"The eyes have it," or so goes the old saying made famous on a daily basis by Luxottica Group S.p.A. (NYSE:LUX), the worldwide leader in eye wear. Most will recall the Risky Business scene where Tom Cruise dances around slightly undressed but still sporting Ray Ban sunglasses. Well, you have Luxottica to thank for those shades and that lasting image. Ray Bans are just one of the many brands Luxottica owns as a vertically integrated eyewear company, handling everything from design to production to retailing. If the eyes have it, then Luxottica has it all.

How Far It's Come
From his hometown in Milan, Leonardo Del Vecchio learned the art of manipulating and engraving medals. Opening for business in 1961 in Agordo, Italy, he began making parts for eyewear manufacturers. His company, Luxottica, started out with only 10 employees and today (over 47 years later) it has over 52,000 people worldwide. In 1967 it began manufacturing lens frames under the Luxottica brand, and in 1971 the company got out of the parts business to concentrate on their own brand. This would lay the foundation for future growth.

Del Vecchio branched out to have a hand in all aspects of the business from manufacturing to marketing - and everything in between. By maintaining control over every part of the business, he was able to be more innovative. Major moves included the 1974 purchase of Scarrone, an Italian eyewear distributor; opening its first foreign subsidiary in Germany in 1981; the purchase of Vogue and Persol (again, two Italian eyewear companies) in the early- to mid-'90s; and, buying Ray-Ban from Bausch & Lomb in 1999. The transformation was almost complete.

The most important screws in its international hardwear came in 1995, when LUX bought Lens Crafters (North America's leading optical retailer) and in 2001, when it bought Sunglass Hut (a leading specialty retailer). These two purchases made it a global player in the eyewear business. And yet, there's still more.

Brand Power
Next to the expanding eyewear business came Oakley for $2.1 billion in November 2007. Luxottica bought the massive sport and specialty eyewear company for two main reasons: 1) to eliminate a major competitor in the sunglass market, and 2) to gain additional technology expertise and a management team focused on innovation. Oakley, as a brand, prospered from this deal. What Oakley lacked in worldwide reach, Luxottica could easily provide. Though still early in this marriage, the acquisition seems to be paying dividends. For example, Oakley generates approximately 27.1% of its wholesale revenue in the third quarter compared to 19.8% for Luxottica's wholesale business; providing even greater balance to quarterly sales. In the next three years, it expects to produce operating synergies of $278 million from the acquisition (minus $46 million in one-time charges). Lastly, if you include Oakley's full-year numbers in 2007's total revenue, you get a pro forma increase of 13.5%. (For further reading on acquisitions, see our Mergers and Acquisitions tutorial.)

What Does The Future Hold?
Luxottica's 2008 Q1 report was good on the top line and okay on the bottom. Consolidated sales were up 16.6%, including an extremely robust 37.6% from the third-party wholesale business. While same-store sales were down 3% in the first quarter, the retail division still managed an increase of 4.8%. Earnings per share was $0.34, down 8.1% from the year earlier. Given the slowdown in the retail market, a weakening U.S. dollar and the cost associated with integrating Oakley, $0.03 is not a big deal in my opinion. Furthermore, in its Q1 earnings announcement it did reaffirm guidance for 2008 between $1.71 and $1.76 per share. The company seems confident that the cost controls put in place to deal with the difficult U.S. retail environment, along with the Oakley acquisition, are enough for it to meet its profit targets in 2008.

Bottom Line
Luxottica has all the lenses in place to continue to focus and dominate the eyewear business for years to come. It has a wholesale and retail network second to none, with proprietary brands like Ray-Ban and Oakley, and licensed brands from well-known companies like Polo Ralph Lauren (NYSE:RL) and Jones Apparel Group (NYSE:JNY). (For more on the retailers, check out The Industry Handbook - The Retail Industry.)

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