace is a luxury brand for modern women and men who choose to express strength, confidence and uniqueness through a bold and distinctive personal style. Versace represents the ideal of a sophisticated, free and highly desirable lifestyle.
· Versus: Under license since 2003, while staying true to the essence of the Versace brand, Versus embodies a younger, edgier take on those themes. Filled with spirit and energy, Versus challenges convention, always in the vanguard of modern urban style.
· Paul Smith Spectacles: The Paul Smith Spectacles brand, launched in 1994, includes prescription and sun eyewear that feature the whimsical yet classic designs and attention to detail that are synonymous with one of Britains leading fashion designers.
· Salvatore Ferragamo: The Salvatore Ferragamo collections are characterized by lavish attention to detail, original use of materials and creative choice of colors. The eyewear collection is inspired by the tradition of craftsmanship of this fashion house, reinterpreted in a contemporary mode.
· Burberry: The Burberry license agreement was signed in 2005, with the launch of the first Burberry eyewear collection in October 2006. This collection features the brands core values of form and function, innovation and the essence of classic style.
· Polo Ralph Lauren: Polo Ralph Lauren is comprised of six collections:
· Purple Label: An exclusive eyewear collection, the Purple Label combines the elegance of tradition with the requirements of the modern gentleman: high quality, precious materials, details and style.
· Ralph Lauren: The Ralph Lauren eyewear collection embraces a youthful sophisticated elegance that mixes refined luxury with cinematic glamour and an air of mystery. For the fashion-conscious woman seeking timeless styling with a modern attitude.
· Polo: The Polo collection is inspired by the heritage of Polo Ralph Lauren apparel. This collection features emblematic models that are classic and never out of style. Polo is the ideal collection for men who appreciate quality and tradition with a fresh design.
· Ralph: The Ralph line is an expression of the Ralph Lauren spirit at an accessible price point. It features the latest looks and trends, as well as some more classic looks, and vibrant colors for a feminine, flirty and fun look.
· Chaps: Chaps features easy-to-wear designs in the classic tradition of Polo Ralph Lauren. The line offers a designer name to the young consumer of moderately-priced sportswear. Since its introduction, Chaps has come to represent classic design, excellent quality and value.
· Club Monaco: Club Monaco offers quality eyewear, uncompromising style and affordable luxury. The styling targets both men and women, between 20 and 40 years of age, who are urban professionals, style enthusiasts, and who appreciate design at mid-level prices.
· Donna Karan: This product line reflects the design sensibility and spirit of the Donna Karan collection, offering men and women sophisticated and sleek styles.
· DKNY: DKNY is easy-to-wear fashion with an urban mindset, the New York City street-smart look. DKNY eyewear caters to modern, urban, fashion-conscious women and men with multifaceted lifestyles: international, eclectic, fun and real.
· Brooks Brothers: Characterized by lightweight materials and a slender line, the Brooks Brothers collections reflect the unique features of the style of this American brand. This is an affordable product line with classic style that delivers functionality, lightness and high quality.
· Anne Klein: The Anne Klein product line targets successful professional women who place an emphasis on quality and image.
· Stella McCartney: The Stella McCartney eyewear collection reflects Stella McCartneys modern sense of innovation in her creation of desirable fashion. Combining everyday functionality with a strong fashion sensibility, the eyewear collection offers contemporary femininity with a sense of modern luxury.
· Tory Burch: Under license since 2008, Tory Burch is an attainable luxury lifestyle brand defined by classic American sportswear with an eclectic sensibility, which embodies the personal style and spirit of its co-founder and creative director, Tory Burch. The first sunglass collection will be in stores in the third quarter of 2009.
The following table presents the respective percentages of our total unit (a unit represents an eyeglass frame or sunglass and excludes sales of other materials) sales that our designer and house brands comprised during the periods indicated:
Prescription Frames and Sunglasses
In 2008, our manufacturing facilities produced a combined total of approximately 50.1 million prescription frames and sunglasses. In 2007 and 2006, our manufacturing facilities produced a combined total of approximately 41.8 million and 37.0 million prescription frames and sunglasses, respectively.
Since 1990, sunglasses have become an increasingly significant product line for us as we seek to capitalize on growth opportunities in the sunglasses segment. In 1990, we acquired a distributor that supplied sunglasses under the Vogue brand name. In 1995, we expanded our activities in the sunglasses market by acquiring Persol S.p.A., an Italian producer of high-quality, fashionable sunglasses and prescription frames in the premium-priced segment of the market. In 1999, we acquired the Ray-Ban business from Bausch & Lomb Incorporated, including the Ray-Ban, Revo, Arnette and Killer Loop brand names. As a result of our acquisition of the Ray-Ban business, the percentage of our unit sales represented by sunglasses that we manufacture has grown significantly. This trend continued with the acquisition of Sunglass Hut and, in 2007, with the expansion of our sunglass-based retail business in South Africa. This growth trend in our sunglass business has continued as a result of our acquisition of Oakley. In addition to the more fashion-oriented sun and ophthalmic products for which we have earned a strong reputation, the Oakley acquisition brings to us a complementary technological expertise and know-how in high-performance optics, which includes sunglasses, prescription eyewear, goggles, shields, visors and electronically-enabled eyewear, most of which feature Oakleys High Definition Optics® (HDO®) technology.
Unit sales of sunglasses manufactured by us and third parties in 2008, as a percentage of our total aggregate unit sales, were 59.6 percent, as compared to 58.4 percent in 2007 and 57.2 percent in 2006.
The following table presents the respective percentages of our total unit sales that our prescription frames and sunglasses comprised for the periods indicated:
We operate our retail operations through our retail brands, which include, among others, LensCrafters, Sunglass Hut, Pearle Vision, ILORI, The Optical Shop of Aspen, OPSM, Laubman & Pank, Budget Eyewear, Bright Eyes, Oakley O Stores and Vaults, David Clulow and our Licensed Brands (Sears Optical and Target Optical). Due to the fragmented nature of the European retail market, we do not have significant optical retail stores in Europe outside of the United Kingdom and Ireland. As of March 31, 2009, our retail business consisted of 5,649 corporate store locations and 547 franchised or licensed locations as follows:
LensCrafters. As of March 31, 2009, we operated a retail network of 1,137 LensCrafters locations worldwide (of which 962 locations are in North America and 175 are in China and Hong Kong) offering a wide selection of prescription frames, sunglasses, lenses and other optical products. LensCrafters is currently the largest optical retail chain in North America in terms of sales. LensCrafters stores sell not only Luxottica products, but also a wide range of lenses and optical products made by other suppliers. LensCrafters products include innovative lenses, such as FeatherWates® (lightweight, thin and impact-resistant lenses), DURALENS® (super scratch-resistant lenses), Advanced View ProgressiveÔ (free-form, digitally surfaced progressive lenses), Invisibles® (anti-reflective lenses) and MVP Maximum View Progressives® (multi-focal lenses without visible lines). Substantially all of our LensCrafters stores are located in high-traffic commercial malls and shopping centers, have an employed optometrist or an independent, licensed optometrist on site (thereby allowing the customer to have an eye examination on site), provide a large range of prescription eyewear choices and, in North America, include a laboratory, which enables us to provide the selected frame with prescription lenses to our customers in approximately one hour. When we acquired LensCrafters in 1995, LensCrafters had approximately 600 stores. Between 1995 and 1998, we opened new stores and acquired other retail chains, reaching over 850 stores in North America by 1999.
From 1999 to 2004, LensCrafters expansion focused primarily on further development of those stores opened between 1996 and 1998. We continue to evaluate potential retail expansion opportunities in North America through the acquiring of retail chains and opening of stores in areas where we are not already heavily represented and in other prime locations. Since the LensCrafters acquisition, we have improved the efficiency of LensCrafters stores by managing the inventory from our central worldwide distribution center in Italy. This has improved inventory service and allowed for a
more rapid supply of styles based on daily sales and inventory data. This has also increased the volume of our products available in LensCrafters stores. In addition, we have focused our promotional activities on those customers looking for a better purchase experience with high-quality products, rapid and efficient customer service and innovative lens and frame technology. As a result of these initiatives, LensCrafters net sales have increased significantly since 1995.
During the last few years, we have shifted LensCrafters to a more premium brand. During this time, we have added additional elements, such as a new premium store concept that is being adopted as stores are remodeled across North America, associate training, advertising and marketing, which together represent the premium brand and future direction of LensCrafters. With these new initiatives, we have seen the average transaction per customer grow. LensCrafters is becoming known as one of the best places to purchase fashionable, designer prescription frames and sunglasses. LensCrafters hopes to shorten the purchase cycle of typically two to three years with this new focus on prescription frames as fashion. LensCrafters is also working to increase its share of the contact lens market. This initiative focuses on selected products (mostly national brand names) and more competitive pricing. This new push for contact lenses is being supported through in-store displays, marketing and associate training.
As noted above, one of the most visible changes in LensCrafters shift toward a premium and stylish eyewear shopping experience is a new design for the stores, which is adopted in new and remodeled store locations across North America. The store design features elegant eyewear display boxes, wood flooring, fashion graphics, sleek decorative accents and artistic lighting fixtures. Every feature of the design directs the spotlight on the shopping gallery of designer eyewear collections, while the fit and finish stations are more private and separated from the shopping and frame selection.
In 2006, we began to expand the use of the LensCrafters name by rebranding certain retail locations to LensCrafters that we acquired as part of the acquisitions of three optical retailers in China, which had a combined total of 274 stores across Asia, including Hong Kong. Hong Kong is one of the most significant Chinese luxury markets where middle class and affluent mainland Chinese visit frequently to purchase luxury goods. Launching LensCrafters as a premium brand in Hong Kong was important for increasing awareness and consumer demand for our products and services. In September 2006, we launched LensCrafters in Beijing, beginning the re-branding strategy of our acquisitions. As of March 31, 2009, we operated 240 retail stores in China and Hong Kong, of which 175 carry the LensCrafters name while the others retain their original brand names. Based on the strategy for 2009, the remaining stores were re-branded to LensCrafters stores during the second quarter of 2009.
In 2009, LensCrafters began positioning itself as the Brand that Loves Your Eyes, a statement that guides all brand decisions and associate interactions with customers. Every few years, LensCrafters has presented a new face to customers, with increasingly targeted marketing, operations and merchandising.
Sunglass Hut. With the acquisition of Sunglass Hut in 2001, we became the worlds leading specialty retailer of sunglasses based on sales. As of March 31, 2009, Sunglass Hut had 1,562 retail locations in North America, 212 in Asia-Pacific, 81 in Europe, 56 in South Africa and 33 in the Middle East. Sunglass Hut operates in-line stores and kiosks in shopping malls, as well as stores in street centers on high-traffic streets and in airports. We have increased sales of Luxottica-manufactured products at Sunglass Hut locations from approximately 14.3 percent of total Sunglass Hut net sales in April 2001 (the first month following the acquisition) to 81 percent in December 2008, including Oakley products. In addition to sunglasses that we manufacture, Sunglass Hut continues to sell a variety of frames manufactured by third-party vendors, including Maui Jim, Safilo, Bushnell, Spy and others. Although we buy products from third parties, we do not believe that the loss of any one supplier would have a significant impact on our future operations as we could easily replace lost supply with other sunglasses manufactured by us or other third-party vendors. After the acquisition of Sunglass Hut and Cole, we consolidated the administrative and certain other functions of these businesses with our existing business to allow significant synergies between sun and optical retail operations. Sunglass Hut outlets are located mostly in enclosed malls and airports with an average retail space of approximately 400 square feet per kiosk/store.
In 2007, we completed the acquisitions of two prominent specialty sun chains in South Africa, for a total of 65 stores, which were rebranded to Sunglass Hut stores in 2008. Both chains have prominent locations in shopping centers in urban areas, including Johannesburg and Cape Town, as well as attractive airport locations.
Today, the Sunglass Hut brand is positioned as a key destination for premium sunglasses. Sunglass Hut offers the latest name-brand products along with outstanding customer service to help customers find their cool.
ILORI. In September 2007, Luxottica launched ILORI, our first luxury specialty store dedicated to sunglasses. ILORI has 18 stores in the United States as of March 31, 2009, including flagship stores in the SoHo neighborhood of New
York City and in Beverly Hills, CA. ILORI caters to a different, more exclusive clientele than Sunglass Hut with higher-priced collections and more pampered, personalized service in luxurious surroundings.
OSA, The Optical Shop of Aspen. As of March 31, 2009, we operated 24 The Optical Shop of Aspen stores throughout the United States, which are luxury optical retail stores offering fashion and luxury eyewear from a variety of designers, as well as certain Oakley-owned brands, including Oliver Peoples, balanced between sun and optical.
Sunglass Icon. Our Sunglass Icon multi-branded sunglass specialty retail locations offer a full range of eyewear, including brands owned or licensed by us, as well as eyewear from other designers and brands. As of March 31, 2009, Sunglass Icon operated 110 locations throughout North America. The Sunglass Icon retail stores are located in premium malls throughout the United States.
Pearle Vision. With the acquisition of Cole in October 2004, we acquired Pearle Vision, the second-largest optical chain after LensCrafters in North America. Although both brands address the mid- to high-end customer bracket, their positioning is complementary. Pearle Vision focuses on the factors that made the brand a success: customers trust in the doctors experience and the quality of service they receive. Pearle Vision stores are mostly located in strip malls instead of the conventional malls where most LensCrafters and Sunglass Hut stores are located. In addition, Luxottica has franchised Pearle Vision locations located throughout North America.
Our relaunching of the Pearle Vision brand in 2004 and 2005 was centered on a return to its original values, which had made Pearle Vision the Home of Trusted Eyecare for generations of Americans.
A product mix increasingly geared to premium, high value-added products has helped restore strong customer relationships, as have efforts to portray doctors in various advertising campaigns. At the same time, a significant reduction in sales promotions helped improve the positioning of the stores and consumer perceptions, resulting in increasing profitability.
The same premise Dr. Pearle used to build the company over 45 years ago remains strong today: Pearle Vision knows eyecare and eyewear, places the customer first, is honest and respects the customer. Pearle Vision distinguishes itself as a Different Kind of Optical, aiming to provide the most complete, professional optical experience available anywhere.
Sales of Luxottica products at Pearle Vision stores enjoyed strong growth, reaching nearly 86 percent of total sales in 2008. Ray-Ban, Versace, Anne Klein and Vogue were some of the stronger-selling brands.
In order to centralize services and achieve economies of scale, most in-store labs were closed, and their work was transferred to nearby LensCrafters labs or to one of our seven large central lens finishing facilities.
Pearle Visions franchises are increasingly turning to us as their preferred supplier, not only due to the strength of our brands and the quality of our products, but also because of Luxotticas Franchise Advantage Program. This program, which is available to franchisees, features marketing solutions, preferential pricing and savings on selected categories of products, including lenses, lab services, contact lenses and accessories, all of which are provided with a high level of service and merchandising support.
We firmly believe that the Pearle Vision brand has significant growth opportunities in both the United States and Canada, where the brand was strengthened in 2006 and is now the only optical chain represented throughout Canada.
As of March 31, 2009, Pearle Vision operated 417 corporate-owned store locations and had 375 franchise locations throughout North America.
Licensed Brands. With the acquisition of Cole, we also acquired a group of distribution outlets under the names Sears Optical and Target Optical (the BJs Optical license acquired with Cole was terminated in March 2008), which we refer to as our Licensed Brands. The Licensed Brands optical retail locations are located in the host stores that bear the names of the hosts. Both of these brands offer consumers the convenience of taking care of their optical needs where they shop and have a precise market positioning. As of March 31, 2009, we operated 878 Sears Optical and 331 Target Optical locations throughout North America.
Oakley O Stores and Vaults. As of March 31, 2009, we operated 58 retail stores in North America under the Oakley Store name, which offer a full range of Oakley-branded optics products as well as Oakley apparel, footwear and accessories. These stores are designed and merchandised to immerse consumers in the Oakley brand through innovative use of product presentation, graphics, audio and visual elements. In addition to these full-price retail venues, we operated 41
Oakley Vaults, our Oakley outlet store concept, featuring discontinued and excess seasonal Oakley-branded merchandise in addition to newer products priced at full retail. Our Oakley retail stores are located in some of the nations leading shopping malls and average approximately 2,500 square feet in size. We had 4 Oakley O Stores and Vaults under franchise in Mexico as of March 31, 2009. Outside of North America, as of March 31, 2009, we operated 30 corporate-owned Oakley O Stores and Vaults and had 13 franchise locations.
Oliver Peoples. Our Oliver Peoples subsidiary operates five luxury optical retail stores (two in Southern California, two in New York City and one in Las Vegas, Nevada). An additional two Oliver Peoples retail locations are operated by others under license, one in Southern California and one in Tokyo.
OPSM, Laubman & Pank and Budget Eyewear. In Australia and New Zealand, we operate three brands, which specialize in the prescription business: OPSM, Australias top eyewear brand for luxury and fashion-minded customers; Laubman & Pank, provider of high-quality eyecare and services; and Budget Eyewear, focused on price-conscious consumers. The three brands operate in all of Australias states, primarily in larger cities. OPSM is our only prescription brand in New Zealand and operates in the main urban areas. All brands have continued to extend further into the fashion segment through innovative store format, personnel training and product assortment programs that are tailored to their respective segments and leverage off of our portfolio of products. In the prescription segment, the three brands have a different positioning which allows us to cover complementary segments with product offerings catering to the needs of different consumer categories. Improved understanding of customers and initiatives have helped OPSM achieve a significant increase in sales and have solidified its position as the best-known brand on the market. Laubman & Panks recognition as an optical fashion brand has continued to increase as promotional programs clearly position the brand as a national chain. The brand is perceived to have a special focus on eye health, resulting from a series of initiatives that include TV campaigns and national screening programs. Budget Eyewear has successfully extended its product offerings while remaining the preferred destination for those wanting good eyewear at lower prices. As of March 31, 2009, a total of 499 stores throughout Australia were operated under the three brands - OPSM (280 stores), Laubman & Pank (130 stores) and Budget Eyewear (89 stores including 13 franchise locations). OPSM is the market leader in New Zealand, based on corporate-owned store locations, with 39 stores, as of March 31, 2009.
Bright Eyes. Bright Eyes, first established in 1985, is one of Australias largest and fastest growing sunglass chains, with over 142 sunglass stores across Australia operating under the Bright Eyes and Sunglass Worx names. As of March 31, 2009, Bright Eyes operated 49 corporate-owned store locations and 92 franchise locations. The stores are located in highly desirable real estate locations and sell brands such as Oakley, Ray-Ban, Prada, Versace, Maui Jim and Arnette.
David Clulow. With 50 years of experience, David Clulow is a premium optical retailer operating in the United Kingdom and Ireland, predominantly in London and the South East of the United Kingdom. The brand is about service, quality and fashion and our marketing is targeted to reinforce these brand values and build long-term relationships with our customers. In addition to operating optical stores, David Clulow operates a number of sunglass concessions in upmarket department stores, further reinforcing our position as a premium brand in the United Kingdom. As of March 31, 2009, David Clulow operated 37 corporate-owned locations (including 9 joint ventures), 5 franchise locations and 27 sun stores/concessions.
We continue to explore opportunities to expand our retail operations worldwide through the opening of new stores or kiosks, or strategic acquisitions, when appropriate.
Oakley Internet and Telesales Operations. We use our Oakley website (www.oakley.com) as a complementary sales channel to our Oakley retail operations and international distribution, allowing consumers to purchase Oakley products as efficiently as possible. The Oakley website is fully e-commerce capable, allowing consumers to purchase our Oakley products for delivery in the United States, Canada and Australia. In addition, the Oakley website includes information about our Oakley products and innovations, such as HDO® (High Definition Optics®), and news about the athletes and others who endorse Oakley products. We believe the Oakley website serves to increase consumer awareness of the Oakley brand, improve customer service and increase sales through Oakleys retail and e-commerce channels. We also maintain a customer service team to respond to telephone inquiries and make sales directly to consumers.
EyeMed. EyeMed Vision Care is one of the largest vision benefits organizations in the United States, serving over 24 million members in corporations, government entities and insurance companies with funded vision benefits through a network of optometrists, ophthalmologists, opticians and Luxottica retail stores.
The primary contributors to EyeMeds growth are the increasing awareness of the importance of vision care and the expansion of existing relationships with health and ancillary benefit organizations. EyeMed also focused on targeting the
smaller employer segment. EyeMed will continue to diversify its product offerings and provider networks to address the needs of its business-to-business customers, while continuing to identify and build demand in new market segments.
Our Principal Markets
The following table presents our net sales by geographic market for the periods indicated:
(1) Excludes the sales of our Things Remembered specialty retail business, which was sold in September 2006. Things Remembered sales for fiscal 2006 (through its date of sale on September 29, 2006) were Euro 157.1 million.
(2) Adjustment/Eliminations represents the elimination of intercompany sales.
Seasonality and Effect of 53-Week Year
We have also historically experienced sales volume fluctuations by quarter due to seasonality associated with the sale of sunglasses, which represented 59.6 percent and 58.4 percent of our units sold in 2008 and 2007, respectively. As a result, our net sales are typically higher in the second quarter, which includes increased sales to wholesale customers and increased sales in our Sunglass Hut stores, and lower in the first quarter, as sunglass sales are lower in the cooler climates of North America, Europe and Northern Asia. These seasonal variations could affect the comparability of our results from period to period. Our North American retail fiscal year is either a 53-week year or a 52-week year, which also can affect the comparability of our results from period to period. When a 53-week year occurs, we generally add the extra week to the fourth quarter. A 53-week year occurs in five- to six-year intervals and occurred in fiscal 2008 and will occur again in fiscal 2014.
We manufacture both metal and plastic frames. In addition to our frame manufacturing capacity, since 1999 we have also produced crystal and polycarbonate sunglass lenses exclusively for our sunglasses collections. Production is principally carried out in our six Italian manufacturing facilities. In China, we manufacture certain products distributed mainly by our North American retail group and certain finished products for our wholesale business, mainly in our owned production facilities. Each of our facilities is tailored to a specific production technology that we believe allows us to achieve a high level of productivity. We have manufacturing facilities in the United States where we manufacture or assemble most of our Oakley eyewear products.
Design and Prototype Selection
We believe that an important aspect of our success has been our emphasis on design and the continuous development of new styles. Our in-house designers work together with external designers to develop new models.
For our designer line products, our design team works with licensors to discuss the basic themes and fashion concepts for each product and then works closely with each licensors designers to refine such themes. In addition, our design team works directly with our marketing and sales departments, which monitor demand for our current models as well as general style trends in eyewear. The data obtained from our marketing and sales departments is then used to refine existing product designs and market positioning in order to react to changing consumer preferences.
Once the product concepts have been selected and approved, we produce prototypes that are used to evaluate the proposed design. Our prototypes are developed using computer-aided design/computer-aided manufacturing technology, known as CAD/CAM, which is fully integrated with our manufacturing processes. CAD/CAM technology allows a designer to view and modify two- and three-dimensional images of a new frame. Because this technology is fully integrated with the manufacturing processes, the conversion from prototype to production is streamlined.
All prototypes are subject to review and approval by our licensors and our designers to ensure consistency with the distinctive image of each product line. Our collections consist of both new models and the most successful existing models. Each year, we add approximately 2,100 new models to our eyewear collections. The ability to constantly renew our product base has enabled us to meet consumer demand in each market segment in which our brands are targeted. See Item 3Key InformationRisk Factors If we do not correctly predict future economic conditions and changes in consumer preferences, our sales of premium products and profitability will suffer.
Oakley develops and employs innovative technologies, materials and processes in the design, development and manufacture of its products. To date, Oakley has designed its products using primarily in-house staff in order to speed the concept-to-market timeline and preserve brand image and authenticity.
The principal raw materials and parts purchased for our manufacturing process include plastic resins, metals, lenses and frame parts. We purchase a substantial majority of our raw materials in Europe and, to a lesser extent, in Asia and the United States. In addition, we use certain external suppliers for frames, eyeglass cases and packaging materials. The Ray-Ban acquisition provided us with know-how and sunglass crystal lens manufacturing capabilities. We believe that our ability to produce sunglass crystal lenses is strategically important given our expanded presence in the sunglass market.
Oakley has built strong relationships with its major suppliers. With most suppliers, Oakley maintains agreements that prohibit disclosure of its proprietary information or technology to third parties. Although Oakley relies on outside suppliers for most of the specific molded components of its glasses, goggles, watches and footwear, it generally retains ownership of the molds used in the production of the components. We believe that most of the components that Oakley uses can be obtained from one or more alternative sources within a relatively short period of time, if necessary or desired. In addition, to further mitigate risk, Oakley has developed an in-house injection molding capability for sunglass frames.
Essilor S.A. has become one of the largest suppliers of our retail operations, accounting for 12% of our total merchandise purchases in 2008 and 15% in 2007. Although we do not have formal, long-term contracts with Essilor or any of our other suppliers, we have not experienced any significant interruptions in our supplies. We believe that the loss of Essilor S.A. or any of our other vendors would not have a significant impact on the future operations of the Company as we could replace them quickly with other third-party suppliers. For additional information, see Note 14 to our Consolidated Financial Statements included in Item 18 of this annual report. Historically, prices of the principal raw materials used in our manufacturing process have been stable.
We have six frame manufacturing facilities in Italy. Five facilities are located in northeastern Italy, the area in which most of the countrys optical industry is based, and the remaining facility is located near Turin. All of our facilities are highly automated, which has allowed us to maintain a high level of production without significant capital outlay. In certain of these facilities, we also produce sunglass crystal lenses and polycarbonate lenses. In 2006, we modernized our operations in Italy by building a new approximately 32,000 square-meter manufacturing facility to produce acetate frames and sunglasses for a total investment of approximately Euro 20.0 million. In 2007, we further expanded our manufacturing facilities in Italy by approximately 28,000 square meters in order to rationalize the product production flow, for a total investment of approximately Euro 23.4 million. We were able to rededicate one of our former facilities to our logistics operation for a total investment of Euro 6.2 million. From 1998 to 2001, we operated, through our 50 percent-owned joint venture (Tristar Optical Company Ltd.) with a Japanese partner, a facility in China to manufacture prescription frames. In 2001, we acquired from our Japanese partner the remaining 50 percent interest in this Chinese manufacturer so that it became one of our wholly-owned subsidiaries. In 2006, we increased our manufacturing capacity in China through the construction of a new approximately 26,000 square-meter manufacturing facility to produce both metal and plastic frames for a total investment of approximately Euro 20.0 million. After the construction of this new facility, our annual average daily production in China increased by approximately 80 percent compared to 2005. In 2007, we further expanded our manufacturing capacity in China by approximately 74,000 square meters, for a total investment of approximately Euro 7.2 million. The percentage of private
label products produced at our facilities in China has been decreasing in favor of increased production of certain of our core, fashion and North American brands.
Over the past several years, we have consolidated our manufacturing processes by tailoring each of our manufacturing facilities in Italy to a specific production technology. This consolidation has allowed us to improve both the productivity and quality of our operations. We produce plastic frames in our facilities in Sedico, Pederobba and Lauriano, while metal frames are produced in our facilities in Agordo and Rovereto. Certain frame parts are produced in our facility in Cencenighe. Our manufacturing facility in China produces both metal and plastic frames. In 2008, approximately 60 percent of the frames manufactured by us were metal-based, and the remainder was plastic.
The manufacturing process for both metal and plastic frames and sunglasses begins with the fabrication of precision tooling and molds based on prototypes developed by our in-house design and engineering staff. We believe that our in-house capacity to engineer and produce precision tooling and molds gives us a strong competitive advantage by enabling us to reduce the lead time for product development and thereby adapt quickly to market trends, contain production costs and maintain smaller and more efficient production runs so that we can better respond to the varying needs of different markets.
The manufacturing process for metal frames is comprised of approximately 70 phases, beginning with the production of basic components such as rims, temples and bridges, which are produced through a molding process. These components are welded together to form frames through numerous stages of detailed assembly work. Once assembled, the metal frames are treated with various coatings to improve their resistance and finish, and then prepared for lens fitting and packaging.
We manufacture plastic frames using either a milling process or injection molding, depending upon the style and color of the frame. In the milling process, a computer-controlled machine carves frames from colored plastic sheets. This process produces rims, temples and bridges that are then assembled, finished and packaged. In the injection molding process, plastic resins are liquefied and injected in molds. The plastic parts are then assembled, coated, finished and packaged.
Our efficient distribution network allows us to track sales and inventory data on a daily basis. As a result, we are able to:
· make and revise manufacturing plans on the basis of current sales information;
· reallocate inventory within our wholesale subsidiaries, thereby reducing overall inventory levels and the risk of obsolescence; and
· react quickly to changing market trends by providing rapid feedback to our in-house design team.
We engage in research and development activities relating to our manufacturing processes on an on-going basis. As a result of such activities, we have invested, and will continue to invest, in automation, thus increasing efficiency while improving quality.
The principal manufacturing facility for our Oakley products is located in Foothill Ranch, California, where we manufacture or assemble most Oakley eyewear products. We have another manufacturing facility located in Dayton, Nevada, where we produce the frames used in our Oakley X Metal® (a proprietary alloy) eyewear products.
At our U.S. manufacturing facilities, we own, operate, and maintain most of the equipment used in the manufacture of Oakleys eyewear products. Much of the equipment used has been specially designed and adapted for Oakleys manufacturing processes. Manufacturing processes that we believe are unlikely to add significant value are currently contracted to outside vendors. State-of-the-art manufacturing practices allow us to respond quickly to customer demand, offer protection against piracy and enable us to adhere to strict quality-control standards. We can build customized Oakley eyewear products to meet individual consumer demand for unique combinations of frame, lens and lens coating and to ship those products in less than 48 hours.
We utilize third-party manufacturers to produce Oakley apparel, footwear, watches, electronically-enabled eyewear and certain goggles.
Costs associated with research and development activities are expensed when incurred and are not significant.
Lens Finishing Labs
In North America, we have seven central lens finishing labs that are of strategic importance to our North American retail business. Combining our broad presence in the market with additional capacity for handling lens finishing work, we anticipate increasing availability of our higher-margin lens treatments to consumers at our stores. Lens finishing labs are also expected to contribute to a reduction of the time and cost of finishing work provided by third parties.
We operate Oakley optical lens laboratories in the United States, Ireland and Japan where we surface prescription lenses. These labs provide Oakley prescription lenses to the North and South American, European and Asian markets, respectively, enabling us to achieve expeditious delivery, better quality control and higher optical standards.
One of our key strategic objectives is ensuring the quality of our products, which has led to the integration of every phase of production in Italy and China. Quality is the critical factor in the premium and luxury segments for both wholesale customers and retail consumers. In 1997, we were among the first companies in the eyewear industry to obtain ISO 9001 certifications. Subsequently, in 2003, we obtained the Vision 2000 certification, which is the third-generation industry recognition for quality production. To ensure the high quality of our products, our quality control and process control teams regularly inspect work-in-progress at various stages of the production cycle. In addition, the majority of materials that we purchase are quality tested. We also conduct inspections of, and certify compliance with, the production processes of our main suppliers. Each of our prescription frames and sunglasses undergoes several stages of quality inspection. Due to the efficiency of our quality controls, the return rate for defective merchandise manufactured by us is approximately one percent.
We design Oakley products in our facilities in the United States to meet or exceed relevant industry standards for safety, performance and durability. Throughout the development process, Oakley optics products undergo extensive testing against standards established specifically for eyewear by ANSI and ASTM. These standards relate to product safety and performance and provide quantitative measures of optical quality, UV protection, light transmission and impact resistance. In addition, we perform a broad range of durability and mechanical integrity tests on Oakley lens coatings that include extremes of exposure to UV light, heat, condensation and humidity. We test Oakley apparel, footwear and accessories against strict guidelines established by ASTM and other industry authorities to ensure quality, performance and durability.
We distribute our products through both wholesale and retail channels.
Distribution by Wholesale Division
We currently distribute our products in over 130 countries and operate mainly through 43 wholly- or majority-owned wholesale distribution subsidiaries strategically located in major markets worldwide. In markets where we do not have wholesale distribution subsidiaries, we employ approximately 100 independent distributors.
Each wholesale distribution subsidiary operates its own network of sales representatives, who are normally retained on a commission basis. Our network of wholesale distribution subsidiaries represents a key element of our business. We believe that control over an extensive distribution network provides us with a competitive advantage, because it enables us to maximize our brand image, marketing efforts and customer service activities by tailoring our operations to meet the specific needs and peculiarities of local markets.
The following table sets forth certain information regarding our significant wholesale distribution subsidiaries and affiliates as of May 31, 2009:
We maintain close contact with our distributors in order to monitor sales and control the quality of the points of sale that display our products. We typically enter into distribution agreements with importers and distributors that establish minimum annual purchases and impose territorial limitations. In addition, to the extent permitted by law, we allow distribution only through specifically authorized retail channels and qualified sales agents.
No single customer or group of related customers accounted for more than five percent of our consolidated net sales in any of the past three years. We do not believe that the loss of any single customer would have a material adverse effect on our financial condition or results of operations.
Our distribution system is integrated internationally. A worldwide computerized information network links the distribution and sales systems with the production facilities in Italy, China and the United States. This network enables us to monitor worldwide sales trends and inventory positions on a daily basis and to allocate production resources accordingly.
We believe that one of our key competitive strengths is our ability to promptly satisfy customer demand in a timely manner, both prior to and following a sale. In order to further improve our customer service capabilities, we have centralized our distribution centers in Europe (Italy) and Asia (Japan) and have begun a process to centralize our wholesale and retail distribution centers in North America over time. We believe that centralizing our distribution centers improves the efficiency of our distribution operations while reducing related costs.
Our sales organization is comprised of a combination of employees and independent sales representatives. Relationships with our large international, national and regional accounts are generally managed and serviced by employees. Independent sales representatives service the remaining base of retailers (which include optometrists, ophthalmologists and opticians) that carry our various product categories.
Currently, we distribute Oakley products in the United States through a base of approximately 11,000 retail accounts. Retail accounts are comprised of optical stores, sunglass retailers, department stores, sporting goods stores and specialty sports stores, including bike, surf, snow, skate, golf and motor sports stores.
Distribution by Retail Division
Through our retail division, we believe we operate the largest group of optical superstores in the United States and Canada based on both sales and store count. We believe we are the largest specialty retailer of sunglasses in the world based on 2008 revenues and believe we have become a leading player in the Australian prescription segment.
In our optical retail stores, customers can choose from a large selection of frames and lenses offering a high level of comfort and fit. In North America, LensCrafters customers can obtain a completed pair of prescription glasses in approximately one hour because of on-site lens grinding laboratories. In our Sunglass Hut, ILORI, Sunglass Icon and Bright Eyes locations, customers can choose from a large selection of Luxottica- and third-party-vendor-manufactured sunglasses. In addition, most locations can assist customers in purchasing other accessories to complement their eyewear purchases. As of March 31, 2009, our retail business consisted of 5,649 corporate-owned store locations and 547 franchised locations. See Products and ServicesRetail Operations above for more information about our retail locations and a breakdown of the geographic regions.
The retail divisions stores sell not only frames that we manufacture but also a wide range of frames, lenses and other ophthalmic products manufactured by other companies. In 2008, units manufactured with our own brand names or our licensed brands, represented approximately 72.4 percent of the total sales of frames based on units sold by the retail division. In contrast, when OPSM was acquired in 2003, only 3.5 percent of the total sales of frames sold were supplied by us and, when Cole was acquired in 2004, less than one percent of the total sales of frames sold were supplied by us.
Substantially all LensCrafters (excluding the LensCrafters rebranded stores in China), Pearle Vision, Licensed Brands, OPSM, Laubman & Pank and Budget Eyewear stores have an employed or independent optometrist on-site, allowing the customer to have an eye examination, select from a large range of prescription eyewear and receive the selected frame with prescription lenses from one location. In addition, substantially all of our LensCrafters stores (excluding the LensCrafters rebranded stores in China), have a lens grinding laboratory on site, which allows our customers to receive a complete set of prescription frames or sunglasses in approximately one hour.
In 2008, we completed the acquisition of David Clulow, an optical retail chain in operation for almost 50 years in the United Kingdom and in Ireland. All of our David Clulow optical stores have on-site optometrists enabling us to control the high service levels and quality advice we provide to our customer. Frames and lenses are sold separately and assembled either in our in-store finishing laboratories, where available, or alternatively in the central glazing laboratory.
We believe that our integrated business model, innovative technology and design, integrated sunglass manufacturing capabilities, effective brand and product marketing efforts and vigorous protection of our intellectual property rights are important aspects of competition and are among our primary competitive advantages.
The prescription frame and sunglasses industry is highly competitive and fragmented. As we market our products throughout the world, we compete with many prescription frame and sunglass companies in various local markets. The major competitive factors include fashion trends, brand recognition, marketing strategies, distribution channels and the number and range of products offered. We believe that some of our largest competitors in the design, manufacturing and wholesale distribution of prescription frames and sunglasses are Charmant Group, De Rigo S.p.A., Marchon Eyewear, Inc., Marcolin S.p.A., Safilo Group S.p.A., Silhouette International Schmied AG and Viva International Group.
Several of our most significant competitors in the manufacture and distribution of eyewear are significant vendors to our retail division. Our success in these markets will depend on, among other things, our ability to manage an efficient distribution network and to market our products effectively as well as the popularity and market acceptance of our brands. See Item 3Key InformationRisk FactorsIf we are unable to successfully introduce new products, our future sales and operating performance will suffer and If we fail to maintain an efficient distribution network in our highly competitive markets, our business, results of operations and financial condition could suffer.
The highly competitive optical retail market in North America includes a large number of small independent competitors and several national and regional chains of optical superstores. In recent years, a number of factors, including consolidation among retail chains and the emergence of optical departments in discount retailers, have resulted in significant competition within the optical retailing industry. We compete against several large optical retailers in North America, including Wal-Mart and Eye Care Centers of America, and, in the sunglasses area, department stores and numerous sunglass retail chains and outlet centers. Our optical retail operations emphasize product quality, selection, customer service and convenience. We do not compete primarily on the basis of price.
We believe that Oakley and our other sports brands are leaders in non-prescription sports eyewear, where they compete with mostly smaller sunglass and goggle companies in various niches, and a number of large eyewear and sports products companies that market eyewear.
The managed vision care market is highly competitive. EyeMed has a number of competitors, including Vision Service Plan (VSP), Davis Vision, and Spectera. While VSP was founded almost 55 years ago and is the current market leader, EyeMeds consistent year over year growth has enabled us to become the second largest market competitor in terms of funded lives. EyeMed competes based on its ability to offer a network and plan design with the goal of delivering overall value based on the price, accessibility and administrative services provided to clients and their members.
Our marketing and advertising activities are designed primarily to enhance the image of Luxottica and our brand portfolio and to drive traffic into our retail locations. Advertising expenses amounted to approximately seven percent of our net sales in each of 2008, 2007 and 2006.
Marketing Strategy for Our Wholesale Distribution Business
Our marketing strategy in the wholesale distribution business is focused on promoting our extensive brand portfolio, our corporate image and the value of our products. Advertising is extremely important in supporting our marketing strategy, and we therefore engage in extensive advertising activities, both at the point-of-sale and through various media directed at the end consumer of our products.
In our media advertising, we utilize mass media, such as print, radio and television, as well as billboard advertising and digital media. The extent of our advertising activities and the selection of different media depend upon the competitive conditions in each particular market. In addition, we advertise in publications targeted to independent practitioners and other market-specific magazines.
Our point-of-sale marketing materials consist of displays, counter cards, catalogs, posters and product literature. Many of these materials are linked to our consumer advertising campaigns. Because the point-of-sale has become increasingly important both as a communication medium and in terms of the consumer brand experience, in 2007, we developed a new approach for our Ray-Ban brand with a shop-in-shop modular concept. This concept can be adapted to the stores we identify as the most suitable, permitting the best delivery of Ray-Bans clear and unique brand signature.
We also benefit from brand-name advertising carried out by licensors of our designer lines intended to promote the image of the designer line. Our advertising and promotional efforts in respect of our licensed brands are developed in coordination with our licensors. We contribute to the designer a specified percentage of our sales of the designer line to be devoted to its advertising and promotion.
With our Oakley brands, we use less-conventional marketing methods in addition to those mentioned above, including sports marketing, grass-roots sporting events and targeted product allocations. We believe the exposure generated by athletes wearing Oakley products during competition and in other media appearances serves as a more powerful endorsement of product performance and style than traditional commercial endorsements. Consequently, we will continue to
use sports marketing and endorsement arrangements extensively to achieve exposure that results in strong brand recognition and authenticity on a global level.
Finally, we participate in major industry trade fairs (including the MIDO fair in Milan, Vision Expo in the United States and the SILMO in Paris), where our new collections are displayed and promoted to the market.
Marketing Strategy for Our Retail Business
In addition to the marketing activities described above, we engage in promotional and advertising activities through our retail business with both short- and long-term objectives. Our short-term objectives are to attract customers to our stores and promote sales. Our long-term objective is to build the image and visibility of our retail brands throughout the world, such as the LensCrafters and Pearle Vision brands in North America, the Sunglass Hut brand worldwide, the David Clulow brand in the United Kingdom and Ireland and the OPSM, Laubman & Pank and Budget Eyewear brands in Australia and New Zealand, thereby encouraging customer loyalty and repeat purchases. As of March 31, 2009, we operated 142 Oakley O Stores and Vaults worldwide, offering a full range of Oakley products including sunglasses, footwear, apparel and accessories. These stores are designed and merchandised to immerse the consumer in the Oakley brand through innovative use of product presentation, graphics and original audio and visual elements. In the United States, Oakley O Stores are in major shopping centers. Oakleys retail operations outside the United States are mostly franchised and are located in Mexico, Europe and Asia-Pacific. Additionally for our eyewear, apparel, footwear and accessories marketed under the Oakley brand, long-term objectives are to utilize high profile retail locations to drive brand equity and create awareness.
We believe that the product quality and service provided by our retail business contribute to our short- and long-term marketing objectives.
A considerable amount of our retail businesss marketing budget is dedicated to direct marketing activities, such as communications with customers (e.g., mailings and catalogues). Our direct marketing activities benefit from our large database of customer information and investment in customer relationships marketing technologies and skills in the United States and in Australia. Another significant portion of the marketing budget is allocated to broadcast and print media (e.g., television, radio and magazines) designed to reach the broad markets in which we operate with image-building messages about our retail business.
Trademarks, Trade Names, Patents and License Agreements
Trademarks, Trade Names and Patents
Our principal trademarks or trade names include Luxottica, Ray-Ban, Oakley, Persol, Vogue, Arnette, Revo, LensCrafters, Sunglass Hut, ILORI, Pearle Vision, OPSM, Laubman & Pank, Budget Eyewear and the Oakley ellipsoid O and square O logos. Our principal trademarks are registered worldwide. Other than Luxottica, Ray-Ban, Oakley, LensCrafters, Sunglass Hut, Pearle Vision, OPSM and the Oakley ellipsoid O and square O logos, we do not believe that any single trademark or trade name is material to our business or results of operations. The collection of Oakley and Ray -Ban products accounted for approximately 10.2 percent and 15.8 percent, respectively, of our net sales in 2008. We believe that our trademarks have significant value for the marketing of our products and that having distinctive marks that are readily identifiable is important for creating and maintaining a market for our products; identifying our brands and distinguishing our products from those of our competitors. Therefore, we utilize a combination of trademarked logos, names and other attributes on nearly all of our products.
LensCrafters has introduced several trademarked lenses that contain innovative technology, such as AVPÒ and AVP Advanced View ProgressivesÒ (multi-focal lenses with a wider view of vision), FeatherWatesÒ (lightweight, thin and impact resistant lenses), DURALENSÒ (super scratch-resistant lenses), InvisiblesÒ (anti-reflective lenses), MVP Maximum View ProgressivesÒ (multi-focal lenses without visible lines) and SUPERVIEWÒ (advanced A/R lenses). LensCrafters purchases these lenses under non-exclusive arrangements with third parties. The names of the lenses used by LensCrafters are typically trademarked, and the trademarks are typically owned by us. OPSM has trademarked several lenses in recent years that it uses in its advertising. They include ActiviseÒ for contact lenses, ActiveÒ for polycarbonate eyeglass lenses and InvisiblesÒ for multi-coated eyeglass lenses.
We utilize patented and proprietary technologies and precision manufacturing processes in the production of our products. As of June 15, 2009, we held a portfolio of over 600 Oakley-related patents worldwide that protect our designs and innovations. Some of the most important of these patents relate to the following categories: innovations in lens technology
and the associated optical advances; electronically enabled eyewear; innovations in frame design and functionality; biased, articulating and dimensionally stable eyewear; and interchangeable lenses.
See Item 3 Key InformationRisk FactorsIf we are unable to protect our proprietary rights, our sales might suffer, and we may incur significant costs to defend such rights.
We have entered into license agreements to manufacture and distribute prescription frames and sunglasses with numerous designers. These license agreements have terms expiring through 2022. The table below summarizes the principal terms of our most significant license agreements.
* Retail Brand Alliance, Inc. is indirectly owned and controlled by one of our directors.
** Japan only.
*** U.S., Canada, Mexico and Japan only.
Under these license agreements, we are required to pay a royalty which generally ranges from five percent to 14 percent of the net sales of the relevant collection, which may be offset by any guaranteed minimum royalty payments. The license agreements also provide for a mandatory marketing contribution that generally amounts to between five and ten percent of net sales. Each licensor is responsible for the manner and form of advertising for its collection. These license agreements typically have terms ranging from three to ten years, but may be terminated early by either party for a variety of reasons, including non-payment of royalties, failure to meet minimum sales thresholds, product alteration and, under certain agreements, a change in control of Luxottica Group S.p.A.
Other than Dolce & Gabbana and D&G and Prada and Miu Miu (which accounted for 5.1 percent and 5.5 percent of our 2008 net sales, respectively), no single designer line accounted for more than five percent of net sales for the year ended December 31, 2008. We believe that early termination of one or a small number of the current license agreements would not have a material adverse effect on our results of operations or financial condition. Upon any early termination of an existing license agreement, we expect that we would seek to enter into alternative arrangements with other designers to reduce any negative impact of such a termination.
Our products are subject to governmental health and safety regulations in most of the countries where they are sold, including the United States. We regularly inspect our production techniques and standards to ensure compliance with applicable requirements. Historically, compliance with such requirements has not had a material effect on our operations.
In addition, governments throughout the world impose import duties and tariffs on products being imported into their countries. Although in the past we have not experienced situations in which the duties or tariffs imposed materially impacted our operations, we can provide no assurances that this will be true in the future.
Our past and present operations, including owned and leased real property, are subject to extensive and changing environmental laws and regulations pertaining to the discharge of materials into the environment, the handling and disposition of waste or otherwise relating to the protection of the environment. We believe that we are in substantial compliance with the applicable environmental laws and regulations. However, we cannot predict with any certainty that we will not in the future incur liability under environmental statutes and regulations with respect to contamination of sites formerly or currently owned or operated by us (including contamination caused by prior owners and operators of such sites) and the off-site disposal of hazardous substances.
Our retail operations are also subject to various legal requirements in the United States, Australia, Canada, New Zealand, Hong Kong, Singapore and Malaysia that regulate the permitted relationships between licensed optometrists or ophthalmologists, who primarily perform eye examinations and prescribe corrective lenses, and opticians, who fill such prescriptions and sell eyeglass frames.
Through our acquisition of Oakley, we produce and sell to the U.S. government, including the U.S. military, and to international governments, certain Oakley and Eye Safety Systems protective eyewear products. As a result, our operations are subject to various regulatory requirements, including the necessity of obtaining government approvals for both new and continuing operations, U.S.-imposed embargoes of sales to specific countries, foreign import controls, expropriation of assets and various decrees, laws, taxes, regulations, interpretations and court decisions that are not always fully developed and that may be retroactively or arbitrarily applied. Additionally, we could be subject to periodic audits by U.S. government personnel for contract and other regulatory compliance.
We are a holding company, and the majority of our operations are conducted through our wholly-owned subsidiaries. We operate in two industry segments: (i) manufacturing and wholesale distribution; and (ii) retail distribution. In the retail segment, we primarily conduct our operations through LensCrafters, Sunglass Hut, Pearle Vision, Cole Licensed Brands and OPSM. In the manufacturing and wholesale distribution segment, we operate through 11 manufacturing plants and 43 geographically-oriented wholesale distribution subsidiaries. See Distribution for a breakdown of the geographic regions.
The significant subsidiaries controlled by Luxottica Group S.p.A., including holding companies, are:
(1) In addition to being a holding company, Oakley, Inc. is also a manufacturer and a distributor.
Property, Plant and Equipment
Our corporate headquarters is located at Via C. Cantù 2, Milan 20123, Italy. Information regarding the location, use and approximate size of our principal offices and facilities as of April 30, 2009 is set forth below:
(1) Such facility is comprised of several different premises located within the same municipality.
(2) Such facility is comprised of several different premises located in Foothill Ranch and Lake Forest, California, United States. The premises in Lake Forest (116,626 square feet) are leased.
(3) Such facility consists of 571,076 square feet dedicated to offices and manufacturing and the rest consists of dormitories, related facilities and undeveloped land. We have leased this facility for 50 years.
(4) 25,963 square feet of this facility are leased.
In 2008, our manufacturing facilities produced a combined total of approximately 50.1 million prescription frames and sunglasses. In 2007 and 2006, our manufacturing facilities produced a combined total of approximately 41.8 million and 37.0 million prescription frames and sunglasses, respectively.
Substantially all of our retail stores are leased. See Products and ServicesRetail Operations above for more information about our retail locations and a breakdown of the geographic regions.
All of our leases expire between 2009 and 2025 and have terms that we believe are generally reasonable and reflective of market conditions.
We believe that our current facilities (including our manufacturing capacity) are adequate to meet our present and reasonably foreseeable needs. There are no encumbrances on any of our principal owned properties.
We operate in two industry segments: (i) manufacturing and wholesale distribution; and (ii) retail distribution. Through our manufacturing and wholesale distribution segment, we are engaged in the design, manufacture, wholesale distribution and marketing of house brand and designer lines of mid- to premium-priced prescription frames and sunglasses. We operate in our retail segment principally through the key brands LensCrafters, Sunglass Hut, Pearle Vision, ILORI, The Optical Shop of Aspen, OPSM, Laubman & Pank, Budget Eyewear, Bright Eyes, Oakley O Stores and Vaults and David Clulow, and our Licensed Brands (Sears Optical and Target Optical). As of December 31, 2008, the retail segment consisted of 5,695 corporate-owned retail locations and 560 franchised or licensed locations as follows:
(1) Includes Sunglass Icon locations.
(2) Licensed brands include Sears Optical and Target Optical.
(3) Includes Oakley O Stores & Vaults, Oliver Peoples and The Optical Shop of Aspen.
(4) Includes Laubman & Pank and Budget Eyewear.
(5) Includes David Clulow and Bright Eyes.
(6) Includes franchised and licensed locations for Pearle Vision, Budget Eyewear, David Clulow, Sunglass Hut, Bright Eyes, O Stores & Vaults, Oliver Peoples and other Chinese brands.
(7) Includes Asia-Pacific, Central & South America and South Africa.
LensCrafters, ILORI, Pearle Vision, our Licensed Brands (Sears Optical and Target Optical) and Oakley (Oakley O Stores and Vaults, Sunglass Icon, The Optical Shop of Aspen and Oliver Peoples), have retail distribution operations located throughout the United States, Canada and Puerto Rico, while OPSM, Laubman & Pank, Budget Eyewear and Bright Eyes operate retail outlets located in Australia and New Zealand. Sunglass Hut is a leading retailer of sunglasses worldwide based on sales. In 2006, we began operating retail locations in mainland China and currently we have rebranded 170 locations to our premium LensCrafters brand in mainland China and Hong Kong. In 2008, we acquired David Clulow, a premium optical retailer operating in the United Kingdom and Ireland. Our net sales consist of direct sales of finished products manufactured with our own brand names or our licensed brands to opticians and other independent retailers through
our wholesale distribution channel and sales directly to consumers through our retail division retail channel. Our average retail unit selling price is significantly higher than our average wholesale unit selling price, as our retail sales typically include lenses as well as frames.
Demand for our products, particularly our higher-end designer lines, is largely dependent on the discretionary spending power of the consumers in the markets in which we operate. See Item 3Key InformationRisk FactorsIf we do not correctly predict future economic conditions and changes in consumer preferences, our sales of premium products and profitability will suffer. We have also historically experienced sales volume fluctuations by quarter due to seasonality associated with the sale of sunglasses. As a result, our net sales are typically higher in the second quarter and lower in the first quarter.
As a result of our numerous acquisitions and the subsequent expansion of our business activities in the United States through these acquisitions, our results of operations, which are reported in Euro, are susceptible to currency rate fluctuations between the Euro and the U.S. dollar. The Euro/U.S. dollar exchange rate has fluctuated from an average exchange rate of Euro 1.00 = U.S.$1.2553 in 2006 to Euro 1.00 = U.S.$1.3705 in 2007 to Euro 1.00 = U.S.$1.4707 in 2008. Additionally, with the acquisition of OPSM and Bright Eyes (acquired through Oakley), our results of operations have been rendered susceptible to currency fluctuations between the Euro and the Australian dollar. Although we engage in certain foreign currency hedging activities to mitigate the impact of these fluctuations, they have impacted our reported revenues and expenses during the periods discussed herein. See Item 11Quantitative and Qualitative Disclosures About Market RiskForeign Exchange Sensitivity and Item 3Key InformationRisk FactorsIf the Euro continues to strengthen relative to certain other currencies, our profitability as a consolidated group will suffer.
The Oakley Merger
On November 14, 2007, we completed the merger with Oakley, for a total purchase price of approximately U.S.$2.1 billion. In accordance with the terms of the merger agreement, Oakleys outstanding shares of common stock were converted into the right to receive U.S.$29.30 per share in cash and Oakley became an indirect wholly-owned subsidiary of Luxottica. The merger was accounted for as a business combination for accounting purposes. For additional information, see Note 5 to our Consolidated Financial Statements included in Item 18 of this annual report.
In connection with the acquisition, we increased our outstanding debt by approximately U.S. $2.2 billion.
Since the consummation of the acquisition, we have begun to implement our strategic integration plan with respect to Oakley. We immediately launched a full portfolio of project tasks, with specific objectives, dedicated joint teams and designated accountabilities to address key integration and synergy areas, with direct significant involvement of our top management.
We expect that our integration with Oakley will result in synergies in the following areas:
· international wholesale development;
· developments related to specific brands (especially Revo and Arnette);
· sourcing retail operations synergies in the key markets of North America and Asia-Pacific; and
· general and administrative expenses.
Currently, all integration project activities are proceeding substantially according to the plan. In particular, specific integration tasks have been completed, including the integration of the retail operations in North America, the integration of the Oakley dedicated sales force and marketing within the Luxottica commercial infrastructure in selected European countries and joint sourcing initiatives, while others are in the implementation or detailed planning phase and are expected to be executed within the planned timeframe.
We expect that the transaction will result in operating synergies, driven by revenue growth and efficiencies. We are currently on schedule to realize the initial estimate of efficiencies.
The primary factors that may influence our ability to execute our integration plans and realize the anticipated cost savings include:
· difficulty in integrating the newly-acquired business and operations in an efficient and effective manner;
· inability to achieve strategic objectives, cost savings and other benefits from the acquisition;
· the loss of key employees of the acquired business;
· the diversion of the attention of senior management from our operations;
· liabilities that were not known at the time of acquisition or the need to address tax or accounting issues;
· difficulty integrating Oakleys human resources systems, operating systems, inventory management system and assortment planning systems with our systems; and
· the cultural differences between our organization and Oakleys organization.
Critical Accounting Policies
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates are based on historical experience and currently available information. Our significant accounting policies are discussed in Note 1 to our Consolidated Financial Statements included in Item 18 of this annual report. The following is a discussion of what management believes are our most critical accounting policies:
Revenues include sales of merchandise (both wholesale and retail), insurance and administrative fees associated with the Companys managed vision care business, eye exams and related professional services and sales of merchandise to franchisees, along with other revenues from franchisees such as royalties based on sales and initial franchise fee revenues.
Revenue is recognized when it is realized or realizable and earned. Revenue is considered to be realized or realizable and earned when there is persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured.
In some countries, the wholesale and retail divisions offer the customer the right to return products for a limited period of time after the sale. However, such right of return does not impact the timing of revenue recognition as all conditions of SFAS No. 48, Revenue Recognition When Right of Return Exists, are satisfied at the date of sale. We have estimated and accrued for the amounts to be returned in the subsequent period. This estimate is based on our right of return policies and practices along with historical data, sales trends and the timing of returns from the original transaction date when applicable. Changes to these policies and practices or a change in the trend of returns could lead to actual returns being different from the amounts estimated and accrued.
Also included in retail division revenues are managed vision care revenues consisting of (i) insurance revenues which are recognized when earned over the terms of the respective contractual relationships and (ii) administrative services revenues which are recognized when services are provided during the contract period. Accruals are established for amounts due under these relationships determined to be uncollectible. Our insurance contracts require us to estimate the potential costs and exposures over the life of the agreement such that the amount charged to the customers will cover these costs. To mitigate the exposure risk, these contracts are usually short-term in nature. However, if we do not accurately estimate the future exposure and risks associated with these contracts, we may suffer losses as we would not be able to cover our costs incurred with revenues from the customer.
Income taxes are recorded in accordance with SFAS No. 109, Accounting for Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on
the difference between the consolidated financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded for deferred tax assets if it is determined that it is more likely than not that the asset will not be realized. These estimated tax rates and the deferred tax assets, including valuation allowances placed upon those deferred tax assets, and liabilities recorded are based on information available at the time of calculation. This information is subject to change due to subsequent tax audits performed by different taxing jurisdictions and changes in corporate structure not contemplated at the time of calculation, as well as various other factors.
As of January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. In addition, it provides additional requirements regarding measurement, de-recognition, disclosure, interest and penalties and classification. FIN 48 must be applied to all existing tax positions for all open tax periods as of the date of adoption (see Note 8 to our Consolidated Financial Statements included in Item 18 of this annual report for a tabular reconciliation of uncertain tax positions). The cumulative effect of adoption of FIN 48 of Euro 8.1 million was recorded as a reduction to retained earnings on the date of adoption.
Our manufactured inventories were approximately 83.7 percent and 66.2 percent of total frame inventory for 2008 and 2007, respectively. All inventories at December 31, 2008 were valued using the lower of cost, as determined under a weighted-average method, or market. Inventories are recorded net of allowances for possible losses. These reserves are calculated using various factors including sales volume, historical shrink results, changes in market conditions and current trends. In addition, production schedules are made on similar factors which, if not estimated correctly, could lead to the production of potentially obsolete inventory. As such, actual results could differ significantly from the estima