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

sales to third parties in 2008 would have been down by 1.8% from 2007 due again to the strengthening of the euro. At constant exchange rates, the decrease would have been euro 65.9 million (1.3%).

Geographically speaking, net sales to third parties in Europe in 2008 were euro 1,077.2 million (up 5.5%, from 2007). Despite the increase in net sales to third parties in Europe, such sales decreased to 51.5% of the segment’s total net sales in 2008 from 59.9% in 2007, due primarily to the inclusion of the Oakley business, which caused a proportionately greater increase in net sales to third parties in North America. In the United States and Canada, net sales to third parties was US$ 716.9 million, representing 23.3% of the segment’s total net sales in 2008 as compared to 18.1% in 2007. The 67.8% increase was driven by the inclusion of Oakley’s results and a good performance by house brands (especially Ray-Ban and Vogue). In euro terms, net sales in North America rose by a more modest 57.7% because the increase due to the inclusion of the dollar-denominated Oakley business was diminished by the strong euro.

In the rest of the world, net sales to third parties were up 41.3% to euro 527.8 million in 2008, representing 25.2% of the segment’s total net sales in 2008 compared to 21.9% in 2007.

The segment’s operating income in 2008 was euro 545.6 million, up 3.3% from euro 528 million in 2007 thanks to the Oakley business. Pro forma (2) operating margin declined to 22.1% from 23% in 2007.

It should be noted that Ray-Ban continued to drive the segment with double-digit growth in both sun and optical products, confirming itself the global leader in terms of market share and brand equity. Authenticity, iconoclastic cool, quality and function are the brand values that have written the brand’s history of success and continued to inspire its strategies and product launches in 2008, ever in line with the “Forever Ray-Ban” brand mission: continuous brand re-invention around a constant set of core values. The key event in 2008 was the Wayfarer launch. Luxottica gave the market a genuine reproduction of the original 1952 model, recreated down to the smallest details with the latest manufacturing technology and with an explosion of fashion colors in both frames and lenses. A full product offering, a dedicated advertising and PR plan and visibility in all points of sale confirmed Wayfarer as today’s edgiest icon in eyewear.

Ray-Ban has always stood for quality and function, yet 2008 marked a highly important new stage in its growth. In the sun business, polarized lens sales saw global growth thanks to an expansion of the crystal range, offering improved clarity and protection. In the optical business, the launch of the Titanium and Memorize styles scored worldwide success with their appeal to consumers looking for comfort, lightness and design.

In November 2008, as part of the same high-value strategy, Ray-Ban made its second limited edition launch: the “Caravan Ultra Limited Edition”. After the success of Aviator in 2007, another key icon. Caravan, was released in precious materials like gold and titanium, with ultra high quality polarized lenses and special color enhancement. Caravan Ultra was distributed to strictly selected retailers and sold excellently worldwide.

High satisfaction was also delivered by the Oakley brand. Despite organizational discontinuities, Luxottica managed to considerably develop the brand’s sales and visibility in European and emerging markets, thus demonstrating the enormous value, current and future, of the 2007 acquisition created by the complementary strengths of the merged businesses.

Sales of Oakley brand sunglasses were up from 2007 across all categories (sport/active, lifestyle, men’s and women’s), partly due to massive presence at the 2008 Beijing Games, which boosted brand awareness and sales.

Oakley’s lifestyle collection continued to garner worldwide attention thanks to styles such as Hijinx and the newly released Antix. Oakley’s sport line showed strong growth with the introduction of Enduring, Oakley’s first women’s sport-specific piece, and with continuing success by Flak Jacket and Radar.

(1) 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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Oakley stepped up its commitment to the women’s eyewear business by doubling the number of styles released in 2008.

Awareness of Oakley’s superior lens technologies has also helped increase sales of Oakley’s polarized eyewear. Oakley enthusiasts continue to flock to the premium priced Exclusive Eyewear collection, which includes signature models such as LiveStrong and Ducati and the highly successful Major League Baseball (MLB).

Oakley goggle sales were up from 2007. The Shaun White and Gretchen Bleiler models in the snow line and the James Stewart MX line were the key contributors in 2008, along with strong sales in military goggles. Exposure in the 2008 X-Games created increased awareness that helped to drive sales. ESS brand military goggles were similarly successful.

Oakley’s Custom Eyewear Program grew in 2008 driven by an expanded style and color offering, channel presence in Oakley retail doors and a re-designed Oakley.com website. In 2008, Oakley goggles were also added to the Oakley Custom Program, which allows consumers to choose frame, lens and customizable strap combinations to fit their personal preferences.

Lastly, the license brand portfolio was enriched by the emerging Stella McCartney brand, whose sun collections will start being distributed in summer 2009, and by the renewal of the Chanel license, one of the world’s most prestigious luxury brands whose collaboration with Luxottica has been an asset to the Group for years.

2006, were very well received by the market, especially in Europe. This was an early endorsement of the ten-year licensing agreement with one of the most dynamic and exclusive luxury brands.

At the end of 2006, Luxottica Group entered a ten-year licensing agreement for the design, production and exclusive worldwide distribution of Tiffany & Co.’s prescription and sun collections. This new agreement, marking Tiffany’s debut in the eyewear market, is also significant in being yet another addition to the impressive list of long-term partnerships the Group has entered or renewed in recent years. The duration of these agreements, at least ten years on average, allows the Group time to develop collections and position them effectively on the market, thus maximizing their potential, each in line with its particular brand values.

The launch of the Polo Ralph Lauren and Tiffany’s collections in 2007 made the brand portfolio even stronger and more well balanced, encompassing the most diverse of consumer tastes and tendencies while continuing to attract more and more other prestige luxury and fashion labels.

In 2007, Luxottica Group continued to extend its global organization and add people to its teams in the key countries in which it operates (United States, Mexico, Brazil, Italy, Greece, The Netherlands, Russia, India, Australia, Japan, Spain, France, Germany and the UK), thus moving its structures closer to the key markets. The Group improved its sales planning and applied selective distribution, using the approach adopted by the luxury brands.

Improvements were made to the structure serving emerging markets, which has already moved quickly to exploit the strong growth prospects in this region.

The wholesale division also improved its coverage of Eastern European markets. Offices opened in Russia and Hungary now cover four fifths of this region. Similarly, the Group opened an office in China to ensure a more efficient monitoring of the market and control over distribution. Direct distribution was initiated in the important South Korean market.