AFC 2019 Group 2 Luxottica PDF

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ACCOUNTING, FINANCE & CONTROL PROJECT WORK Master of Science in Management Engineering A.Y. 2019/2020 Professor Paolo Maccarrone

Manuel Finardi

Vincenzo Franco

Emanuele Fedrigoll Fedrigollii

Giorgio Giliberti

Sara Gentilini

Vladislav Fateev

GROUP 2 1

INDE INDEX X 1. Hist History ory ........................................................................................................................................ 3 2. Intern Internal al an and d ex extern tern ternal al anal analysis ysis ..................................................................................................... 3 3. Corp Corporate orate Strate Strategy gy...................................................................................................................... 4 4. Long Longitudin itudin itudinal al an analysis alysis ................................................................................................................... 4 4.1 Income Statement analysis ...................................................................................................... 4 4.1.1 Revenues ............................................................................................................................ 5 4.1.2 Costs................................................................................................................................... 5 4.1.3 Financial and Tax Management.......................................................................................... 6

4.2 Assets & Liabilities .................................................................................................................... 6 4.2.1 Current nonfinancial A&L ................................................................................................... 6 4.2.2 Property, Plants and Equipment ........................................................................................ 7 4.2.3 Effect of Business Combination .......................................................................................... 7 4.2.4 Debt.................................................................................................................................... 7

4.3 Cash flow .................................................................................................................................. 8 4.4 Company value creation perspective ...................................................................................... 8 4.5 Stakeholder perspective ........................................................................................................... 9 4.6 Shareholder perspective .......................................................................................................... 9 4.7 Liquidity Performance ............................................................................................................ 10 5. B Bench ench enchmark mark analys analysis is ....................................................................................................................... 10 5.1 Company value creation perspective .................................................................................... 11 5.2 Shareholder & Stakeholder perspective ................................................................................ 12 5.3 Acid test and Cash Flow to Debt ratio analysis ..................................................................... 13 6. B Bibli ibli ibliogr ogr ograph aph aphyy .................................................................................................................................. 13 7. A Attac ttac ttachm hm hments ents .................................................................................................................................. 14 7.1 Luxottica’s Financial Statements ............................................................................................ 14 7.2 Safilo’s Financial Statements .................................................................................................. 16 7.3 Marcolin’s Financial Statements ............................................................................................ 18 7.4 NAU’s Financial Statements ................................................................................................... 20

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1. 1.HIST HIST HISTORY ORY Luxottica was founded in 1961 by Leonardo Del Vecchio in Agordo, north of Belluno in Italy. The company started out manufacturing components and accessories for the optical industry. Starting from the 1970s, Del Vecchio decided to sell his own manufactured products directly to retailers, beginning the vertical integration process of his company while also focusing on international expansion. In the 1990s “glas glasses ses were evolv evolving ing into a fas fashio hio hion n acc access ess essory ory and a powe powerful rful expr expressi essi ession on of styl style” e” pushing Del Vecchio to sign license agreements with international fashion groups. The company also decided to acquire and invest in its own brands, which now range from the sporty Oakleys to the legendary Ray-bans. At this point in time, the company decided to enter the optical retail distribution business primarily in the American and European markets. In the new millennium, the retail expansion and vertical integration continued, driving the company towards the vision benefits business (with the creation of EyeMed). Nowadays, Luxottica is the world’s largest eyewear company, market leader in both service and innovation. As of October 1st, 2018, the merger between Essilor and Luxottica was completed and a new firm, EssilorLuxottica was created. The financial statements of Luxottica for 2018 do not include the consolidation of Essilor’s results, which will be combined starting from FY 2019. During 2019, EssilorLuxottica has continued its expansion through various acquisitions in the lens crafting (Barberini S.p.A.) and Retail businesses (Grandvision).

2. 2.VALU VALU VALUE E CHA CHAIN IN – C CORE ORE R RESOU ESOU ESOURCES RCES

Worldwid Worldwide e distribut distribution ion channel

Strong an and d wel welll balanced portfolio

Highly qu qualified alified employee employeess

Controlled a nd certified suppliers all over the wo world rld

Global footprin ootprintt a nd deep kn knowledg owledg owledge e of the market and the customers

2. 2.PORT PORT PORTER’ ER’ ER’SS FFIV IV IVE E FFORCE ORCE ORCESS LOW

LOW MEDIUM

MEDIUM

SUBSTITUTE PRODUCTS

INTERNAL RIVALRY

NEW ENTRANCE

- Contact lenses - Visual corrective surgery These products are a possible threath but are either too expensive and perceived as risky (surgery) or do not completely eliminate the need of prescription glasses

- High industries concentration - High diversity of competitors and lower vertical integration

- Need of a fashion brand license in order to be appealing to customers - Retail network commercial exclusivity - High requirements in terms of vision health and ray protection (in order to enter the lens grafting market)

LOW CUSTOMERS' BARGAIN POWER

SUPPLIERS' BARGAIN POWER

- Products differentiation is very high, therefore customer price sensitivity is low - Low customers concentration in both retail and wholesale market

- High vertical integration leads to a lower competition with suppliers - The high volumes and the high percentage of intra-group transactions allow to have higher control along the supply chain

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Antitrust laws (related to strategic M&A) Tax rates and incentives

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Stability of the host country’s currency Economic growth rate, inflation and interest rate Discretionary income and unemployment rate

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Different fashion tastes Target market’s social structure and growth

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New trending technologies and effects on the product offering

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Laws regulating environmental pollution Climate change awareness and increasing appeal for recycled materials

3. 3.CORP CORP CORPOR OR ORATE ATE SSTR TR TRATEG ATEG ATEGYY “To see the beauty of life”, the beauty of looking ahead and seeing a better future.

Global product supply and distribution

Strategic M&A

Design, innovation & product creation

Global b rand bu building ilding & marketi marketing ng

Market ex expans pans pansion ion

“To see the beauty of life” is the vision that inspires the work of the company and it stems from the search for a balance between sustainability, comfortability, and custom-tailoring of a product experience while still valuing the transparency and wellbeing of relations. Luxottica’s long-term strategy is to continue to expand in the eyewear and eye care sectors by growing continuously its businesses while trying to deliver the best eyewear products possible. Furthermore, the company will continue to focus on the vertically integrated business model that the group has developed, following the customer along the entire value chain (one of the company’s competitive advantages). Luxottica acknowledges that its success lies in its talented and committed employees, which play a crucial role in making what the firm is today. The company is also persistently investing in R&D leading the way in design and technological innovation while enlarging its brand portfolio with licenses and acquisitions.

4.LONGITUDINAL ANALYSIS In the following report we will try to assess the financial performance of Luxottica while learning about its business and comparing its results to a few selected direct competitors. In order to do so the income statement items, when specified, have been adjusted by eliminating the non-recurrent revenues/costs.

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4.1 INC INCOME OME SSTATE TATE TATEMENT MENT ANA ANALYS LYS LYSIS IS 4.1 4.1.1 .1 R REVE EVE EVENUE NUE NUESS The overall company net sale saless in 2018 were 8.9 billion €, a decrease of 250 million € from the previous year, halting the 2015-2017 trend of a steady increase in sales. Because of the multinational nature of Luxottica’s business, the final value of Net Sales is strongly affected by currency fluctuations between the Euro (which is the reporting currency) and the other currencies which the company manages. In particular, the recent weakening of the US dollar and British pound negatively affected the value of net sales. In order to have a clearer image of the overall state of the market, we adjusted the net sales using constant exchange rates. The results show how in the past four years the company’s sales increased while their growth rate is gradually slowing down. This is attributable to the maturity of the European and North American markets, where the company sells 79% of its products. More specifically, among the company’s so sources urces of rev revenues enues enues, in the past four years, the sales of the company’s core products decreased by around -320 million € (-4%). In contrast, other sources of revenue grew, mitigating the loss in the sales of core products. In particular, the vision care business and royalties from franchisees had a combined growth of + 410 million (+101%).

4.1 4.1.2 .2 CO COSTS STS

In 2018 the costs of sales decreased by 40 million € (-2%), in contrast with the growing trend registered from 2015 to 2017. Interestingly enough, there appears to be no significant correlation between variations in cost of sales and net sales. In the analyzed time period Luxottica was able to cut the operating expenses each year, for a total saving of 160 million €.

Regarding the cost structure by function, selling and advertising appears to be the most significant cost item (47% of the total operating expenses, decreased by 140 million € (4%) in 2018, inverting the growing trend). Moreover, General and administrative expenses are decreasing, adding up to 230 million € worth of savings in four years (3% of the cost item).

The analysis of costs divided by natur nature e highlights a general expense reduction trend for most of the items. More specifically, the company was able to decrease the cost of raw materials, advertising, and promotional expenses, royalties and trade market expenses saving more than 220 million €. The cost of personnel (most stable and relevant cost item, 2,65 billion €) adds up to 35% of the total cost. Furthermore, there is a strong increasing trend for both Production and Logistics costs which almost doubled in value in four years' time, resulting in a cost increase of more than 410 million €.

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Summing up, the EBIT value between 2015 and 2017 was stable around 5,9-6 billion €. Although the company was able to increase its sales, there was a more-than-proportional increase in the operative costs preventing a rise of the EBIT value. In 2018 despite a decrease in both costs of sales and operative expenses the loss in Net sales caused a reduction of EBIT up to 5,7 billion €, the worst performance in the last four years.

4.1 4.1.3 .3 FI FINA NA NANC NC NCIA IA IALL A AN ND TA TAX XM MANA ANA ANAGE GE GEMEN MEN MENTT Luxottica has had positive financial management results, cutting in half the fina financi nci ncial al cos costs ts (from 99 million € in 2015 to 50 million € in 2018). Thanks to these savings the EBT has a positive trend, but the significant loss in the value of non-adjusted revenues of 2018 caused the worst EBT performance of the last 4 years. Similarly, tax expens expenses es have been decreasing in the last years. Because of both recurring and nonrecurring tax benefits, the tax incidence and costs have a decreasing trend, with an all-time low value in 2017. These benefits are attributable to a permanent reduction (starting from 2017) of the taxes on corporate income (from 35% to 21%) in the US. In addition, the Patent Box benefits related to 2015, 2016 and 2017 further decreased the tax incidence in 2017 (as they were recognized to the company as of December 2017). The total tax savings in 2017 were around 164 million €, around 43% of the total non-adjusted taxes due. The variations of the non-adjusted values of S (Net pro profit fit / EBT) can be therefore explained looking at the factors above.

S S ad adjusted justed

2018 73.3 73.3% % 72.9 72.9% %

2017 82.9 82.9% % 69.9 69.9% %

2016 64.6 64.6% % 64.2 64.2% %

2015 63.1 63.1% % 61.8 61.8% %

The tax incidence variation had a significant impact on Luxottica’s performance, as the highest Net profit results were recorded in 2017, the year with the highest amount of tax benefits. Similarly in 2018, the company achieved the second-highest net profit results, even though the EBT performance was poor because of the lower sales.

4.2 ASS ASSETS ETS & LIAB LIABIL IL ILITIE ITIE ITIESS 4.2 4.2.1 .1 CU CURREN RREN RRENTT N NON ON ON-FIN -FIN -FINAN AN ANCIA CIA CIALL A& A&LL Inve Inventori ntori ntories es es: starting from 2015 the company managed to effectively reduce the amount of raw materials held at stock while on the other hand increasing the level of finished goods directly available for the customers to purchase in the retail store. This was aimed at improving the quality of the customer experience by having inventory levels in line with customer demand. Acco Account unt recei receivable vable vabless and ac accoun coun countt paya payables bles increased during the 4-year time frame both in terms of absolute value and in relation to the total group’s revenue (account receivables/revenue) and Total costs (account payables + salaries payables / total costs). The delay in cashing in receivable and cashing out payables was respectively 27,3 days and 43,5 days in 2018. These same values as of December 2015 were respectively 24,9 and 42,7 days.

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4.2 4.2.2 .2 PPRO RO ROPERT PERT PERTY, Y, PPLAN LAN LANTS TS AN AND D EEQUIP QUIP QUIPME ME MENT NT The amount of capital immobilized in Proper Property, ty, Plan Plantt and equip equipment ment appears to be increasing in the analyzed time frame. The breakdown of the various included fixed assets highlights a strongly variating year-by-year distribution of the investments in the regions in which Luxottica operates (with an increasing focus on the Asia Pacific and South American markets). More specifically, it appears that the great part of the in inves ves vestm tm tment ent exp expenditu enditu enditure re is shifting towards lands, buildings and leasehold improvements also attributable to the increasing focus on the retail market (opening/remodeling of stores). The overall incidence of lands, buildings and leasehold improvements compared to the incidence of machinery and plants changed from 2015 to 2018 of +5.79% and -5% respectively.

4.2 4.2.3 .3 EEFFE FFE FFECT CT OF BUS BUSINE INE INESS SS CO COMBI MBI MBIN NATI ATION ON ONSS The various business combinations, acquisitions and agreements between Luxottica and the counterpart companies affect both profitability (due to existing synergies) and fixed capital of the company. Luxottica exploits business development in specific target segments throughout the intensive use of M&A. The companies acquired during the last 4 years include both retail distributors (Spectacle Hut, Óticas Carol, Salmoiraghi & Viganò) and companies focused on eyewear related manufacturing (Fukui Megane, Exciton, SGW). The increased capital requirements due to business combinations mainly affect the value of Go Good od odwil wil willl an and d Inta Intangibl ngibl ngible e ass assets ets (which are respectively 52% and 16% of the overall value of noncurrent assets in 2018). The fluctuation of these values is due to both currency translation differences, high amortization policies and obviously the timing of the conclusion of the business combination. In conclusion, the amount of Intangible assets decreased by 22% from 2015 while the value of Goodwill remained stable. Therefore, although the level of acquisitions is high, the relevance of these assets has decreased.

4.2 4.2.4 .4 D DEB EB EBTT & EEQUIT QUIT QUITYY The company’s deb debtt towards financial institution is split among 3 items of the Balance Sheet. More specifically, current debts that reach maturity during 2019 total up to 652 million €. As displayed in the table on the left, the level of current-indebtedness of the firm fluctuates along the analyzed time frame due to the different rate at which long term borrowings reach maturity. Similarly, long term debt, which appears to be stable from 2015 to 2017 decreased by 37% between the F.Y. 2017 and 2018. In conclusion the level of indebtness of Luxottica, apart from the initial increase in 2016 appears to be steadily decreasing year by year. Because of the merger with Essilor and the need of cash to sustain synergetic investments, during the first half of 2019 EssilorLuxottica increased its current debts by 675 million €, choosing to focus on shorter-term deals with banks. The increase in the value of total equi equity ty of the company is in line with the additions to the retained earnings and the adjustments made for translation currency differences. The evident growth slowdown in 2017 is mainly due to the latter of the previously mentioned effects.

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4.3 CAS CASH H FLO FLOW W Looking at the evolution of the cash flow generation performance, a few items appear to be worth analyzing further in detail. The amount of cash generated from opera operatin tin tingg acti activiti viti vities es has a positive trend from 2015 to 2017. In 2018, on the other hand, this item falls below the general expectations. This is mainly due to a variation of the capability of Luxottica to convert assets and liabilities into cash (especially because of the upfront payment due to the Bass Pro agreement for USD 100 million). The...