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This excerpt taken from the LUX 6-K filed May 12, 2009. FINANCIAL OVERVIEW
Luxottica’s 2008 fiscal year was characterized by three factors: the first year of integration with Oakley, the depreciation of the US dollar and other currencies used by the Group against the euro, and the drastic slowdown first in the American and then the European markets.
Despite the sudden deterioration in the second half, sales grew at sustained levels to top euro 5 billion for the first time in the Group’s history. This was mainly due to the contribution made by Oakley’s sales.
The fourth quarter saw a significant contraction of demand, reflected in an erosion of margins in both segments.
In this situation, Luxottica reacted with all the flexibility and efficacy of its integrated business model, which enabled it to maintain a high level of free cash flow (1) in 2008 (Euro 302 million). Luxottica also benefited from the effects of the merger with Oakley, ongoing capital investments (around Euro 300 million) and measures designed to boost sales and improve efficiency. The Group expects these measures to bear fruit in the coming quarters, helping to strengthen Luxottica’s balance sheet and optimize costs so that new opportunities can be taken up.
In the second half, the Group launched a program to improve efficiency in the North American retail division, followed in the fourth quarter with a series of measures to adjust the industrial and logistics infrastructure to bring the Group in line with shrinking demand as quickly as possible.
In 2008, Luxottica Group posted sales of Euro 5,201.6 million, up 4.7% from Euro 4,966.1 million in 2007. The consolidation of Oakley’s sales resulted in an increase to net sales of Euro 638.4 million, which was partially offset by the combined effect of the following three factors:
· exchange rates, and in particular the weakening of the US dollar, causing a negative impact of Euro 294.2 million, mostly at the retail level;
· the slowdown in the retail distribution segment, which saw its sales decline by Euro 95.9 million; and
· a slight contraction in sales (Euro 12.7 million) by the wholesale distribution segment, net of Oakley.
Pro forma (2) net sales decreased by euro 337.4 million, or 6.1%, compared to 2007. A decrease in net sales in the retail distribution segment (down 2.1% on a pro forma basis (2) and at constant exchange rates) and the strengthening of the euro were the main causes of this contraction: their combined effect more than offset the increase in wholesale net sales to third parties (+1.3% at constant exchange rates in 2008).
The consolidation of Oakley, which is a predominantly wholesale business, and the appreciation of the euro, which had a bigger impact on the retail distribution segment, significantly changed the Group’s revenue breakdown. Sales for the retail distribution segment decreased from 65.7% of total sales in 2007 to 59.8% of total sales in 2008; conversely, wholesale sales to third parties rose from 34.3% of total sales in 2007 to 40.2% of total sales in 2008.
Analysis of costs and profitability shows that the cost of sales rose 10.7% to euro 1,744.9 million from euro 1,575.6 million in 2007, mainly due to the growth in sales. As a percentage of sales, cost of sales rose from 31.7% to 33.5%, above all due to the depreciation of the US dollar against the Euro: net sales are primarily in US dollars, while costs are primarily in Euro. Gross profit in 2008 rose 2.0% to euro 3,456.7 million from euro 3,390.4 million in 2007. Despite the increase in gross profit, gross profit decreased as a percentage of sales from 68.3% to 66.5%, due to a proportionately greater increase in the cost of sales.
Total operating expenses increased by 5.9% to euro 2,706.9 million from euro 2,557.1 million in 2007, representing 52.0% of sales in 2008 against 51.5% of sales in 2007.
Sales and advertising expenses, including royalties, also grew, by 4.5%, from euro 2,069.3 million in 2007 to euro 2,161.4 million in 2008, mainly due to a euro 53.9 million increase in sales force compensation. As a percentage of sales, selling and advertising expenses were more or less stable at 41.5% (41.7% in 2007). General and administrative expenses, including amortization of intangible fixed assets, increased by 11.8% in 2008, to euro 545.6 million from euro 487.8 million in 2007, which was mainly due to a non-recurring capital gain of euro 20.0 million (before tax) relating to the disposal of a property in Milan in May 2007, an
(1) Free cash flow and EPS before trademark amortization are not measures in accordance with US GAAP. For additional disclosures regarding non-US GAAP measures and a reconciliation to US GAAP measures, see Annex. (2) Pro forma data reflects the inclusion of results by Oakley, Inc., a subsidiary that was acquired in November 2007, as if it had been acquired on January 1, 2007.
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increase in the general and administrative expenses of the wholesale distribution segment arising from production and distribution by the new Oakley business and euro 26.5 million in amortization of Oakley intangible fixed assets. These increases were partially offset by the completion of amortization of a number of minor trade names (around euro 6.3 million) and cost cutting over the year. As a percentage of sales, general and administrative expenses rose from 9.8% in 2007 to 10.5% in 2008.
For the reasons described above, the Group’s income from operations decreased 10.0% to euro 749.8 million, from euro 833.3 million in 2007. As a percentage of sales, income from operations decreased from 16.8% in 2007 to 14.4% in 2008. Excluding the non-recurring capital gain from the sale of a property in Milan in 2007, income from operations would have decreased by 7.8%. On a pro forma basis (1), the operating margin for 2007 would have been 15.5%.
Net interest expense increased to euro 122.0 million in 2008 from euro 72.4 million in 2007, mainly due to the increased indebtedness arising from the Oakley acquisition.
Net income in 2008 was euro 379.7 million, down from euro 492.2 million in 2007. Net of an extraordinary capital loss of approximately euro 15 million (after taxes) arising from the sale of a note receivable in 2008 acquired as part of our sale of the Things Remembered business and the non-recurring capital gain from the sale of a property in Milan in 2007, net income in 2008 would have been euro 395.0 million compared to euro 479.1 million in 2007. Earnings per share in 2008 was euro 0.83 (at an average euro/dollar exchange rate of 1:1.47). Net of the non-recurring events mentioned above, EPS was euro 0.87, down 17.8% from 2007. On a comparable basis, i.e. considering EPS in US dollars before trademark amortization (2), the decrease would have been 9.2%. The decrease in EPS before trademark amortization was almost entirely due to greater financial charges than in the previous year and to exchange rate fluctuations.
In a difficult year marked by the emergence of a huge financial and economic crisis, Luxottica nonetheless produced solid results, in which the successful integration of Oakley undoubtedly played an important role. In particular, with respect to Oakley’s integration, we completed organizational restructuring in Europe and the emerging markets for the wholesale distribution segment as well as the integration of the American and Australian retail chains, and the Group is starting to see the synergies it expected. Sharing of resources and cost savings in procurement, logistics and IT have also been achieved. On the product and marketing front, there were brand relaunches by REVO, assigned to a team in Foothill Ranch, California and Oliver Peoples, whose primary production is to be located in Agordo. There are also interesting opportunities in the sunglass lens business, stemming mainly from the power and recognition of the Oakley brand, whose as yet unexpressed potential at a global level is considerable.
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