ESLOF - EssilorLuxottica: Solid Q2 Pharma Upside On The Horizon

2023-07-27 06:04:24 ET

Summary

• EssilorLuxottica reported an 8.2% increase in revenue to €12.8bn for H1 2023, with net profit up 9%, confirming a positive operating leverage.
• EssilorLuxottica plans to enter the hearing aid market with a revolutionary technology following the acquisition of Israeli start-up Nuance.
• Solid FCF development, lower debt, 2026 targets achievable. Our buy target is then confirmed.

Since our initiation of coverage called " EssilorLuxottica Is A Combination Of Value And Growth ," the company's stock price (ESLOF)(ESLOY) appreciated by almost 30% (including the dividend payment). Before our deep-dive into the just announced quarterly results, our buy rating is supported by 1) acquisition synergies with GrandVision's integration; 2) the company's collaboration renewals; 3) solid balance sheet with minor CAPEX requirement and a continuous supportive remuneration policy (with higher DPS and ongoing buyback); and 4) EssilorLuxottica's 2026 long-term targets .

As a reminder, in 2023, the company finalized Armani, Swarovski, Brunello Cucinelli, and Ferrari partnerships. Last month, a new addition to the company's recent collaboration was added . Indeed, we positively reported that EssilorLuxottica would produce and distribute Jimmy Choo eyewear products with a ten-year licensing agreement starting in 2024.

Upside from Mare Growth thesis

To support our EssilorLuxottica's growth story is key to report the following.

After Meta & Ray-Ban agreement , the company takes a new leap in eyewear innovation that integrates sight and hearing. This opens a new chapter in EssilorLuxottica's history. The idea is to create a new market - but also to project the group into a new industry - which combines glasses and hearing aids. Last year, EssilorLuxottica acquired an Israeli startup called Nuance which produces hi-tech audio devices based on algorithms. Starting from Nuance, the company created a "Super Audio" team combined with engineering and manufacturing capabilities. The CEO foresees the new product launch in 2024 second half, first in North America and then in the rest of the world. The new product will be sold in Amplifon ( OTCPK:AMFPF ) stores, a listed Italian company that engages its activities in the hearing care retail market. In addition, the new solutions will benefit from EssilorLuxottica's total store count (with the latest data being 17,619 stores worldwide, including corporates and franchising shops).

At the Lab, we also like 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." 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. Therefore, it might provide a significant upside in EssilorLuxottica' valuation. In addition, we positively report the new advertising campaign to support the Varilux XR launch. Have a look at the video . The company's competitive advantages are increasing thanks to AI and patented technology on the eye-responsive progressive lens.

Q2 results

The company delivered top-line sales up 8.2% at constant exchange rates to €12.8 billion and a net income of €1.6 billion (+9%). The company archives the first half with a positive earnings boost (Fig 1). It is ready for a brilliant second half thanks to strategic launches, including the new features for Ray-Ban stories in collaboration with Meta. As already mentioned, EssilorLuxottica's innovation products continue to be robust. The company introduced Varilux XR in the past months, launched Ray-Ban Reverse, and commercialized Stellest to new markets. In the Q2 details, Q2 sales confirmed the growth pace recorded in Q1 (+8% versus +8.6%) at €6.7 billion. This was supported thanks to the positive performance of all operating segments, geographical areas, categories, channels, and price ranges, except for the US retail segment, which recorded a negative performance in the wake of lower demand. Looking at H1, North America remained positive, up 2.3% at constant exchange rates. Conversely, EMEA recorded a further boost, growing by 10.6% at constant exchange rates. APAC sales stood out and were the best performance in the past quarter, growing by almost 24% at current exchange rates (Fig 2). This was due to Chinese recovery and Stellest's positive performance. Lastly, Latin America grew by 9.3%.

Fig 1

Fig 2

Conclusion and Valuation

Looking at our investment thesis, other supportive news is very much in line with our estimates.

1. We expect a travel rebound in Q3, and this will support EssilorLuxottica's sunglasses summer season;
2. There was a record of Employee Share Ownership . In detail, the company issued 5,909,082 new stocks, approximately 1.32% of the total share capital. These are employees that decided not to receive a dividend payment but to have ' skin in the game' ;
3. According to the CMD target, here at the Lab, we align with the company's forecast (2026 sales at €27 and 28 billion range and an adj. core operating profit margin in the 19% and 20% range). Q1 and Q2 development confirmed the trajectory. We believe that the EBIT margin is achievable, and on a quarterly basis, the company increased the profitability by an additional ten basis points while growing the business;
4. In addition, FCF was up by 5%, and despite the dividend payment, the company was able to reduce its financial obligations (including leasing) compared to December's end.

This is a crucial statement, but we are seeing a development in the medical sector, and we believe that this new hearing solution will provide a positive catalyst to price in 2024. As a reminder, the company is now selling mainly products with non-prescription, which are also wearable fashion luxury items. We are above Wall Street analysts' estimates. Q2 numbers were positive, and we expect a solid Q3 confirming our thesis to arrive at an EPS of €6.5 by year-end. Valuing the company with its forecast estimates with the current valuation ensures our buy rating target at €196 per share ($107 in ADR).

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