ESLOF - EssilorLuxottica Is Set For Growth

2023-04-22 01:34:18 ET

Summary

• From a resilient Q4 result to a positive sales trajectory in Q1 2023.
• Here at the Lab, we expect a supportive re-pricing from Wall Street analysts. Chinese reopening is just icing on the cake.
• EssilorLuxottica confirmed its 2026 financial targets. Our buy rating is then confirmed.

Since our EssilorLuxottica's ([[ESLOF]], [[ESLOY]]) initiation of coverage titled the group is a combination of Value & Growth released in mid-June 2022, the company's stock price is up by more than 33% (considering today's share increase of plus 6%). Related to the value part, it is important to emphasize that the company's board already propose to the shareholders' meeting a dividend of €3.23 per share, which is up by 29% compared to the previous year. Shareholders will be offered the option of receiving the dividend in cash or in newly issued shares (as a scrip dividend). The ex-dividend date is scheduled for May 22nd and the dividend will start to be paid on the 13th of June. At our entry price, the company is yielding almost 2.5%, outperforming the current average S&P 500 yield which is at 1.66% .

Q1 results

Starting with the CEO's words, we could not be more satisfied to report that Francesco Milleri is very pleased with the company's start of the year. He also noted how EssilorLuxottica recorded " another strong quarter " in every region and all the channels contributed to the company's performance. Speaking of numbers, the eyewear giant delivered Q1 top-line sales of €6.15 billion which were up 9.7% on a quarterly basis. Compared to the Q1 2022 results, the company grew by 8.6% at constant exchange rates and at a plus 9.7% at current exchange rates. In addition, the company posted its best quarter ever in terms of revenue line versus last year. Here at the Lab, since 2022, we have had a long-buy rating on luxury items and we are now taking full advantage of our investments.

Looking at geographical areas, North America and EMEA recorded a high-single-digit growth, while APAC and Latin America grew by double-digits. However, all geographical areas have seen an acceleration compared to the fourth quarter of last year (Fig 1). Major product categories, from sunglasses and optical frames to contact lenses, have grown at a steady pace. In terms of brands, major lens brands, and Shamir performed well, while luxury was still the best category for frames.

(Fig 1)

Fig 2

Comparable store sales were up in high-single-digit growth, with ex-GrandVision above the group average. Well, we are not surprised, in our last publication, we were also forecasting higher GrandVision's integration synergies.

Important to report is the positive Wall Street sentiment on the above result in North America, with no indication of a deterioration in current trends. We believe that equity research analysts will support a company's re-rating. In detail, double-checking future estimates, Wall Street is now forecasting revenue growth of 5.4% in 2023 (from 4.3% previously). The major change was the North American region to 4.6% from 3.6%, Europe to 3.2% from 2.0%, and the Asia-Pacific area to 14.0% from 12.0%. They are also raising the EBIT margin estimate by 30 basis points for 2023 to 17.8%.

Conclusion and Valuation

We are still positive on EssilorLuxottica for the following MACRO to MICRO reasons:

1. Travel rebound will support the next sunglasses summer season;
2. The company confirmed its 2026 targets, and we are estimating a revenue line for €27 billion in 2026 (Q1 sales were a positive confirmation of this trajectory);
3. Still in 2026, we are forecasting an adjusted operating margin of 19%, and again we believe that is manageable. This is supported by EssilorLuxottica's vertical integration and favorable track record. In Q1, there was no margin disclosure, but 2022 adj. EBIT margin was at 18.4% with an increase of over 100 basis points versus 2021 figures;
4. A supportive ongoing buyback and a record in Employee Share Ownership ;
5. M&A optionality and the latest collaboration agreements .

In our initiation of coverage, we explained how the company's stock price decline was not matched by a fall in earnings expectations . As already mentioned, this mismatch persists but is being reduced. So, we should not be surprised to see a positive stock price performance in the near future. Analysts are re-pricing (in late) the company target price and here at the Lab, being already ahead of the Street consensus, we decided to confirm our buy at €196 per share ($107 in ADR).

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