LONDON, United Kingdom — Eyewear rarely, if ever, tops luxury shopping lists. Yet here is eyewear behemoth Luxottica, a company whose success in designing, manufacturing and distributing eyewear for most of the world's big luxury brands ranks it in the luxury top 10 by market capitalisation.
The business is strong and a wide-ranging strategic overhaul is being rolled out and already delivering results. Yet the stock market seems to be more concerned with side issues than with the fundamentals of the business.
I cannot help drawing comparisons with another company whose potential was overlooked as investors focused on superficial shortcomings. A decade ago, the merger of Boots and Alliance Healthcare (then Alliance UniChem) created the potential for major supply chain efficiencies and international revenue opportunities between a major retailer and a leading international pharmacy wholesale business. However, almost everybody seemed to fixate on the shabby image of Boots' stores in central London and suburban Britain. Only later did they wake up to find Alliance Boots, having passed through the hands of private equity giant KKR, acquired by Walgreens to create the world’s largest pharmacy chain.
I’m not saying that Luxottica has a negative image — far from it. However, I do think that there are similarities with Alliance Boots that help explain Luxottica’s situation and which give a hint to its future. Just as Boots and Alliance Healthcare recognised the strategic opportunity that their merger created, so Luxottica has launched strategic initiatives with far reaching consequences.
Here we have a company with a strong business and high strategic potential yet less in vogue with the stock market.
Its STARS programme (Superior Turn Automatic Replenishment System) is creating a virtually integrated retail base that is increasing store sales and lowering selling costs, eliminating the need to directly acquire retail operations and increasing returns for retailers and Luxottica alike. At Luxottica's LensCrafters business, the company is streamlining its lab base and lens manufacturing regional centres, increasing space productivity and lowering lens manufacturing costs to a fraction of what they are today. On the digital side, the company is rapidly making up for lost ground by introducing 'click-and-mortar' and full e-commerce capabilities.
Together these moves are potentially transformational. However, I think many observers view them individually and consequently see a complicated mix of actions rather than parts of a structured plan targeting a single objective.
Indeed, the stock markets seem to be losing sight of the fundamental value of the business, just as they did with Alliance Boots 10 years ago, and focusing instead on the surface. For example, the markets seem to have taken exception to the presence on Luxottica’s board of someone close to the chairman, Leonardo Del Vecchio. Rather similarly they seemed to object to the presence on the board of Alliance Boots of the partner of Alliance Healthcare’s controlling shareholder, Stefano Pessina, who went on to be a key factor in creating shareholder value at Alliance Boots. But is it so bad that Del Vecchio, who owns almost 70 percent of Luxottica, to want a trusted pair of hands on the board?
Stefano Pessina controlled 15 percent of Alliance Boots when KKR took hold of the company. Minority shareholders stood to gain significantly when this happened. Of course, the pay-off to Pessina and KKR came when Alliance Boots was sold to Walgreens, giving rise to the largest pharmacy chain in the world that was able to reap the full benefits of the group’s strategic overhaul.
With Luxottica, here we have a company with a strong business and high strategic potential yet less in vogue with the stock market. It’s about time the markets started looking at Luxottica’s fundamental value, because if not, Del Vecchio may at some point decide to take it private — just as Stefano Pessina did with Alliance Boots.
Luca Solca is the head of luxury goods at BNP Exane Paribas.