EssilorLuxottica Société anonyme Fundamental Analysis
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EssilorLuxottica Société anonyme
Last Updated: 26 July 2023
OTCPK: ESLOF
GICS Sector: Healthcare
Sub-industry: Medical Instruments & Supplies
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Table of Contents
You can download a summary of EssilorLuxottica's fundamental analysis in PDF here.
Management
CEO: Francesco Milleri
Tenure: 2.6 years
EssilorLuxottica's management team has an average tenure of 2.6 years. It is considered experienced.
Source of Revenue
EssilorLuxottica is a company that operates globally, providing integrated eyecare and eyewear products and services. This includes the design, manufacture and distribution of ophthalmic lenses, frames, and sunglasses.
They offer a wide range of lenses under various brand names, including Crizal, Essilor, Eyezen, Stellest, Xperio, Optifog, Satisloh, Barberini, Shamir, Nikon, KODAK Lens, Oakley, Ray-Ban, Transitions, Vailux, and Xperio.
Moreover, they also supply different eyewear products under brand names such as Ray-Ban, Oakley, Persol, Oliver Peoples, Alain Mikli, Costa del Mar, Native Eyewear, Luxottica, Sferoflex, Heritage, Sensaya, Miki Ninn, DbyD, Unofficial and Seen, Arnette, Vogue Eyewear, Bolon, Molsion, and Ossé, along with other licensed brands.
EssilorLuxottica Portfolio of Brands
Additionally, EssilorLuxottica is involved in the design, development, marketing, and maintenance of lens edging and mounting instruments for opticians and prescription laboratories. They also offer optometry instruments for eyecare professionals, schools, occupational medicine centres, the military, and other institutions.
EssilorLuxottica distributes ophthalmic lenses, frames, and sunglasses to third-party professionals and has a retail presence through brick-and-mortar stores and e-commerce websites. The company operates through two segments:
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Professional Solutions: This represents the wholesale business, supplying products and services to independent opticians, distributors, third-party e-commerce platforms, and large retail chains in the eyecare and eyewear industry.
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Direct to Consumer: This represents the retail business, where products and services are supplied directly to end consumers through physical stores and online channels (e-commerce).
EssilorLuxottica Société anonyme Reportable Segment Revenue FY2022
In the Professional Solutions segment, EssilorLuxottica serves over 300,000 third-party eyecare professionals worldwide. They support independent eyecare professionals through various programs and partnerships, like EssilorLuxottica 360, which helps with practice growth by providing support in business aspects such as visibility, traffic, sellout, and productivity. Another partnership called Essilor Experts aims to strengthen expertise in vision health and increase sales growth with the Group's branded products. The company also invests in education through the Leonardo learning platform, offering courses to employees, partners, and eyecare professionals to develop their skills and support industry growth.
In the Direct to Consumer segment, EssilorLuxottica sells products and services directly to end consumers through physical stores and online channels. This segment experienced growth in 2022, driven by new cross-channel opportunities and cross-brand initiatives, offering enhanced services in the online shopping journey and online prescription experience. The company's omnichannel program involves over 3,700 stores worldwide, providing a seamless customer experience with services like same-day Buy-Online-Pick-Up-To-Store, same-day home delivery through Ship-From-Store, and Return-In-Store options. They also integrate online appointment booking services and external eye exam platforms to enhance the prescription consumer experience. Pure e-commerce platforms like Glasses.com and Contactsdirect were upgraded with cross-channel and cross-brand opportunities to provide superior service with a human touch in a fully digital experience.
EssilorLuxottica Global Store Count
EssilorLuxottica Société anonyme Economic Moat
EssilorLuxottica Société anonyme Economic Moat
Economic Moat: Wide
There are many ways to identify EssilorLuxottica Société anonyme’s economic moat, but I focus on the above 5 types. The rating is purely subjective and based on my in-depth understanding and analysis of EssilorLuxottica Société anonyme. Please check my summary to understand more about the economic moat.
Performance Checklist
Is EssilorLuxottica Société anonyme’s revenue growing YoY for the past 5 years consistently? Yes.
Is the net income growing YoY for the past 5 years consistently? Inconsistent.
Is the cash flow from operating activities growing YoY for the past 5 years consistently? Yes.
Is the free cash flow positive for the past 5 years? Yes.
Is the gross margin % consistent/ growing for the past 5 years? Yes.
Is the EPS growing for the past 5 years? Inconsistent.
EssilorLuxottica Société anonyme Revenue, Net Income, Operating Cash Flow, and FCF (EUR Millions)
Is the free cash flow per share growing for the past 5 years? Yes.
EssilorLuxottica Société anonyme FCF per Share
Management Effectiveness
Is EssilorLuxottica Société anonyme’s ROE consistently at 12%-15% YoY for the past 5 years? No.
EssilorLuxottica Société anonyme Return on Equity
Is the ROIC consistently at 12%-15% YoY for the past 5 years? No.
EssilorLuxottica Société anonyme Return on Invested Capital vs Weighted Average Cost of Capital
The trendline for the number of shares outstanding is increasing, which is something that an investor would not be pleased to see.
EssilorLuxottica Société anonyme Shares Outstanding (Million Shares)
EssilorLuxottica Société anonyme Financial Health
EssilorLuxottica Société anonyme Financial Health (EUR Millions)
Current Ratio: 1.1 (pass my requirement of >1.0)
Debt-to-EBITDA: 2.0 (pass my requirement of <3.0)
Interest Coverage: 19.9 (pass my requirement of >3.0)
Debt Servicing Ratio: 3.3% (pass my requirement of <30.0%)
Dividend
Current Dividend yield: 1.8%
Have the dividend payments been stable for the past 5 years? Inconsistent.
Have the dividend payments been growing for the past 5 years? Inconsistent.
EssilorLuxottica Société anonyme’s dividend payments are reasonably covered by its earnings and its cash flows.
EssilorLuxottica Société anonyme Intrinsic Valuation
Estimated intrinsic value: EUR 108.16 (USD 121.00)
Value is calculated using discounted cash flow method (taking into account their cash and debt) and scenario planning.
Average free cash flow used: EUR 3,000M
Projected growth rate: 8%
Beta: 1.0
Discount rate: 8.0%
Margin of safety: 30% (Uncertainty: Mid)
Price range after the margin of safety: <USD 85.00
Date of calculation: 27 July 2023
Free cash flow used is a weighted average that is rounded to the nearest tens. In some instances, I used a more realistic number to represent the free cash flow.
Total debt and cash and short-term investments are last quarter figures that are rounded to the nearest tens. In some instances, I used more realistic numbers to represent them.
EssilorLuxottica Société anonyme Intrinsic Valuation
EssilorLuxottica Société anonyme Relative Valuation
EssilorLuxottica Société anonyme EV-to-EBITDA vs its peers
EssilorLuxottica Société anonyme Price-Earnings Ratio vs its peers
EssilorLuxottica Société anonyme Historical Price-Earnings Ratio
Additional Resources
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My Top Concern
The current global macroeconomic environment is highly volatile, and the impact of risks is expected to increase in the coming years. One major concern is inflation, which is affecting raw material costs and availability, as well as energy, labour, and shipping costs in certain countries like Argentina and Turkey. This inflationary pressure may reduce consumer purchasing power, potentially leading to difficulties for EssilorLuxottica in managing rising costs. Additionally, the macroeconomic context exposes the company to the risk that its suppliers may face challenges, which could disrupt the continuity of the supply chain.
The eyewear industry is also dynamic and demands innovation and sustainability. For EssilorLuxottica to maintain its competitive advantage, it must invest in research and development. The emergence of new technologies and competitors poses challenges, and meeting customer needs is crucial for success. Customers' expectations are increasingly focused on sustainability. Failure to implement sustainable practices may harm EssilorLuxottica's reputation and turnover.
The market faces potential challenges from new entrants offering innovative products, technologies, and digital business models. Additionally, fashion groups investing heavily in the eyewear sector pose competition for traditional products. Moreover, Managed Vision Care markets are becoming more competitive, and aggressive strategies from competitors are possible.
While EssilorLuxottica's position in the smart glasses industry has been strengthened through its relationship with Meta, other tech giants may introduce new products, intensifying the competition. Additionally, private equity players with aggressive online discount offers could impact the company's revenues.
Lastly, EssilorLuxottica operates globally and deals with multiple currencies, making its financial results susceptible to foreign exchange fluctuations. The EUR/USD exchange rate has a significant impact, as 40% of sales and around 65% of Adjusted Operating Profit depend on USD. Approximately 75% of the company's sales are conducted in foreign currencies, including USD, AUD, BRL, GBP, and CNY, leading to considerable sales volatility.
Summary for EssilorLuxottica Société anonyme
EssilorLuxottica Société anonyme’s economic moat primarily derived from its intangible assets and economies of scale. These intangible assets encompass its strong brand presence, extensive distribution network, patents, intellectual properties, and unique customer relationships that are challenging for new entrants to duplicate.
The company possesses a formidable portfolio of well-established and recognized eyewear brands, including Ray-Ban, Oakley, and many others. These brands inspire unwavering customer loyalty due to their dedication to quality, fashion, and style. Consequently, they create a significant competitive edge, setting EssilorLuxottica apart from lesser-known competitors and strengthening its dominant position in the eyewear industry. This strong brand equity acts as a powerful barrier to entry, safeguarding the company's market share and enhancing its long-term profitability.
EssilorLuxottica has established an extensive global distribution network, which includes its retail stores like LensCrafters and Sunglass Hut, as well as partnerships with independent opticians and retailers. This wide-reaching network enhances its ability to reach a broad customer base and solidifies its market presence. Replicating such a network would be challenging, providing EssilorLuxottica with an edge.
The company's intangible assets are further reinforced by strategic alliances with opticians, ophthalmologists, and eye care professionals. These partnerships play a crucial role in endorsing and advocating for their premium eyewear offerings, fostering lasting customer loyalty, and driving repeat business. By cultivating these essential connections within the eye care industry, the company solidifies its position as the go-to choice for both professionals and consumers.
EssilorLuxottica is a leader in optical technology, giving the company a competitive edge in terms of product innovation and differentiation. The company holds various patents and intellectual property rights related to lens technology, frame designs, and manufacturing processes, preventing easy replication of its products and technologies by competitors.
The eyewear industry's complex web of regulations and standards serves as a robust barrier to entry for new entrants. Within this context, EssilorLuxottica enjoys a significant advantage, as its compliance with stringent requirements and well-established expertise in navigating the regulatory landscape create a formidable moat. This fortified position shields the company from potential new entrants seeking to challenge its dominance, reaffirming its market leadership and fostering long-term stability and growth.
In addition to intangible assets, the company achieves economies of scale through its vertical integration. It controls both lens manufacturing and eyewear frame design and manufacturing, allowing better control over the production process, cost efficiencies, and a steady supply of high-quality products. This integration also provides the company with a cost advantage over its competitors.
Moreover, its sheer size enables the company to negotiate better deals with suppliers, reduce production costs, and potentially offer competitive pricing to consumers.
Furthermore, EssilorLuxottica benefits from considerable switching costs. While not as substantial as other factors, once customers have been fitted with specialized lenses tailored to their needs, switching to another eyewear brand incurs high costs and inconveniences. This imbues a sense of loyalty among customers, encouraging repeat purchases and fostering brand loyalty. The combination of switching costs and other moat factors reinforces EssilorLuxottica's competitive advantage, fortifying its market position and sustaining long-term growth.
In conclusion, EssilorLuxottica's impressive array of competitive advantages, including its strong brand portfolio, extensive global distribution network, strategic partnerships, leadership in optical technology, adherence to regulatory standards, economies of scale, and considerable switching costs, firmly establish it as a wide moat company. These intangible assets and operational strengths provide a formidable barrier to entry for potential competitors, solidifying EssilorLuxottica's dominant position in the eyewear industry.
Over the past five years, EssilorLuxottica has demonstrated commendable performance with its revenue consistently growing year on year. However, the same cannot be said for its net income, as it has shown some inconsistency in its growth trajectory over the same period. Despite this, the company has managed to maintain a positive trend in the cash flow from operating activities, displaying steady growth over the past five years. Furthermore, EssilorLuxottica's ability to maintain positive free cash flow for the same period is a testament to its financial stability and prudent management. Moreover, investors can take solace in the fact that the company's gross margin % has remained consistent over the past five years, underscoring its efficiency and resilience in managing costs and maximizing profitability.
EssilorLuxottica has poor capital allocation over the past five years. The company's ROE has not consistently remained in the 12%-15% range year on year and even falls below the industry average ROE. Similarly, the ROIC has not consistently met the 12%-15% target over the same period and has remained below the company's WACC, indicating suboptimal utilization of invested capital. In addition, EssilorLuxottica has witnessed an increase in the number of shares outstanding. This could be seen as an unfavourable signal for investors, as it dilutes shareholder value.
EssilorLuxottica's financial health appears to be robust based on key financial indicators. The company's current ratio of 1.1 indicates that it has sufficient current assets to cover its short-term liabilities. Additionally, the debt-to-EBITDA ratio of 2.0 demonstrates that EssilorLuxottica's debt level is well within control, comfortably meeting my requirement of being below 3.0. This implies that the company has a reasonable level of debt relative to its earnings, reducing the risk associated with its financial obligations. Moreover, with an interest coverage ratio of 19.9, EssilorLuxottica exhibits a strong capacity to meet its interest expenses. The debt servicing ratio also reflects that only a small portion of the company's earnings is utilized to service its debt.
Investing in EssilorLuxottica requires careful consideration due to various factors. On the positive side, the company boasts a wide economic moat, indicating a competitive advantage that can protect its market share and profitability over time. However, there have been concerns surrounding its performance and capital allocation, as the ROE and ROIC have been unsatisfactory and inconsistent. On the bright side, EssilorLuxottica maintains a healthy balance sheet, which provides some level of stability. Despite these factors, potential investors should be aware that investing in this company carries a significant amount of uncertainty. To mitigate risks, a high margin of safety, at least 30%, would be prudent to account for any unforeseen challenges or underperformance.
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