Luxottica Group: Strengths, Weaknesses, Opportunities, Threats

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. Fresh off their third quarter earnings report, which displayed the company’s prevalent financial strength and sent the stock up moderately, I would like to focus on the Italian eyewear giant Luxottica Group (NYSE: LUX).

Strengths:

  • As a 60 Minutes report unveiled, the company has a near absolute monarchy in the eyewear market; they own nearly all of the major brands, own the largest eyewear distributors, including Sunglass Hut and LensCrafters, and even own EyeMed Vision Care, the second largest eye care insurance company in the country.
  • Because of this monopoly, Luxottica is able to raise prices at a steady and constant rate, making most name brand glasses very expensive.
  • The company pays out an annual dividend of $0.62, which yields 1.63%.
  • Year over year, the top and bottom line are growing at double digit rates, which is projected to continue to at least the year 2014.
  • While many of Luxottica’s products cannot be classified as essential, many customers need glasses due to eye impairments.

Weaknesses:

  • Global economic conditions are stagnant at best at the moment, and purchasing very expensive eye wear is the opposite of a necessity.
  • The company’s wide-spread monopoly was revealed on a special 60 Minutes report, and may have caused some customers to feel as if they are being deceived as all of the brands are not carried under one name.
  • While emerging markets proved to be incredibly strong, growth from European markets was up slightly, but weighted down the overall growth of the company.
  • The company possesses a price to earnings ratio of 38.55, which even with Luxottica’s fast-paced growth makes the stock look rather pricey.
  • Only 3% of the shares outstanding are held by institutional investors showing that long-term investors do not find this stock extremely attractive.

Opportunities:

  • Emerging market growth is undeniably impressive, with wholesale revenue being projected to grow 25-30% for the year, and markets such as Turkey, China, India, Mexico, and Brazil fueling growth into the future.
  • Technological advancements should fuel customer interest and maintain sales growth.
  • Acquisition of other popular rising brands is always in the cards, and could fuel future growth.
  • Investments in emerging markets such as China and India should pay dividends in the coming future, as rising middle classes possess more money to spend on luxury items.
  • If Luxottica could create a cheaper brand of glasses that could have equally impressive margins they could tend to a larger market.

Threats:

  • While it is unlikely because of the near absolute monarchy the company has on the industry, other brands and competition are always a threat.
  • Market saturation at a point may become an obstacle, but at the current moment does not appear to be affecting the growth of the company.
  • Economic downfall could lead to a weakened consumer that does not have the excess money to buy an expensive pair of glasses.
  • Western Europe threatens to derail Luxottica’s growth trajectory, as Spain barely eked out positive growth while Italy almost was flat.
  • Customers may lose confidence in the brands and may feel deceived after watching the 60 Minutes report, however this should not prove to be too much of a problem in the long-run.

Competitors

One of Luxottica's biggest publically-traded competitors is The Cooper Companies (NYSE: COO). Cooper Companies is specialized in more of the medically necessary contact lenses business.

A large portion of Luxottica’s revenue is derived from selling medically-necessary glasses that are personalized to a specific customer’s needs, through its holdings like LensCrafters and Pearle Vision. One product that is a very popular alternative to actual glasses is contact lenses. One section of Cooper’s business is CooperVision, one of the world’s largest manufacturers of soft contact lenses.  People have a choice, material glasses from Luxottica or contact lenses from Cooper Companies, and because of the high-stakes, each company is constantly trying to convince the customers that their product is better.

Conclusion

Luxottica has many strengths, weaknesses, opportunities, and threats; however, in the end it appears to be a financially solid company with a strong monarchy on the eyewear industry. Its competitors pose only minor threats to its core business, and when push comes to shove, Luxottica is an amazing company that should continue its incredible run into the future, and is a screaming buy on any market pullback.   


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus