Morning Note: Market news and an update from eyewear company EssilorLuxottica.

Market News

US equity markets pulled back again last night last night – S&P 500 (-0.5%), Nasdaq (-0.9%) – with mounting doubt over the outlook for the US economy and a weakening American consumer has seen investors racing to redeploy money in bond and currency markets. Tied in with stockholders sceptical that AI will pay off soon, big winners such as Nvidia and Broadcom are being used as a source of profits.

Markets were mixed in Asia this morning: Nikkei 225 (-0.5%); Hang Seng (+0.1); Shanghai Composite (+0.1%). The

The yen rose above 154, while China’s 10-year yield hit a record low.

The FTSE 100 is currently trading 0.7% higher at 8,242. Chancellor Reeves is expected to reveal a £20bn hole in government spending for essential public services on Monday, paving the way for potential tax rises in the autumn budget, according to The Guardian. Sterling currently trades at $1.2869 and €1.1858.

Some UK price indicators, along with cooling wage growth, point to a Bank of England rate cut as soon as next week. Services inflation has eased more than the headline measure suggests once volatile factors and Taylor Swift’s tour impact are stripped out, Bloomberg Economics said.

Source: Bloomberg

Company News

Yesterday evening, EssilorLuxottica released H1 results that were better than market expectations driven by a strong performance on margins. The group reiterated 2026 financial targets. After a positive start to the year, the shares have been volatile of late, in particular following the announcement last week of the acquisition of the Supreme brand and rumours that Meta are looking to take a stake in the company. In response to yesterday’s results, they have been marked up by 7%.

EssilorLuxottica is the global leader (with a 25% share) in the eyecare and eyewear industry with exposure to the design, manufacture, and distribution of ophthalmic lenses, prescription frames, and sunglasses. We believe the long-term outlook for the industry is positive, driven by an ageing population, increased incidence of poor eyesight (caused in part by the increased use of smart phones and tablets), a growing emerging market middle class, increased education regarding sun protection, and the growth of eyewear as a fashion accessory. By 2050, uncorrected poor vision is predicted to reach epidemic proportions with over 50% of the world’s population expected to suffer from myopia (short-sightedness), many with serious vision-threatening side effects and long-term implications.

The company’s competitive advantage is based on its scale, portfolio of premium brands (such as Ray-Ban and Oakley), product innovation, flexible manufacturing base, quality service, routes to consumer, and partnerships. Essilor owns licences for some of the best-known luxury brands, including Chanel, Prada, Armani, and Jimmy Choo. The group also owns a majority interest in GrandVision (GV), a global leader in optical retail and an online presence, ownership of which expands its global retail footprint (to 18,000 stores) and reduces the competitive risk of retailer consolidation. The company states that its mission is to prevent industry commoditisation in Western markets, whilst promoting premiumisation in emerging markets.

Last week, the company announced two acquisitions. The first was an 80% stake in family-owned Heidelberg Engineering, a German company specialising in diagnostic solutions, digital surgical technologies, and healthcare IT for clinical ophthalmology. The deal brings expertise in early detection and diagnosis and will enhance the group’s presence in the med-tech space. The company did not disclose financial details.

The company has also paid $1.5bn in cash for the streetwear brand Supreme, known for its lifestyle apparel, footwear, and accessories. The company runs a digital-first business and 17 stores in the US, Asia, and Europe. Although at first glance, the move appears to be somewhat of a diversification from the group’s core business – the shares were marked down 5% on the day – last night on the analysts’ call the company sought to justify the move. They highlighted it provides a direct channel to an audience that is very difficult to reach and adds a margin accretive business to the group.

Back to the results. During the first half, revenue grew by 5.3% at constant exchange rates (CER) to €13.3bn, in line with the long-term targets, albeit a touch below the market forecast. In the second quarter (+5.2%), the company generated the ‘sound’ pace of growth it recorded in the first quarter (+5.5%). This was achieved despite the tough comparison with the 8.2% growth rate in H1 2023.

EssilorLuxottica is a vertically integrated player whose go-to market strategy is based on two distribution channels. Professional Solutions includes the supply of products and services to third-party eyecare professionals (i.e., wholesale). In H1, revenue grew by 5.0% at CER to €6,414m.

Direct to Consumer includes the sale of products and services directly to end consumers, that is the retail business, comprised of brick-and-mortar stores and e-commerce platforms. In the first half, revenue grew by 5.7% at CER to €6,876m.

By geography, North America, the group’s largest region (45% of sales), grew by 1.5% at CER, held back by still negative comparable-store sales at Sunglass Hut and negative trends with the eyecare professionals (ECPs) not engaged in partner programmes. Elsewhere, growth was much stronger: EMEA (+7.9%); Latin America (+8.6%); and Asia Pacific (+9.8%).

In addition to underlying market trends, growth is being driven by high quality and differentiated product innovation across the existing product line and in new markets. For example, Stellest (myopia management) is being rolled out to additional markets and rose by 80%, Varilux XR lenses powered by AI and Ray-Ban Meta (next generation smart glasses) have been successfully launched, and Ray-Ban Reverse (which can shift from traditional convex to concave lenses) has delivered disruptive design and technology. These new products will be accretive to both price/mix and margin.

The company has also diversified into the hearing solutions market with a disruptive new technology (i.e., lenses with acoustic technology) to meet the needs of the 1.2bn consumers suffering from mild to moderate hearing loss. The audio component is completely invisible, removing a psychological barrier that has historically stood in the way of consumer adoption of traditional hearing aids. On the call, the company highlighted the positive results the product (called Nuance) has seen in consumer testing in the US. As a result, the scale of the launch in the second half of the year will be ‘large’ and focused on the wholesale market through partnerships with practitioners.

Over time, the company has been able to convert its revenue growth into margin expansion, leveraging its vertically integrated business model and successfully absorbing the inflationary pressures on most cost items. Gross margins are high and were up 40bps at CER to 64.3% in H1. This impressive performance came despite the decline in the Sunglasses business and was driven by improving price/mix elsewhere and the impact of GrandVision acquisition. This trend is expected to continue in the second half of the year. The pro-forma operating margin grew by 50 basis points at CER to 18.8%. The increase was driven by improved price/mix and increased operational efficiencies offset in part by ongoing cost inflation and strategic investment. As a result, operating profit grew by 8.5% at CER to €2,431m, above market expectations.

The business generates strong free cash flow (up 2% to €971m in H1) and is financially robust. The group ended the first half with net debt (including lease liabilities) of €9.8bn, 1.5x EBITDA. As a sign of the group’s confidence in the outlook for the business, a dividend of €3.95 was approved at the AGM May, up 29%, equating to a 2% yield.

Looking forward, Essilor doesn’t provide near-term guidance. However, the company remains confident in its strategic vision and its ability to deliver on its long-term outlook for annual revenue growth of mid-single digit between 2022 and 2026 and adjusted operating profit margin of 19%-20% in 2026 (vs 16.9% in 2023).

Finally, the CEO confirmed he had been informed by Meta that it might take a stake in the company, highlighting he would welcome such a step. The group added it has no plan for a capital increase dedicated to Meta; any share purchase would have to be made on the market. Such an investment wouldn’t impact the scope to enter into commercial relationships with rivals like Google and Apple. The company also highlighted that if Meta decided not to take a stake it wouldn’t impact its current commercial arrangement.

Source: Bloomberg