ESLOF - EssilorLuxottica: A Resilient Q4 Buy Confirmed

Summary

• Record turnover but in line with expectations. Q4 was rather weak, but China is now reopening.
• Dividend proposal of €3.23 is up by 29%.
• EssilorLuxottica is committed to achieving 2026 targets. This is not priced in.

Last week, EssilorLuxottica ( ESLOF , ESLOY ) released its Fiscal Year 2022 update, and today we decided to review our investment thesis. In our initiation of coverage, we emphasized how the firm was a perfect mix between of growth and value , and after having analyzed the latest accounts in combination with its update disclosed on the Capital Market Day , we are still confident in our long-standing buy rating. Last year, the company has gone through a phase of transition, and we all know the reasons (Del Vecchio); however, the CEO's first words were related to M&A optionality as a value driver for earnings growth. Our overweight was also supported by 1) higher synergies with GrandVision's integration ; 2) EssilorLuxottica's new collaborations thanks to the Armani partnership renewal and the new multi-year license agreements with Swarovski, Brunello Cucinelli, and Ferrari; and 3) more importantly, the company's 2026 long-term targets with sales between €27 and 28 billion range and an adjusted core EBIT margin in the 19% and 20% range. It was a good call, the company stock price is up by more than 17%, outperforming the main index returns, and also they announced a DPS increase of 29% to €3.23 compared to the previous year's end (this was well above Mare Evidence Lab's expectation). If approved by the board, the dividend will be paid in mid-June. Here at the Lab, we were looking for value and growth, and well, we can clearly say that we got both of them.

Q4 and FY 2022 Results

The Italian-French eyewear giant closed 2022 with a turnover of €24.5 billion and a net profit of €2.86 billion. Despite that, fourth-quarter performances were less resilient than expected. Deliveries in the last three and six months of the year were certainly more cautious than in the first part of 2022. However, we are confident for the long run and EssilorLuxottica might benefit from the China reopening. At the aggregate level, 2022 top-line sales were up 13.9% on a yearly basis and closed the year with an adjusted operating margin of 16.8%, slightly above the Bloomberg consensus, and an adjusted net profit of €2.86 billion, up 23.3% at current exchange rates. As already mentioned in our previous publication, EssilorLuxottica's operating leverage is working and this is also coupled with savings from integration.

Regarding Q4, the turnover missed slightly Wall Street consensus expectations (€6.18 billion vs €6.11 billion recorded by the company). Looking at the various geographical areas, North and South America significantly grew, reaching respectively €2.89 billion (+14% year-on-year at current exchange rates) and €398 million (+10.6%). However, the result of Latin America was less than half of Bloomberg's expectations, equal to €916.1 million, due to the stable Brazilian performance. Also in Asia, revenues for the quarter disappointed, €731 million against €744.6 million expected, slowed down by the zero-Covid restrictions imposed by the Chinese government. And finally in the EMEA area - which includes the Middle East and Africa - turnover rose by 5% at current exchange rates to approximately €2.09 billion, thanks to the solid results of France, Italy, Spain, the United Kingdom, and the Scandinavian countries. In terms of operating segments, direct to consumer division led revenue growth with sales up 14.6% to €12.72 billion, while the Professional solutions division grew 13.2% to €11 77 billion, mainly driven by the solid performance of the EMEA area and by the acceleration in North America. Store sales increased by 7.7% with ex-GrandVision stores outperforming at +9.3%. Related to our key financial ratio:

1. The adj. core EBIT margin increased by 70 basis points (and is in line with CMD targets);
2. Despite a slightly higher net debt, interest expenses decrease to €129 million thanks to a more efficient financing structure. This was also due to EssilorLuxottica share repurchase program. In detail, the company bought back 2.9 million shares or approximately 0.5% of its share capital;
3. FCF reached €2.25 billion (from €2.79 billion); however, the company increased its investment CAPEX.

Conclusion and Valuation

The company has a solid liquidity position and fully confirmed its 2026 guidance. Despite the lower Q4 results, consumer expenditure was still resilient and travel recovery still needs to play. The new collaboration agreements confirmed that the company is progressing ex-Del Vecchio. As already mentioned, we are above Wall Street's target and we moved our analysis from the stock price performance is not matched by a fall in earnings expectations to EssilorLuxottica is delivering its 2026 plan (and this is not priced in). Therefore, our target price of €196 per share is confirmed ($104 in ADR).

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