EssilorLuxottica Earnings: Strong Revenue Growth, but Muted Margin Development

We maintain our EUR 155 fair value estimate for wide-moat EssilorLuxottica EL as the company reported solid first-half results. Its revenue growth rate at constant exchange rates continued at a high-single-digit pace with 8% in the second quarter and 8.2% in the first half. Growth was led by the Asia-Pacific region with a 23.9% increase in the second quarter, boosted by greater China where growth was over 50%, was also boosted by Stellest (preventive care-lens products targeting children). Growth in Europe, Middle East, and Africa was also strong at 10.6%. Both regions accelerated sequentially in the second quarter. Growth in Latin America was also at a high single digit for the quarter and the quarter. Sales in North America, a problematic region for many luxury names in our coverage due to a very high comparison base, were helped by nonrecurring drivers (COVID-19 time-savings and payment checks) that decelerated, but remained in positive territory in the second quarter, with 2.3% growth at constant exchange rates. Sunglasses retail in the region, which tends to be more discretionary, turned negative in the quarter. We believe high exposure to less cyclical optical prescription product categories, at over 70% of revenue, should protect EssilorLuxottica from economic headwinds to an extent. The adjusted operating margin expanded by 10 basis points despite inflationary headwinds due to good cost controls.

Additionally, EssilorLuxottica announced its entry into the hearing aid market with an innovative hearing product that is invisible and integrated into eyewear, due to be launched in second-half 2024. This innovative product is interesting, but unlikely to have a material impact on our fair value estimate for the group anytime soon.