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Why Stock in the Owner of Oakley Outlet Online and Ray-Ban Sunglasses Is Looking Brighter

A Ray-Ban logo on a pair of sunglasses, manufactured by EssilorLuxottica.

Angel Garcia/Bloomberg
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Ray-Ban and Oakley eyewear maker EssilorLuxottica  has resolved several years of post-merger turmoil, naming an insider as CEO, tasked with integrating the two businesses.

In 2017, leading French lens maker Essilor came together with Italian frame producer Luxottica, but the resulting French-listed company (ticker: EL: France) has been held back by a friction-fueled co-leadership agreement.

In May, the two businesses were fully unified, with Luxottica CEO Francesco Milleri retaining that title, and Luxottica founder Leonardo Del Vecchio appointed chairman. “I am proud to say that my lifelong dream of creating a fully integrated, all-round champion in the eyewear industry has come true,” Del Vecchio said in a statement at the time.

This new phase smooths the way for the company to cut costs, introduce new products, and consider possible acquisitions, which could transform the business and further boost the stock.

The shares have risen about 28% over the past 12 months, to €152.24 ($179.56), in line with rival lens maker Hoya  (7741: Japan). But EssilorLuxottica lags behind luxury goods firm and Gucci owner Kering  (KER: France), up 41.3%, and Ralph Lauren  (RL), which has gained 45.3%.

Sumit Sayal, an analyst at research firm Alpha Value, has a price target of €179 on the stock. Piral Dadhania at RBC Capital Markets wrote in a June note that “across all levels of management, the business has already moved away from co-management to a more streamlined structure.”

The speed of the management changes shows “the sense of urgency in progressing the integration agenda,” which will unlock value in the company in the coming years, Dadhania said.

The €67.7 billion eyewear giant, which has the license to make frames for Armani, Bulgari, Chanel, and Prada, and owns retailer Sunglass Hut, employs 180,000 workers. The company fetches a high multiple of 31.7 times this year’s expected earnings, but is valued at a 20% discount to its peers.

Earnings and sales tumbled in 2020; the company attributed that to Covid-related lockdowns. Operating profit more than halved to €452 million, from €1.6 billion in 2019, on sales of €14.4 billion.

Still, given the conditions, the results “demonstrate the strength of our business model and the benefits of our integration,” Milleri said in a statement. Strong management and recognized brands, combined with organizational changes and cost controls point to “solid profitability” ahead, he added.

In late June, EssilorLuxottica decided to proceed with another transaction, a €7.3 billion-euro merger with GrandVision  that gives EssilorLuxottica a network of 7,000 retail stores that offer eyecare services, sunglasses, and prescription eyeglasses.

The optical prescription operation, which accounts for two-thirds of revenue, is a reliable repeat business. It offsets the uncertainty of impulse purchases, a less dependable source of revenue.

And the company is developing new products, including those for prescription lenses, which RBC’s Dadhania says offer “a meaningful opportunity for the group.”

Costs could be trimmed by an estimated €420 to €600 million by the end of 2023. While the online business remains a strong channel for expansion, it still only accounts for 10% of revenue, up from 7%, according to Dadhania. China contributes just 6% of sales, but that’s expected to climb as access to vision care expands and more people buy products.

The optics are looking good for the newly structured EssilorLuxottica.