ESLOF - EssilorLuxottica Is A Perfect Combination Of Tech Pharma And Fashion

2023-10-07 07:54:16 ET

Summary

• EssilorLuxottica and Meta have unveiled the second generation of smart glasses, featuring live-streaming and AI applications.
• Better numbers in EssilorLuxottica's pharma division thanks to Stelles myopia lenses performance. The company also has M&A optionality.
• Swarovski and EssilorLuxottica unveiled the new collaboration. Here at the Lab, we expect positive Q3 sales performance thanks to the travel rebound, confirming our buy rating target.

With the recent news on EssilorLuxottica ([[ESLOF]], [[ESLOY]]), today we decided to confirm our long-term target on the company's financials. At the Lab, we perceive EssilorLuxottica as a perfect MIX between a tech, a pharmaceutical player, and a fashion company. As a reminder our buy rating was also supported by a long-term trajectory of value and growth thanks to 1) M&A flexibility, 2) synergies with GrandVision's integration, 2) a new fashion collaboration, and 3) a strong balance sheet with no major CAPEX requirement.

EssilorLuxottica Tech Update

On September 27th, 2023, EssilorLuxottica presented the new generation of Ray-Ban Meta smart glasses. This is the second collection of hi-tech sunglasses equipped with a live-streaming function with artificial intelligence support. AI technology will be available only in the US market. The new smart glasses are offered in a total of 21 styles, including the Wayfarer and Headliner models. They are used with the most advanced optical technology that significantly improves audio and image quality. In detail, compared to the first generation released in 2021, the new glasses support a high resolution at 1080p, and it is now easier to share and modify content creations. Starting from October 17th, the new Ray-Ban Meta smart glasses will be available for online purchase and in-store through the EssilorLuxottica retail network, which includes Salmoiraghi & Viganò, Lenscrafters, and Sunglass Hut.

Rocco Basilico, EssilorLuxottica's Chief Wearables Officer, explained how these new features are what the company " imagined when it decided to enter this space. Truly wearable, life-enhancing technology. And it will only get better. "

The Ray-Ban Meta collection is one of a kind, and more importantly, the new collection has much higher entry price points. In detail, the entry price comes at $299, €329, and £299 vs. a European price for a Wayfarer glass goes from €155 to €175. Therefore, taking the price mid-point, there is at least a 100% markup with the new smart glasses.

EssilorLuxottica Pharma Update

Here at the Lab, already in Q2, we positively reported the CEO's words : "Meeting critical consumer needs with the boldest actions is part of our DNA. While sight remains our core business - and growing the optical market our strategy." EssilorLuxottica entering the hearing aid market has caused a stir. Understanding how disruptive the impact of EssilorLuxottica's financials is challenging to estimate. The company is ready to distribute the new glasses in 2024 and only in the American market.

Furthermore, these new glasses that amplify hearing will be an over-the-counter (OTC) product and have little to do with traditional hearing aids, which are medical devices and require the technicians' intervention, who customize the product based on individual deficits. Here at the Lab, we believe the new glasses are designed for people with mild deficits, certainly not for more severe acoustic pathologies. Despite that, this is a good path that shows how EssilorLuxottica is looking for new ways and innovative products to expand its business. As already mentioned , " 1.25 billion consumers have moderate hearing loss. According to research , 83% of consumers with hearing deficits are not wearing a solution. This new product might be a mission-critical health solution." As a reminder, EssilorLuxottica accelerates its pharma trajectory thanks to a bolt-on acquisition. Another growth driver we included in our 2023 estimates is the positive performance of Stelles myopia lenses, which have already exceeded one million pairs of glasses sold, anticipating the objective that EssilorLuxottica had previously set.

EssilorLuxottica Fashion Update

As part of our follow-up strategy, we are back to commenting on EssilorLuxottica's New Collaborations today. In detail, following the Swarovski agreement signed last December , the Group recently unveiled a new collection of premium sunglasses and eyeglasses. Inspired by the brand's signature jewelry lines, such as Lucent and Millenial, the new collection was designed under the creative direction of Giovanna Engelbert. This was positively viewed by Wall Street and confirmed EssilorLuxottica as the leader in the glasses market.

Conclusion and Valuation

Our internal team is now more cautious about the luxury sector, but we see EssilorLuxottica well protected in a downside scenario, given its product functionality. Ahead of the financial results, which will be released on October 19th, we expect 5.5% growth in the company's sales, given the solid summer season travel rebound after our analysis on easyJet , Ryanair , and Deutsche Lufthansa . We believe the company is on track to reach and exceed the 2026 objectives set at the CMD. In our estimates, we are forecasting 2026 top-line sales at €27.5 billion with an EBIT margin of 19.4%; following the new Ray-Ban Meta smart glasses entry price combined with the reality of entering the hearing pharmaceutical market, we believe the company is set for a long run in earnings upgrade. In addition, to support our buy rating confirmed at €196 per share ($107 in ADR), we should recall the buyback announcement of 3.5 billion shares worth. Buyback combined with dividends makes the company yield almost 7% with the current stock price.

For further details see: