Alessandra Senici – Investor Relations
Andrea Guerra – Chief Executive Officer
Enrico Cavatorta – Chief Financial Officer & GM Central Corporate Functions
Mark Weikel – Retail Optical North America
Fabio d’Angelantonio – Executive Vice President- Retail Luxury & Sun
Elizabeth Digiandomenico – President, Luxottica Vision Care
Colin Baden – Chief Executive Officer-Oakley
Luca Lo Curzio – Global Marketing Director
Eric Anderson – Chief Executive & General Manager-GMO Opticas
Giorgio Striano – Senior Vice President-Oakley & Luxottica Optical Manufacturing
Srinivas Kumar – Head-Pearle Vision
John Haugh – Executive Vice President and General Manager-Sunglass Hut North America
Edward Kummer – Senior Vice President-Global E-Commerce
Erik Searles – Vice President-Oakley Retail
Allegra Perry – Cantor Fitzgerald
Daniel H. Hofkin – William Blair & Co. LLC
Bassel Choughari – Joh. Berenberg, Gossler & Co. KG
Luca Solca – Exane BNP Paribas
Mark Friedman – The Retail Tracker
Omar Saad – International Strategy & Investment Group LLC
Julian Easthope – Barclays Capital
David Theobald – Global Growth Investments LLC
Matthew Benkendorf – Vontobel Asset Management, Inc.
Luxottica Group SpA (LUX) 2013 Investor Day Conference Call October 8, 2013 4:00 AM ET
As a reminder, a slide presentation which we will informally follow today is available for download from our website under the reading Investor Relation Presentation section.
This presentation includes certain non-IFRS financial information within the meaning of Regulation G under the U.S. Securities Exchange Act. Further information, including additional information required by Regulation G, is also available in Luxottica Group’s press release relating to its Investor Day, which may be found on our website, under the reading Investor Relation, Press Releases section.
During the course of today’s presentation certain projections or other forward-looking statements may be made regarding Luxottica Group’s future financial performance or future events. We wish to caution you that such projections or statements are based upon current information and expectation and actual results may differ materially from those projected in the forward-looking statements. You can read more about such forward-looking statements on Page 2 of the slide presentation.
We also refer you to our filing with the SEC and Italian Securities Authorities. These filings contain additional information concerning factors that could cause actual results to differ materially from those contained in management projection or forward-looking statements.
Good morning to everyone, and welcome to our North American retail headquarters. After the very positive feedback, we had the last year at our Investor Day in Agordo fully dedicated to our operation. We decided to organize a detail analyze focus on our North American business.
North America is our biggest market, its continue to be a growing market and today we will talk about the long-term opportunity for the Optical and Sun industry for our Roselle business for Oakley, the optical retail chains and the Sunglass Hut as well.
This morning during the presentation, there will be a lot of speakers, I am not going to introduce them all now, but I’ll ask Mark for RONA, Fabio for Sunglass Hut, and Colin for Oakley to do it later. The afternoon and tomorrow morning will be dedicated to a short tour and thanks to our colleagues and friends of one site we will take part to a local nation.
So before starting with Andrea, I would like to remind you that this presentation is being recorded, and it also available via the video webcast. Andrea?
Good morning, to all of you, I thought that Alessandra, how do you call it housekeeping, would that be longer, so I was still writing something else, but here I am. Good morning to all of you, very happy being here, very happy to see all of you, very happy to be in Mason in Cincinnati in our retail headquarters as Alessandra was talking about it, and so we will spent the next two days going through a lot of different things, a lot of different projects, a lot of different evolutions.
As you know, we have been talking about this new world, many different times. This new world is offering unbelievably new experiences, new opportunities, new facts. On the other side make sure that we have also some more challenges, different challenges. And here we are, I think we are proud and we are very relax in showing you our good paths, our challenging paths, our tough things, our fantastic things. And we are in a journey, in a journey about what. About a consumer that is always on, a consumer that expects more, a consumer that understands much better what they can choose. A consumer that pertains to be served always and when they wish and where they want.
And on the other side, the opportunity of technology; technologies today allowing us to do whatever we want. The real thing is are we able to do whatever we want. And are we able to connect and to put together all different technologies, in order that the famous consumer is happy about this. So it's a journey, a journey that started many years ago and we are really proud to show all of this.
Where are we Luxottica Group? we just finished and finalized Q2 and we are now entering Q3 as you all know Q3 basically October, November is a no-news quarter and then we have a little bit of December, for some of our business December is still very important for some of our business just a portion of December is important, but all in all I would say that when the first nine months have been solid and good as they have been. We normally look to the last three years with a positive attitude.
This quarter was good, we are happy, another solid quarter in terms of topline as usual some business better than others, some geographies better than others, some over exceeding expectations, some sometimes below our expectations, but all-in-all another very solid quarter. So we expect also profitability to be in line with this good solid quarter.
What is the issue today? The issue today is this unbelievable currency fluctuations there is not much we can do and it's not just the dollar, the U.S. dollar, its many different currencies moving at the same time and pretty widely and this thing started some months ago so it's not a news. We had communicated that we would have gone through a quarter where last year in terms of euro and in terms of our numbers was the best comparison possible so Q3 has a tough comparison, has a tough comparison of many different currencies but even United States dollars is down somewhere around 7% and that is pretty strong in our numbers.
So sometimes it's tough to work hard, execute well and then look to your numbers and don't see much, but there are other moments of life where you are not doing much, and your numbers are over inflated by currency, so you need to be happy at that time and you need not to be sad in these other times, but all-in-all really we are extremely happy.
So I would start from the headline that we have given to this presentation because we could be surprised, United States is the largest optical market in the world. United States and North America is the largest markets for Luxottica. Luxottica is the leader company of the world in this industry, so how can we say, how can we state, how can we define this today as North America structurally growing markets and there are many different reasons, many different opportunities to see it.
We're working and leading a very strange industry this is a 200 years old new industry it's not a mature industry not at all. It's not an industry which is structurally saturated and constantly we have to invent a new path. No this is an industry which is completely new and there are at least four reasons why I define this as a very new industry.
The first reason is the emotional connection between ourselves, between American consumers and these objects either they are prescription frames or sunglasses that relationship is completely new. It was a pure, pure functional pragmatic relationship today it is obviously a functional relationship, but added on top of that there is a huge emotional path, which allows us to think about the way we choose our glasses is completely different, the way we wear sunglasses is completely different. The way we choose what to wear on a Saturday compared to a Tuesday is completely different. So all of this new emotional status around the relationship between glasses and consumers is allowing us to state that this is a completely new industry.
The second reason is there is a huge demographic wave, there is a huge social evolution and there is a huge behavioral change and I could define it very easily saying look, baby boomers are into the optical industry today heavy. And on the other side Millennials are into the sunglass market new and heavy. These are the two reasons why I feel this is a new industry, the connection, the choice, the wish of these two generations in those two segments of our industries are making a difference and we’ll make a huge difference.
On the other side, demographic and social behaviors are changing in terms of understanding, vision correction, vision need, the need of an eye exam and understanding that eyes are important to see, but eyes are the first and main window of your health. Some of you, many of you will go through our new eye exams and you will see how the words I’m using today are facts, are reality.
Today, we really can detect a lot. and as you know, I’m here talking a little bit wider about United States, healthcare, expenses and costs. vision is absolutely a minor small part of it and through vision we can help a lot. We can help a lot in detecting many different things, diseases, illness and we can detect a lot of weaknesses and we can help a lot in optimizing healthcare expenses in this country. So you will go through that and I’m sure that everyone that goes through these exams will say yes, those were not just words, but those were facts.
The third reason why I’m defining this industry as new is the famous premiumization. So we all know that the habits of Americans have always been pretty pragmatic, pretty functional. And you can see how Hollywood has changed, how TV has changed, it’s easy to observe how people walk in by the time gateway cities of United States 10 years ago and today addressed. it’s easy, it’s easy to understand and read the statistics about malls and downtowns and look what are the brands occupying certain allies of malls and certain streets downtown.
Who was Coach 10 years ago, who was Tory Burch 10 years ago, who was Michael Kors 10 years ago and things are changing, changing fast in this environment and this is a constant and continue evolution of the premiumization. and you know and I’ve really be in this for my past decade or so. This is the wildest and biggest opportunity for us in premium sun.
If you ask me what is the market, which is the market, which is the region, this is the region and this is why we have invested, this is why we have begun seven, eight years ago, a complete transformation of what Sunglass Hut was.
From being a destination of man functional lenses to never lose that, but add ladies, if you want to be in glamour, if you want to be in fashion, if you want to be sexy, I mean it’s easier to go this direction rather than that, but the most important thing is to hold on at home, which hosts both and I think that this is keeping on and what did we do in the last decade.
Ray-Ban just started at the beginning of the decade than to the portfolio, we added Oakley then to the portfolio we added Ralph Lauren then to the portfolio we added Tiffany, then to the portfolio we added Tory Burch, then to the portfolio we added Coach. That was so important, so critical in order to allow us to have the best portfolio to influence the American consumer in a premiumization journey.
I think all of these are very important factors why I’m defining this as a new industry in United States; the fourth reason is the technological breakthrough. it’s huge.
Think how just on lenses easy lenses AR anti-reflection, United States was behind the world think about how the digital surfacing allowed a completely different way and perceptive of Sun RX, or Sun prescription, whoever was wearing sun prescription 10 years ago you could spot them right away, very straight forward, very rectangular, very flat glass. Today 80% to 85% of what you see in Sunglass Hut is RXable. That's why that’s completely new and we have a new generation coming into prescription wishing those kind of glasses, so all of this allows me to say that we are in a new industry.
If we can go, this says how I can go up but I cannot go behind. Here, how is United States today in 2013, so it’s a good market, it’s a positive market with some caveats that is consumer today is ready to shop. And we all know that cash is basically for free in the United States in the last couple of years. And unfortunately authorities also said at certain times no its not for free any more. And after a month they said, now maybe it’s for free again. And I think this is one of the reason of the huge currencies mess we have in the world.
But what happened is if I have cash for free I go for my car, I go for my washing machine, I go for something more durable. And we had a little bit of softness during 2013 in mall traffic. I think that there was the only item that we disliked about United States in 2013. Then we had one small thing that instead was a little bit more painful for us which is and I use the American word because I mean I would never know, the budget sequestration, which mean budget reduction to people that don’t get it like me.
And so we had a little bit of our Oakley military budget which has been widely cut by authorities. So we are fine we still have our issues. Am I 100% happy LensCrafters performance? No. Are we in a journey? Yes. Am I 100% about happy about Sunglass Hut? I’m 101% happy about Sunglass Hut. Am I happy of the journey of Pearle? Yes, I am. Am I happy of the journey of Target? Yes I’m. What about Sears. Sears is pretty easy to be detected when we get the promotion right we are happy, when we don’t get it we are unhappy. So Q1, Q2 we were happy, Q3 we are unhappy. And I hope that with the leadership of Mary Anne, Mary Anne was appointed to Sears beginning of the year.
And we said, as you know we had some strategic thoughts about Sears that we were not able to accomplish and complete. And we said lets go back, lets put best talents, lets re think about it, let’s re-dream about it, and let’s go. And I think that today the team is there, momentum is there. We know what we have to do, we don’t have to make mistakes and I think that we will be happier going forward with Sears as well.
So this is what we are doing we are extremely moving on I think this is obvious I mean on e-commerce things are finally moving. Sun is a much easier subject than optical. Optical is still many different tries and tests across the ocean, across the world and United States as well many people would say okay let’s go in and do optical retail online after 6, 9,12 months either they sell Sun or they sell contact lenses or they close with some exceptions. But its is still a sector where we as well have a number of tests going we have not been successful with all.
We’re learning a lot, a lot and I think that that will lead to success. This is Sun, this is the trajectory of Sun. This is the journey of Sun. It’s an easy one today, it’s obvious. Why did it start later than what we could have imagined at the beginning because there is no sizes with sunglasses and you know better than me that a curve of 1 millimeter on your cheek make your face being completely different from what you expected it when you are looking at frame.
So it’s moving, it’s moving fast Oakley.com, SunglassHut.com, and Ray-Ban.com, two of the three are just a couple of three years old. Okaley.com has almost a decade of life and things are moving and moving pretty fast. And we do not expect anything to be lower than what we had so far in percentage increase in the next two or three years. As we said and I would repeat this, this is not our numbers this is numbers that are given from different sources and this is about premiumization of sunglasses, this is about premiumization of lenses and this is about baby boomers coming in the Optical reality.
So when we go and look to a part, an asset of our business where we have done a wonderful job in the last years is the wholesale part. So I will take care of that. Many of you heard how we have been slow for a longtime between 1995 and 2005, we basically went to sleep. We didn’t really tackle wholesale. Why was that because we had acquired LensCrafters in 1995, we had a little bit people not very happy between our customers and we gave it up. We didn’t service them anymore. We didn’t be proactive anymore. We were not happy. We were not nice. We were not efficient. We were nothing.
We begun to rework on wholesale in 2005 and 2006, took some years to take it back to where we wished and now it’s three, four years of rapid, fantastic, wonderful growth. Is this finished, absolutely not. If you ask me how many of our top five markets can double in the next five, six years, there is one for sure which is Brazil. And I would bet on United States. It’s a challenging bet. It’s a tough bet, but I could bet on this. Why is that because we are much stronger than before, some of competitors are a little bit weaker than what they were some years ago, some of their brands have shifted from one organizations from another and even people that really – there are always in the markets people which do not like us, fine. I mean the doctor is not prescribing that they work with LensCrafters with our sales with Luxottica. I mean it’s a pity because we can service them. We an allow them to understand how to brand, how to live in this world, how to service, it’s a pity. But all the rest understood it. We’re happy. We’re moving. We’re investing more and more. Our teams are absolutely motivated and the brand portfolio is outstanding.
Rayban, think about Rayban. Rayban is American. Rayban suffered across world in the 90s, pretty heavily. And you know better than me that when a brand suffers the sickness, the illness, the pain is tougher in the home country. So when we saw Rayban coming back in 2002, 2003, 2004 in Europe nothing was happening in United States. We have seen some of it in 2006, 2007 and then we began to see Rayban coming back. And today it’s pretty visible and it’s a constant growth. And we do not yet have the market share that we wish and this is Sun, this is prescription and this is happiness of all our consumers.
Oakley on the other side; this is their home country, never a crisis, here we are. The core consumer, performance, technology, sports, a little bit wider circle of consumers active, weekend warriors, a little bit wider consumer, lifestyle, happy people and I think that the connection between these three dots, the connection between these three circles has been paramount in this many years and will continue to be. And we always say, can Oakley grow another time for 10%. Yes, it can because this is a market that can grow. This is a market that meets premiumization and the premiumization of Oakley and Ray-Ban is very clear, comes exactly from what consumer have been asking for the last 20 years; functionality, technology, performance, adding on it a little bit of design, style, colors. This is what we are doing and this is what the consumer is asking us.
So nothing goes into wholesale without service. And this is the big investments we have done in the last three years, is a constant and continuous big highway between ourselves and our customers, allowing them to pick, allowing them to understand what they want, allowing them a flawless, constant and continuous service level on products, lens and spare parts. And I think that this has been really the asset that did not allow us to win in the last three years because this is new, this is six, eight months old, but this is allowing us to look to the next three years with completely different new eyes. So everything I said leads me to mark, leads me to retail optic in North America and I really hope that this next couple of days really allow you to understand that this is a very ancient new industry and that we can really expand it and make it a land of opportunities. Thank you very much and have a wonderful day.
Thanks Andrea. Well, first off welcome to everybody to Cincinnati. It is a thrill to have you here. We’re excited that everybody has been able to make it in, even if you got in 3 o’clock in the morning from New York last night.
So I wanted to tell you quickly, about two and a half years ago Andrea asked me to lead LensCrafters, and at that time I knew virtually nothing about the optical industry. So I took it on like a due diligence and said, what research can I get, what can I learn about this company, what can I learn about this category and I also talked to everybody that I could find in the world that could help me better understand it.
And I found the same thing that I’m sure that you have is that we recognized it’s a very fragmented industry, very fragmented. But there is tremendous untapped potential to grow this category through a multi-brand strategy. The other thing you recognize about the optical category in North America is the increasingly diverse and unique customers that exist out there. They’re unique, diverse, and emerging.
And RONA has a very unique set of assets to tap into and serve these very unique and emerging customers. And if you combine this idea about this unique, diverse and emerging consumers in this untapped potential, you can see that the optical category is absolutely right for change.
Today the optical category in North America is about $35.5 billion, right U.S. Huge growth in this category that Andrea alluded to. One, is increasing the frequency of eye exams, and two, the frequency of the purchase of eye glasses; two critical areas. There are 183 million adults in the United States that require vision correction today.
You know what percentage of those adults received an eye exam last year? 41%. That’s incredibly low when you compare to other categories. 74 million people got their eyes examined last year. Well, think about this scenario. If we increased that just from 41% to 50%, the eye exam category would grow by 1.4 billion every year.
Now the other thing that’s interesting about this, if you play this scenario out, we know when a patient or a customer has an eye exam. Over 70% of the time they convert to purchasing a pair of eye glasses. So play the synergy of that, 41% to just 50% and they buy eyeglasses 70% of the time, it’s another $4.6 billion in the frame category every year.
Pretty interesting, the other thing that happens is now you’ve got instead of 74 million people, we’ve got 91 people getting the quality eye care that they deserve. I think the other thing that’s interesting if you just look out a little bit 2020, seven years from now. There will be many more people, 194 million people that need vision correction in the United States. And again, if you apply the same formula that’s another 1.8 billion of growth.
The interesting thing is we’ve seen this type of growth and the shift in customer behaviors in other categories they were also right for change. So if you look at the dental hygiene category for a second, it is sky rocketed in the last few years, part of this is primarily due to teeth whitening and digital procedures. This category, this segment alone is forecast to grow to $270 million up to $2 billion and you have to ask yourself, why is this? Why would you talk about this analog? Will the dentist have clearly done a couple of things differently?
One is the elevated and transforming the experience, but your smile on your teeth aren’t just functional, they’re health, wellness and beauty, and that same change can occur today in the eyecare and eyewear industry, as we shift from function to a premium fashioned accessory. So, you ask yourself how are we addressing this huge potential?
RONA’s multi-brand strategy is uniquely positioned to tap into this diverse and emerging customer basis. So, think about just the way that we all use the products and services that we have. We’re all customers, so we have different things for different lifestyle occasions. So you may have a code on today, Friday night you may wear a jeans and a t-shirt, we’re all like that, right.
In the United States, we’re going to kick out of looking at women that have on average 10 handbags. You know how many of eyeglasses those women have on average, two. So as we convert from function to fashion, if we run, which you did $2.5 billion last year. So, one additional eyeglasses to each customer is another $2.2 billion of growth. So, you can just begin to see what can happen in this category in North America.
RONA is uniquely positioned as the number one optical retailer to tap into these different categories. If you think about the number two optical retailer in North America, its Walmart Optical, they have over 3,000 stores and they do about 1.4 billion, a little over 1.4 billion in sales every year.
Now they are firmly entrenched in the discount and value niche. They do a great job. We have LensCrafters, we have Pearle Vision, we have Sears Optical and we have Target Optical. We have a wide variety of portfolio of brands that can tap into this unique set of customers desires that our competitors just can’t reach. This wide variety of segments that we can tap into we can also do at scale.
LensCrafters, our biggest brand is fully focused on introducing innovative digital technology to change the game in the optical category. LensCrafters had a challenging summer sun season and back to school, which we’ll be very excited about and we’re confident about the results in the brand improvements that we’re seeing through things like AccuExam, Omnichannel and others.
If you think about the customers, that LensCrafters serves, these are the style-conscious customers and the performance focused customers. Now the style-conscious customer is easy right. These are customers that already get the idea of premium fashion accessories. The performance focused customer really cares about not just correcting their vision correction needs, but enhancing the activity that they are involved in. What’s fascinating about this for us as you can see that this will lead to continuing personalization requirements over the next years to be able to help this move forward. And I think Colin will probably talk about that in a few minutes.
The other piece that’s really interesting is to think about the Pearle Vision customer. This customer wants to have a relationship with the neighborhood doctor is really into eyecare and the medical side of this, it is going to come back for an eye exam to their same doctor year year-after-year. And they love the Pearle Vision experience that Srini and team have developed. The Target Optical consumer reaches the busy financially comfortable 30 something female that is very savvy. She knows the value is more than just the lowest price and she wants a simple and fun environment to purchase her opticals and Sun Products. Sears reaches the value focused consumer that's really a legacy consumer 45 years to 65 years old a bit more function than fashion and as a trust and confidence in Sears to provide the quality and service that here she desires.
It's interesting I like to think about other companies; in this case one other company has taken this type of strategy. I stop at Starbucks every morning, Starbucks has done this between Starbucks and Seattle’s Best they are doing the same thing to the Tea category today tapping into diverse at emerging customer bases. So when you think about the reach and the brand, and the scale that we have you can understand why we believe that Retail Optical North America will transform the eyewear and eye care experience and grow the category.
I think the one of the things I think about that is showing some of the preferential differences the shopping pattern differences for our consumer here in North America is to know that 3% of the prescription frames are sold online today that's a free to choose customer. Now if you think about this and you look at the managed vision care consumer and what could be online it’s about 9% of the market is right to go online, right.
And what's interesting and if you think about this everyone in the room knows that number is going to increase, everyone here knows that a multichannel customer is more loyal, and spends more money, the other thing is really fascinating is there is emerging research that’s showing in the optical category in North America when a consumer activates in store and activates digitally online, Arnette Channel they accelerate their purchase frequency, which is back to one of the two things we talked about that really has a chance to grow the category in a tremendous way.
And this is one of the reasons that LensCrafters is fully dedicated to an Arnette Channel experience which you will experience today in one of our stores. LensCrafters and Ronor are fully committed to enabling digital technology at scale that changes the game in the experience for eyewear and eye care and grows the category. LensCrafters growth strategy is include digital technology at scale, a 1400 store premium optical chain delivering personal and digital experiences that delight the customer through Accu exam, Arnette Channel and more and becoming the destination for prescription sun.
Pearle Vision their growth strategy includes 1000 store network, primarily franchised operators that will be capable of going international by 2018 and Srini and team have done a spectacular job on positioning the brand and already putting in place an eye care center 1.0 in Cleveland, which Srini will just talk about in just a few minutes.
Target our host is a serious company right, I think they've got a robust online experience they did $72 billion last year we are in 331 of their 1770 stores in North America and we are very excited to be able to grow with them to upto 400 stores by 2016. In fact our intentions are to triple the size of Target Optical by 2018. Part of the way we're doing this as Target Optical has done a great job in pioneering about prescription.com for Sparona [ph] and they've done a great job; in fact they are now the third largest volume prescription optical retailer in the United States. We offer a variety of options one of which is obviously appointments another is contact lens and now frames.
They also offer the option that if you want to try and have delivery to your home for frames pick up what you like, order them online, or go to the store and pick them up. So the growth strategy is there, the other thing is really fascinating for us is some of the innovative ideas that we are talking about with the host that would improve our footprint further.
In Sears Optical, if you think about Sears the host there are over 2500 stores that are in line our specialty stores. This is the home of shop your way, where over two thirds of the Sears sales go through this loyalty site that provides benefits and points to the participants. Two-thirds.
In Sears Optical is firmly looking at the Sears Optical brand positioning and tapping into the growth that does exist in Sears host, that’s shop your way. Top DMAs, top 50 stores and the ethnic consumer. And [Indiscernible] team where also keenly focused on simplifying the experience in Sears.
So I think you can see the tremendous growth potential that Verona has to grow from $2.5 billion last year to over $3 billion in 2016, which will include e-commerce upto 5% of our sales around $100 million to $150 million. Since 2010, we’ve significantly grown profitability and expect our profitability to grow by another 200 bps by 2016. And to elevate this experience to achieve this growth, we’ll invest about $250 million in retail optical North America over the next three years.
Part of this will obviously would be the digital journey that we have talked about including an Arnette Channel. And all brands will benefit from this and some of the capabilities that we will work on as part of that will be our customer relationship management, our mobile and dot.com enhancements, 3D facial imaging and prescription e-commerce. All of these investments allows to have a more intimate close relationship with our customer to elevate the game and providing them, their desires and what they are looking for and to transform their experience.
The other thing that’s interesting to me after having been here for almost 4 years between Sunglass Hut, LensCrafters and Retail Optical North America is how resilient this business has become. We are more resilient today than we have ever been. We do a strategic restructuring that puts us right on point with the consumer against our resources, against our forward facing strategies and we are more efficient. That also allows us to focus on infusing the Optical category with great capabilities around customer relationship management, digital, retail technology and investing so that we are ahead off and with the consumers, desires not reacting to her desires.
I am really excited about Verona’s growth potential if you think about the portfolio, if you think about the scale and the platforms we have the ability to transform the eyewear and eye care experience and tapping to this incredible opportunity and grow this category in the future. Super excited, now what I’d like to do is I’d like to introduce Eric Anderson, the President and General Manager of LensCrafters, North America. Eric?
Thank you, Mark. And thanks to all of you for coming out today as Mark mentioned my name is Eric Anderson and this is my 16th year with Luxottica and I’ve had a front row seat to Luxottica’s growth in North America I started with LensCrafters back on in 1998 and I’ve had leadership roles on Ray-Ban, Sunglass Hut, Pearle Vision, Target Optical and most recently I was in Santiago in Chile helping to integrate the GMO Latin American business into the group very excited to have you on back LensCrafters today and on the front-lines are growing the optical retail category and positively impacting and realize our customers patients, associates and doctors.
30 years ago LensCrafters founder Dean Butler either have to better way to give customers, better service and provide accurate glasses that could be delivered faster than a couple of weeks the industry standard at the time. LensCrafters revolutionized the industry by creating the first super optical store right here in Cincinnati that combined the doctor's office to retail dispensary and for the first time the optical lab this enabled us to provide a wider selection of frames at reasonable prices and delivered glasses in an hour.
LensCrafters single-handedly assured in a new and revolutionary way of doing business and that grow well beyond expectations. Well that same spirit of innovation that the company was founded upon is alive and well today it’s a primary ingredient of the sustained growth story behind the LensCrafters business. Today LensCrafters is the recognized vision care expert in North America, bringing the best of eye care and eyewear together to create an amazing customer experience, the patient and customers are at the center of everything that we do and that hasn’t really changed since 1983.
Our doctors and associates bring alive our brand promise of see what you love and love what you see to ensure our customers see and look their very best. And we can do all this because we understand the importance of sight, it is our responsibility as industry leaders to provide the best vision care experience to protect as precious gift for all of our customers and patients, we build lasting relationships by elevating what LensCrafters stands for in the hearts and minds of our customers and patients and exceeding their expectations.
We also help people feel great in their eyewear by providing the best service and product assortment in our industry. And finally we innovate to change vision care for the better and we do this by creating branded signature experiences coupled with leading edge technology that is the best in the industry today.
LensCrafters is a company that has a strong foundation built on progressive business model that has paved the way for our business to strategically grow where it is today. Our long-term growth strategy is one that brings value to customers and patients and is propelled by our brands rich history of pioneering industry first, lens technologies, frame brands, lab innovations, exam innovations and retail services.
We are the change agents with knowledge, power and the skills that transform not only the industry, but the lives of those we touch all this while having an attractive impact on our bottom line as well.
As Mark mentioned earlier today we have a thousand locations in North America serving more than 4 million customers each year, in the future we have the potential to grow up to 1400 locations in North America, we’re also available today online 24/7 at lenscrafters.com and we’ll be expanding our e-commerce offerings to increase access to brand, our brand in the future as Andrea was talking and Mark as well.
Lens leadership though has historically been a key differentiator for us and created a competitive advantage for the business while helping us better serve our customers and patients, our lens innovation history includes FeatherWates back in the late 80’s LensCrafters was the first of fully commercialized poly-carbonate lenses under the name FeatherWates bringing thinner, lighter lenses to our customers in about an hour.
With DURALENS we have the introduction which introduce customers to lenses with twice the scratch resistant of standard lenses also available in an hour, more recently you may remember scratch guard, we brought scratch guard lenses to our customers combining anti-reflective qualities with hydrophobic qualities, repelling dirt and water with a thin and light lens, and just last week we announced an exclusive partnership with UK based Adlens to test variable optic lenses that can change from near vision to far vision using a liquid crystal technology activated by the push of a button.
These are few examples of innovation in our lens line-up over time we’ve been able to develop a lens assortment that can meet the needs of any customer. Now as I mentioned earlier there are value competitors out there that compete on the basis of price and this can sometimes result in under serving customers by compromising the best lens to match customers lifestyles. We absolutely will not compromise the vision care of our patients and customers, we strive to ensure that each individual customer and patient receives the personalized care they deserve.
And innovation is a key enabler to this vision. LensCrafters is the single most powerful player in the optical category today, we continue to build our brand equity and our business results through our growth strategy. Our annual sales today exceed $1.8 billion per year, and some interesting stats over the last 15 years we’ve grown revenue by 73%, we’ve grown our average dollar customer by 65% and we’ve grown our number of locations by 36%, our gross margin and our operating income placed us among the most profitable retailers of any kind in North America.
In fact we’re expecting to hit the second highest gross margin in LensCrafters history in 2013, and our brand the LensCrafters brand is the most recognized in the category and our amazing brand experience enabled by technology is one of our key differentiators.
We prove in the technological innovation can be leveraged to change vision care for the better and historically much of this innovation has come in the form of lens technologies that I mentioned a few minutes ago, we’re also very active in extending innovation to our labs through programs like [indiscernible] in the doctors way through AccuExam it has been mentioned multiple times today and on our retail floor through things like ACCUFIT and now associated iPads and you will all have the opportunity to experience these live during our store visits later on this afternoon.
Well we couldn’t deliver any of these innovations without our greatest assets, something I’m extremely passionate about and that is our people. It seemed here at LensCrafters all of our 20,000 to 20,000 associates and doctors are simply the best. They genuinely care about each and every patient and customer that walks into our store. One of the best parts about my job is being able to read the thousands of unsolicited customer and patient testimonials that we receive each year. There are so many amazing stories about associates and doctors going above and beyond to serve their customers and patients; from the retail manager who visits a disabled person at their home to dispense glasses during their lunch hour to the incredible stories of doctors discovering urgent health issues during routine eye exams, what we do is truly a calling to us
Now like any organization, there are some opportunities to grow our business, we’ve identified some key underserved segments that we are in the process of addressing, including households with incomes under 75 grand and also mature [indiscernible] optic customers as well and we are actively working on developing an enhanced mix of products, prices and services to better serve these segments.
Now we exist, we believe we exist because we love eyes and our objective is to make every customer and patient experience real and amazing. We want everyone to see and look their best, but shopping for eyewear is a grudge purchase for too many people. The purchase cycle in our category is close to two years and that means there is millions of people walking around without eyecare or eyewear as Mark was taking about before and that keeps us up at night.
So we’ve identified six game changers that will begin to change that perception; help to make the customer and patient experience dramatically better and help to transform the eyecare industry and grow our category, at the same time, we’ll be writing the next chapter in our category leadership growth story. These ideas include a new marketing approach, which positions LensCrafters as the isle of global premium vision care leader and includes a new approach to creative media and CRM or customer relationship marketing that was mentioned earlier. Includes igniting our people; igniting our people is a series of new ideas to further empower and inspire our associates and doctors to deliver even a more amazing experience in the due today
Pricing and promotion evolution, we’re working to determine what is the best balance of pricing and promotion in a highly promotional category that’s consistent with this promise in this level of care we are trying to provide. Sun was mentioned a few times today, say that Sun category in our continent is truly an emerging market. Too many eyeglass wearers are walking around without proper sun protection or squinting or without proper visual acuity during situations with chlorella like driving the kids to soccer practice. We have plans to grow this business dramatically.
The patient experience transformation, I want to spend a minute on this. The cornerstone of this transformation is something we call AccuExam, which you’ll see during the store visits later today. An AccuExam is a program that addresses key patient pain points by bringing together the latest digital eye exam technology with a personal dialogue with the doctor to create a truly amazing and memorable patient experience. It starts with digital pre test equipment that can look deep into the physiology of the eye and record the unique figure prints of every eye that we look at.
Information is automatically linked to the doctor’s office with a digital phoropter after with in the goes one or two, enables the doctor to create an incredibly accurate RX even to the 100th of a diaopter and using retinal scan imaginary from your eye and the latest CGI demos, the doctor can provide a comprehensive assessment of your eye health, including identification of early stage issues like macular degeneration, cataract, diabetes and other health issues.
As Andrea said earlier, the eyes are window to the health of the individual, not just for eyecare disorders, but also for general health issues like diabetes and heart disease. In short, AccuExam turns an often painful experience into an informative, comprehensive consultation with an eyecare professional using the digital technology as an enabler. AccuExam is also a proven success. In our initial 34 store test, we saw an increase in sales, units, exams and, best of all, patient satisfaction increased 5%, which ultimately gives us the opportunity to increase patient loyalty. Today, AccuExam is currently launching in 54 stores in California, eye exam stores of California, bringing the total number of LensCrafters stores with AccuExam to 90 by the end of 2013 and we plan to launch AccuExam into another 80 stores in 2014.
And the last on the list there is omni. For us omni channel is a code name for revolutionizing our customer and patient experience once again using digital technology as a key enabler. As a result, the customer can access LensCrafters whenever and wherever they want.
Let me paint a picture for you. Our vision of Omni channel looks something like this. It starts with booking an eye exam online through our automated appointment book, which is on lenscrafters.com today. The patient arrives at the doctor of optometry next to LensCrafters for an amazing AccuExam patient experience which as we talked, is in a rollout mode right now.
Once you have the RX, you will be assisted by one of our incredible associates, who can use his or her personal iPad to help you select the best frames for you from either the in-store assortment or from our infinite aisle that’s available, they could take your picture in multiple frames, which is something its very important if you have a high prescription, you can’t see the frames that you’re trying on in the store. You can share that image with your friends, you can compare them on the iPad with the advice of the associate and then they’ll you select the best lens, using the iPad for virtual demonstrations and benefit illustrations and they will be able to calculate your price and including insurance benefits as well.
These associate iPads will be in 100% of LensCrafters stores by the end of November 2013. Once you’ve selected your frames and you’re lenses, the associate will custom fit you at the dispensing counter using our exclusive digital eyewear fitting system that is five times more accurate than the standard eyeglass fitting methods today. These are already deployed in all stores as of last year. Once you’ve been measured for our on-site lab, we’ll be able to produce your eyewear in about an hour including premium AR lenses supported by initiatives like the AR on an Hour technology, you’ve heard about before. And finally after the purchase, we’ll stay in touch with you by email or text. We want to know if you’re satisfied with your glasses, are you adapting to your new progressive lenses. We also want to know how was your experience because we’re richer getting that information back and we use that to modify our service process as well.
You can log on to your account anytime and track your past purchase history, access your RX through My Account, which is available today on lenscrafters.com. You can also pick up an additional pair of eyewear through e-commerce on our site is well. And as Mark said before, we know that multi-channel Omni customers are four times more loyal to the brand if they are able to access on an Omni channel basis.
So this is the vision we’re pursing and making a reality today. Omni channel places the customer at the centre of this experience, an experience that will be seamless, easy and possibly even fun. This will drive customer loyalty and shorten the two-year purchase cycle that I mentioned earlier. So whether it’s online, or on the retail floor, in the lab or in the doctor’s office we can make the customer and patient experience so much better and we’re committed to leading this change.
So in closing, it’s a very exciting time if you are working on LensCrafters business. We’re in the process of leading both change and growth in the North American optical retail category. I’m personally very excited that we’ll have the opportunity to bring this to life today for all of you in a very tangible way during our store visits this afternoon. I want to thank you for your time and I’d like to turn this stage over to Giorgio Striano, who will speak about optical manufacturing. Thank you.
Good morning everybody. Thank you, Eric. So my name is Giorgio Striano. I joined Luxottica since 2009, where I did fantastic journey from Italy, through China and then arriving into U.S. leading at first the Oakley frame operation which is the coolest frame plant in the world and then widening my responsibilities over lens processing. So Luxottica Optical Manufacturing is one of the largest optical network in North America. The lens laboratories allow us to provide better and faster services to our customers. Supported by the global operation team, inside our plant we have the most advanced manufacturing technologies and methodologies to support among the most important result, quality improvement, productivity increase and reduced manufacturing lead time.
The technological progress is better happening inside the industry we are creating as Andrea was suggesting a new industry. Think about DST, Digital Servicing Technology is possible to produce very high accurate lenses, highly customized lenses to a very complex combination of very laboratory software into the most of advanced equipment assisting on the market. And since Luxottica is the leader in North America we are leading this market. And we are leading this change through an incredible opportunity of combining frame and lens technology together for a perfect fusion so that we can create in the early stage of the design an incredible innovative and unbeatable consumer experience.
So let’s have a look at our manufacturing platform. In North America we have four labs, one is in Winnipeg in Canada, then we have in Columbus, Memphis and Dallas. Recently we announced the closing of the fifth one that is in Knoxville due to a review of our manufacturing footprint and the result of that the review was of course to drive efficiencies and to maximize these resources across the network.
Then we have another additional plant in South California, fully dedicated to Oakley prescription lenses. And through those lab we support also from a technological standpoint the 900 LensCrafter in store lab across all the North America country.
And also in 2012, we started a new lens plant in China to support North America optical retail operation. And the plant in China has been developed using the same standard that are available in North America. Therefore, we can provide great efficiencies, maximize synergies, maintaining high quality standard and creating a great service level so that we can support the North American brand to keep their promised delivery date to the customer.
So the Chinese production it’s also very strategic because in the same site we can combine frame technology with lens technology and therefore when we industrialize a new frame, we can see how it fit with our lenses and therefore in the early stage of the design, we can make some improvement so that when we arrive to the mass production, we can always provide a perfect product.
Overall, to support our store operation, we produce almost everyday of the year. And we have an incredible record for 2013 to produce almost 20 million lenses across all the network including China. Our operational strengths which are embedded in our Luxottica DNA allow us to attain high quality product always to continuously introduce innovation and to arrive faster to the customer. And we will see some of those result in the next slide.
We are the leader of this market. We are leading this market in terms of product and processes. We have an incredible internal R&D department. We have engineering department and also we are in partnership with our supplier. We are investing a lot in terms of team capability and in terms of technology, so that we can always be at the leading edge of quality product and service on the market. We have digital surfacing technology, we created dedicated Ray-Ban prescription lenses. We have optimized prescription range for high sun frames. We have gradients lenses, we are developing new full color in high-index lenses.
So Luxottica optical manufacturing continuously introduce breakthrough product inside the market. And this is driving the growth of the category. It’s bringing to the North America consumer greatest product so that the consumer can have the best eye care that is possible to provide in terms of technology and also to the consumer, we can allow them to have a great premium product.
In the last three years, we have launched more than 120 new lens type. So as Erika [ph] mentioned before we introduced the first in LensCrafter many years ago the FeatherWates lenses, so polycarbonate lenses and polarized polycarbonate lenses. LensCrafter has been the first to introduce polarized gradients lenses and now we are expanding that the range to new material, so that we can enlarge our spectrum of performances.
We have an incredible portfolio of premium lenses. More than 50% of our growth is coming from digital lenses. That technology is new revolutionary technology that is available in LensCrafter and Luxottica since 2008. And we are continuously updating that bring a new high-definition lenses to our customer. so very recently in LensCrafter, we introduced a new digital lenses so-called Enhanced View lenses, EV lenses.
In Oakley, we are going to launch in the next months a new Oakley True Digital Edge lenses. Those lenses are the most technological advanced in terms of progressive and single vision design for our customer. we are using a pattern technology that is exclusive for LensCrafter that is able to reduce the thickness of the lenses, virtually eliminate operation for the progressive user, expanding the prescription range for the sun lens user and providing the best clarity and the best image contrast available in the market.
Ray-Ban lenses, so we created a specific Ray-Ban lenses. This is one of this in two version, we call RoX plus. So RoX is the standard Ray-Ban lenses that is supported by a internally design marking technology that is available to provide genuine logo and color for Ray-Ban RX branded lenses. And then we have the premium version as that is this one, that is called RoX plus, so it’s high index digital surfacing lenses combined with the state-of-the-art edging technology, so that we can provide a plano sunglass look to the RX user.
As I said, we are at the state-of-the art in terms of technology. and this capability position looks optical manufacturing as is the player that is able to provide the best and fastest new product into the market. our R&D capability support lens surfacing treatment, with the superior performance, so we have a great, anti-reflective coating, and we have anti-scratching superior coating that is only available into our store, also we have in our central lab, the most advanced lens shaping technology, so that we can create a perfect fit with our frame and lenses.
Also, we are deploying inside 410 LensCrafter store, a new technology for anti-reflective in one our, so that we are able to drive incredible increase in demand for premium lenses with the shortest amount of time and we are going to expand this technology into additional 90 store by June of next year. and now we are deploying into some LensCrafter store the digital surfacing technology, so that we can offer the most premium lenses in one our service.
Finally to provide a full digital experience to our customer, we implemented the AccuFit technology, which is our digital measurement system. So AccuFit is able to provide five times more accurate spectacle fittings and the AccuFit is fully integrated with our lens manufacturing system, so that we can collect all the data and we can provide the manufacturing of a perfect customized lenses.
All the investment that we did in the recent years are reflected in much higher penetration of premium lenses in our store compared to the competition, if we look at the statistics in North America industry, I guess we represent more or less 5.2% of the total volume; in RONA, we represent a little bit more than 11%; in LensCrafters, we represent more than 14%. But we are not only driving the innovation of the technologies, but also, we are driving efficiency while meeting the customer demands.
So let me share some result in terms of customer service and operational excellence. So service to customer means arrive faster and better to the market, which is key for us and from the early stage of each order, we monitor each phase, so order processing, manufacturing timing, packaging, delivery to store, dispensing to customer so each the single phase is track it, monitor it, analyze it and improve it, and this allow us to bring a time to market reduction of 30% in the last three years and it’s not finished, we are anticipating at least a 28% improvement in the next three years.
And the two big enabler of this result are first we have really an amazing call center that is interacting everyday with our consumer in a multiple way telephone, web, mail, social network, live chat. All the way that this are supported by the different technological platform in order to have a better communication and second we have a very strong information technology competencies which is the backbone of our supply chain for store to lab connection and therefore we can leverage on technology such as iCloud computing or mobile device inside the store and inside the lab, so that we can use them to display information to capture orders, to monitor the status of the jobs and even to make surveys so that we can collect these data, we can analyze this data and we can provide and improve with the purchasing experience day by day.
And therefore we can see those results are reflected into customer satisfaction increase since 2011 by 40%. Then operational excellence as I said, operation excellence is embedded in the Luxottica DNA. So we uncompromised of quality, we are always thriving to get a reduced defect across all our process, we have the most advanced equipment available in the market in many case we design those equipment, we have a specific processes that are tailored for our different material that we process in our labs. We have the most advanced testing equipment that are able to capture the performances and the properties of new less material that we introduce in the market and most important we are supporting the growth of our people so that we can lift up the edge of our performances and therefore we were able to reduce our defect rate in the last three years of 40%.
Amazing result and then applying lean methodologies we were able to adding continuous improvement, reduce the stock, having continuous flow of material into our lab so that we were able to achieve more than 40% productivity increase measure in jobs per hour in the last three years and is not yet done.
So to arrive to the conclusion, quality, consumer centric perspective, continuous innovation and announcing the capability of our people those represent the pillar for driving more amazing results in the next years and I wish that you can get little sense of that through the next video.
Thank you for your attention and now let me introduce the amazing leader for Pearle Vision Srini.
Grazie, Girogio. Good morning and thank you for your time, and thank you for coming over. Here at Cincinnati, before I start I want to close your eyes, close your eyes for a moment and think about an emotional connection. Think about a young doctor, think about a doctor who emotionally connects with you and most importantly talks to you about your eye health, about your wellness and about your life. You can open your eyes.
Ladies and gentlemen I’m Srini Kumar, I’ve been less than two years with Luxottica and I am here to talk about a man, talk about a man who started a journey 50 years ago, one store, five employees, a town called Savannah, Georgia. His name is Dr. Stanley Pearle. Stanley Pearle created genuine eye care in this industry. He revolutionized the industry five decades ago, it will be too long for me to talk about what he accomplished in five decades, but I want to touch up on a few key elements.
Within two years, he took the company public years later, he led an advocacy to the Federal Trade Commission, which fundamentally changed the optical industry in North America, What was that called? It was called the eyeglass rule. What was eyeglass rule? Well, first, he allowed doctors to advertise their services, pretty cool thing and on that back. Second, most important in Pearle we call it patient centric, you would call it customer centric, he allowed patients and customers to take their prescription and go for choices where they could get genuine care huge, huge.
He didn’t stop there. Early 80s he started a new innovation within this category and I come from franchising background for over 20 years. He created a first franchise optical chain. Didn’t stop there, he created the first managed vision care, $5 a year annual membership, that’s it.
So, obviously this man was well ahead of his time, well ahead of his time that obviously investors followed a great company to invest into, but it was not till 2004, we genuinely believe there was a true partnership, why a true partnership with the company, which you very well now called Luxottica founded on the same principles, founded on genuine values of taking care of eyes in a different fashion. Founded with the exact principles of a man who vision and had a dream very much like Stanley Pearle. So that was the history that was the journey. That was the emotional connection. That was what Andrea kind of talk you this morning.
Now it’s 2013 we had a new team, what are we trying to do we call it the next chapter, a chapter which is actually return that it goes back to chapter one a journey back to its roots, a journey back to its roots with Stanley Pearle founded this organization, founded this chain on genuine eye care that’s what we stand for that’s what this journey is all about. So what it entail Mark talked a little bit about it in his presentation.
It’s started by really understanding what our doctors said, what our customers said, what our patient said. On the one hand more importantly in our case it was also about listening to our franchisees, our franchisees tend to be both doctors and non-doctors or opticians and some investors. Listening to them, and they told us one simple thing get this brand back to his roots genuine eye care, genuine eye care from a neighborhood doctor that patient will always go and see that was one.
The second was okay, we clarify the brand positioning embrace that romance that and bring it into life. So, we brought in a simple change, we actually followed a logo, which was done in 1978 by Stanley Pearle, we brought back a retro effect of Pearle Vision.
We bought in a simple optical mnemonic. We brought in something that we should be proud of, we are the only chain in the optical world who could claim established in 1961. So that’s we did, but I would really want you to understand what is genuine eye care if that if I can have the video please.
Thank you. Genuine eye care from your neighborhood doctor, a promise that was started 50 years ago. Most important words eye care first, glass is second. Take care of your eyes, guess what you’re going to buy the glasses. That’s what we stand for, that’s what this revolution or of getting back to its root is all about. Now that was one differentiation today’s marketplace is about brands being differentiated, differentiate or die is what people say. So we have done that, but we also within Luxottica want to differentiate it in another fashion. A differentiation on what we call a business model differentiation and what was that is called franchising. It’s the largest employing workforce in the United States and the growing category around the world.
We believe there was this industry is ready for a change on innovation within this business model. Why the 30,000 providers, there is no exit, franchising could provides you exit. Second, if you build a franchising business founded on listening to the operating and making them successful based on that profitability we call it unit economics you have an asset like scalable model.
So that’s the next journey where we put together putting governance models, listening to our franchisees and doctors and making it a doctor centered brand. So what were the doctors looking for? We went to optometry schools and listen to them, listen to the 30 year students and 40 year students, what were they telling us, they were telling us Pearle Vision, well, you guys are taking back to genuine care, help us run a business. We’re doctors; we want to take care of eyes. What does that mean well, we are in the retail business, help me select the right vendors, frame manufacturers negotiate for us.
I do not want to have capital invested in my store on a lab help me, provide a lab service, what better company to provide those services but Luxottica. So we have a team today working with the wholesale team that actually services all our franchisees with special terms for our doctors, for our opticians within our store. Working the Georgina’s team and some of the other partners in the lens manufacturing, providing a compressive solution for doctors, so differentiation on brand, differentiation on business model.
The journey didn’t stop there. We set bring it back into life within the sprit, bring that sprit into four walls, bring that genuine care within four walls, transform this experience. So the team and I went across the work again last year and it came up this summer, testing what we call eye care center 1.0. It’s a transformative experience where the doctor will speak with you as a patient.
It is a transformation experience where there is a beautiful smooth transition from a genuine doctor for a patient now walking out and romancing product. We have actually call it, the eye care center 1.0 because we’ll move the doctor forward. No longer do you have to walk through an aisle and see the doctor behind, you will romance the doctor right in front. With that I want to share with you our new concept eye care center 1.0 if I can have the video please.
So thank you I hope you could see the work we have been trying to do in differentiating this brand, both its business model and its experience. But this was the journey which we have worked not only with very smart minds more than me, we are working with our partners which are doctors and opticians, our franchisees, working with this together with them in creating this wonderful dream.
Wonderful journey what I said is at the beginning of my presentation close your eyes and dream about the doctor. Dream about the future what this category can do? Dream about a category that a doctor who comes out of school now has an opportunity to build a business, and be a business man and scale it u, through franchising.
So our future, very simple initial dreams build a thousand store network because we like a word called $1 billion, that’s the first, second we will take it globally, through franchising. Before I close when you get a moment I know you travel light, there are couple of baskets right next to the coffee area, the back. If you care to understand the little bit about our journey, we got a little bit hand out, we got a little coffee table booklet, you may like to use the USB which says Pearle Vision pick it up, no obligations take it it’s right there.
And now I would like my privilege and pleasure to introduce a friend and colleague of mine. We call Elizabeth Digiandomenico much easier Liz Di.
I hope my name is going to be as easy as my presentation today to tell you a little bit about insurance in the U.S market space. So I love to start out with EyeMed vision care and to how one of the common questions I get is how do you fit into this family of assets for Luxottica. But before I’m going to answer that question, I think I need to do a little bit of for some of the non-U.S folks. What is managed vision care in the U.S.? So let me start with this, first let me define it, it is the way we deliver vision insurance benefits it’s a delivery system for vision care needs, eyewear and eye care is that simple.
And what we try to do in managed vision care is we want to manage the quality and the cost of the eye care and the eye care services. So how does that work? First you have a managed vision care company carrier, EyeMed is a managed vision care carrier, while we are responsible for doing what we love to do I should say is we build networks. And we negotiate prices, discounts on eye exams, contact lenses and prescription eye wear.
And there is about three or four of us in the U.S market that have about 80% of the share. How we sell? We have two ways we sell. We sell direct to the client, and who is our client? It’s generally the HR Director, the HR VP of an employer group, what they are responsible for is creating that portfolio benefits for their employees whether it’s medical, whether it’s dental or whether it’s vision.
So we have about 10,000 direct clients, okay 9,600 I’m rounding up. But we have about 9,600 clients, where we’ll go direct to the employer like a Home Depot. But we also are fine with working through health plans. We are for those that do understand the benefit industry, we’re the administrator, and we’re happy to work with the top three out of five; five health carriers in the U.S. that would be Aetna, WellPoint and Humana. And, so how does that work, so they’ll go out to the employer group and say let me offer you a bundle medical offering. Oh, let me through in vision, let me through in dental, let me take care of your total body.
So in that situation we’re still the administrator, we still negotiate the discounts for the vision benefits, and we still supply the network as to where the members can go. But our distribution is those two primary ways, then obviously, we have providers, those that provide the services in the managed vision care space.
Just to give you perspective our largest network is called Access. It has 22,000 doors, about 5,000 of those doors are retail doors and the rest are independent. And obviously of the 5,000 retail doors, half of those doors are RONA doors that you’ve talked – heard about today. So what we really proud of in our network is we have a diverse network. We believe Americans those that want to buy managed vision care have a right to choose between retail and independent.
But at the center of this ecosystem is the member. They are the one that will utilize the benefit, they are the consumer at the retail optical North American stores, and there are about 36 million, close to 36 million, we have in EyeMed Vision Care that we’re proud to serve today.
Let me tell you one thing about this managed vision care member. Here she shops about 2.1 times a year. A repurchase cycle of 2.1 versus a non-insurance customer is about 2.5. First, what I would say is huge opportunity. If in America, I can get my teeth clean two times a year. I should get an annual eye exam. So, I think an EyeMed one of our objectives is to help, educate that member and getting there annual eye exam. And committed to reducing that from 2.1 down to something closer to one, but that’s kind of the ecosystem.
So, let’s talk about delivery. Health insurance, Americans get their medical through managed care as well. So as we look at vision insurance, what EyeMed does. Selling vision insurance you have to look at the health insurance, the medical insurance side. So, how do Americans get health insurance they get it three ways; they get it first through their employer, sponsored. The HR Director, the HR VP deciding, what am I going to offer to my employees. They also get it through the government, I am sure you all are aware of Medicaid and Medicare. When I talk Medicaid that is aid for the poor, and when I talk Medicare that is care for the elderly. So there is over 94 million people they have some form of government subsidy for taking care of their health.
And then, finally some Americans get it through the individual. But, you can see about 80% of Americans have some form of medical insurance through managed care. And then, 49 million that you see that’s the uninsured, that’s called Healthcare Reform. Right, what we were trying to do and we are still trying to do is to make sure Americans have a right to a medical insurance, and I think you saw last week, we opened up our public exchanges, you couldn’t get on it, took you nine hours, but we did open up the public exchanges. And again what’s the purpose is to make sure every American has medical insurance.
Now, if you look at vision insurance on the other side, you have about a 130 million covered lives. 40 million again from government sponsored Medicaid for many children the government will sponsor, get your eye exam and get a pair of glasses if you need it. And there is also 19 million through our employer sponsored, again going to the HR buyer and making sure vision is part of the offering for benefits. But, there is a big grey area their called uninsured individuals and significant, but 179 million Americans don’t have either don’t needed, they don’t buy it or they’re using it – they are not getting their annual eye exam, and that’s the opportunity. One of the questions I commonly get is, do you see Healthcare Reform as an opportunity for you? And I say, yes.
One of the things that government did have said, any time you sell a health package in the U.S. starting in 01-01-14, there will be 10 essential healthcare benefits and guess what one of the them is a pediatric benefit. So anytime a healthcare product is sold in the U.S. on these public exchanges are for any employer group less than 50. This will be embedded in the group plan design, for a child under 19 to get an annual exam and a pair of glasses. So that will be embedded in the health plan or the medical plan, but given that we partner with Aetna, Humana, Wellpoint and several other resellers. we will have access to this pediatric benefit and we truly see there is an opportunity.
Okay. so have we been winning in the marketplace, if you allow me just to boost a little bit. as you see on the chart there, the industry – the managed vision care industry has been growing about 1% every year from 2009 to 2012. And I’m proud to report that EyeMed has grown about 11%. So we’ve grown our market share from 19% to above 25% of this 135-ish million covered lives. And I’m happy to say that it’s about close to three times that of our largest competitor who has 37% of the market share.
So I think what’s more important is, why are you winning. And I think it really comes back to the customer centric focus. What our customers tell us is, what differentiates EyeMed and there’s really three things: our network, they love having access to retail and to independence, they love the value proposition in the premium they pay for the benefit that they get and they love our customer service.
We know that 24x7; they can touch our benefit through our web, through our smartphone, whatever you want to make sure you understand your benefit, where to go to use it and what your benefit is. So that’s a little bit about winning for us. but I hope here and this is the real important point. It’s not just about winning in the marketplace; it’s about winning for Luxottica and fitting into this ecosystem of Luxottica and how do we do that.
So I told you, we have $36 million, close to $36 million in Americas, okay, I should say over $35 million. But every time one of those members chooses to use their benefit. 40% of the time, nearly 40% of the time, they will use one of our company owned locations.
To use their vision benefit, 60% of the time, they will use an independent location or another retailer on our network. But the beauty of that is, even if they go to an independent location, we don’t require our independence to use or put frames on our board to be on our network, but the member chooses it. So in that situation, we also create value for Luxottica that an insurance member came into an independent location and bought a Luxottica frame.
So that’s kind of the value proposition is some of us – somebody when they said, you’re a traffic generator for Luxottica. I guess we are, but what we look at is we’re really just trying to make sure Americans have access and get annual exams and user their vision benefit.
So I couldn’t have a closing chart without telling you, we love our 10,000 clients, close to 10,000 clients. Here are some of the clients that we have and I don’t like to get comfortable. So I still say we have plenty of room to double that over the next several years, but I know what it’s going to take, because in EyeMed, we don’t make anything.
I keep telling my team, we don’t manufacture anything, what we sell is our service and our value proposition. But we know that innovation will be as extremely important to what we do. And so just a couple examples of what we’ve done for some of these clients. One of the things we did is, we optimized our web, mobilized – optimized it whatever, so that you could get access to us 24x7.
The second thing we did is we’ve rolled out of kids program and we have several companies that have chosen to offer that to their employers where a child can get an eye exam two times a year, because they’re all using their smartphones everyday, every moment and their prescriptions are changing very frequently. And the third thing we did is we had uh-huh moment. We’d learned in about last year with the home depot client that when we offered an upgraded plan and enhanced plan, 65% of the time they chose it and they used it more and they loved it more.
So we learned that, we did some focus groups and we’ve now introduced, what’s called eye prefer, so when you go out and make your annual elections that we all will be doing than part of Luxottica will be doing annual elections for our medical dental and vision, we’ll be offering a three tiered program. I won’t go into the specifics of all three tiers, but that third tier says, maybe you need to buy vision insurance for two pair of glasses everyday; one clear and one sun.
And so we’re really excited to see what the results of that will bring. And then finally on my excitement level was, there’s a lot of assets in Luxottica we have not tapped into in terms of this insurance space. So I’m sure you’ll hear about a lot of them today and I am really excited about the partnership that we can create with some of our power brands and see how we can dial up our plan design and our member experience, maybe the omni channel experience for the future.
And I’ll just leave you with one thought that probably inspired me the most. We were doing a focus group and one of the focus group members said, you know, I see EyeMed as kind of, you got that competitor over here is the Microsoft and EyeMed can be the up and coming Apple. And I am sure I am not going to be creating the next generation iPad., but what I will be doing is figuring out how to delight our members, our insurance members, our EyeMed Vision Care, so that we can continue on our passive growth.
Thank you very much. Hope you enjoyed your insurance education today.
Thank you, Liza.
It is a coffee break now. Sorry. Right?
So we’re right in a coffee break and then we’ll start again at 11.15.
Ready to start again the presentation and now we are moving to the Sun business and I am pleased to introduce Fabio d’Angelantonio discussing about the Sunglass Hut.
Gracias, Alessandra. Good morning, everybody. So how it works? So Sunglass Hut, here we go, is a nice story, nice story to tell. I hope pretty consistent with our – the story we told in the past years, hopefully not boring. We know in Sunglass Hut, we’ve been talking in the past presentation we’re very clear about what our brand stands for today. We are very clear about what our operating model is. So it’s a story of execution, its story of growth, while maintaining the right attention to adapt to the different geographies we get into.
Sunglass is – Sunglass Hut is about fun, is about energy, is about dynamism, what we trying to create is stories about fashion and sunglasses is about is instant gratification. So we try to get people into game, consumer attract consumer into the game and this way drive conversion. What we sell, we shall feel good and we feel good about the business that we are achieving this year in 2013. So Sunglass Hut is still growing double-digit. Sunglasshut.com is in the range of high single digit and if you also – our conversion score is growing in every single geography as well as our consumer equity metrics, both equity and satisfaction are as high as ever, which is a super result for us.
We went – in the last 24 months we opened more than 500 stores. In the last 12 months, in 2013, we entered in Chile, we entered in Germany, we entered in Malaysia and by the end of the year, we should be able to announce another couple of Asian countries in which we are closing agreements. So very happy about our global journey on, what we call, the Sun [indiscernible], so growing beyond the existing geography in LatAm, Europe – Latin America, Europe and Asia. In every single geography this year, we are growing comp mid single digit or above, so initial growth everywhere around the world, very happy about those results.
The story we try to present today is about North America and our team will try to explain and give a little bit of size of the growth and in the same time being clear about what the recipe has been for this growth, which are the three key elements, which is product, which is our people and our experience, and which is the brand that have been producing this growth. But on the other side, I think, even more interesting for you trying to portrait clear avenues that we see as opportunity. Premiumization, we’ve been taking about that. Andrea mentioned is how many more customer – consumer we can trade up from under $50 sunglasses to a premium sunglasses or normal price sunglasses, I will say premium is already an overstated word.
The second female customer, how many more female customer we’re going to attract in Sunglass Hut. Third is our department store and general host opportunity, fourth is our real estate expansion, fifth is Sunglass Hut taking full profit, all digital opportunities are connected with consumers. Those are really the objective today, being clear about the recipient side and the growth avenues on the other. I will ask to see a little film about how sunglasses art is growing in a sunny way around the world and then I introduce the rest of the team.
So it’s my privilege to introduce one of the team members that I had the privilege to work with. So John Haugh, General Manager of North America; Edward Kummer, Global Leader of E-com; and Luca Lo Curzio, Global Leader for Marketing for Sunglass Hut.
Unidentified Company Representative
[Indiscernible] Fabio. Welcome everybody. Thank you for coming to Cincinnati. It always looks like this. It's a fantastic place and we are glad you are here celebrating with us. If you look at our business, if you look at where we have come from 2010 to 2013, we are up 36%, we’ve added 7% stores. So the top line growth has been amazing. It's been outstanding. It's been one of the best performances in retail. In 2013, we anticipate kind of mid-to-high single digits on top of three years of double-digit comp, which again, will put us in the top tier of where American retailers are. We feel very, very good about that. The other thing that we feel strong about is our growth is coming from AUR, Average Unit Retail. It’s what our driving our price up and we’ll talk more about premiumization, but we’re also getting more transactions and we are improving our conversion. So we’ve got a good, balance of where growth is coming from, we would like to say we are bringing sunshine to this business. So if you look at where we have come, if you look at our progress, it’s a result of some deliberate actions we have doubled our marketing expense in the last three year, Luca Lo Curzio will talk about that we are bring in more customers to our brand and strengthening our brand, we have made significant investments in capital, we spent more than $100 million in the last three years, this is meant that we have remodeled stores, we’ve improved our foot print, we’ve had it easier for our customers to find us and purchase from us.
We have also spent significantly in digital it being omni-channel. Edward will talk about this, but we have brought technology into the stores and we’ve brought technology to our consumers that has also driven our business and finally our front-line what really differentiates us in the marketplace our associate base. We have paid our front-line 33% more in the last three years; we have increased what we paid them by 33% in the last three year. So if you think about what is more marketing get to, what is more capital investment get to and what this paying your front line more get to, its give you 350 more basis points of profit over the last three years, something we are very, very proud of and it has turned our business into something that is strong, that is resilient and that is ready to continue to grow for the next decade.
When we look at what works in retail is product, people buy product, people buy our sunglasses. Its starts with where we are with product, our challenge, our opportunity, our team literally choses from tens of thousands of frames. Tens of thousands of options are out there, our average stores hold about 850 frame. So what we have to do is curate tens of thousands of options and put the right curation, the right selection, the right offering in the stores for our associates – excuse me for our customers to come in and purchase.
What we have to do is, we have to balance classic product like Ray-Band Aviator, which while classic continues to be invented with folding with new lens, in fact this holiday we will have a solid gold aviator in our stores that retails for about $3500, which we are very proud of, that’s premiumization feel good about that.
We also have something we call fresh flowers. Everybody who knows retails knows that new products are really the life-blood of retail, we will introduce 1600 what we call NPIs New Product Introductions into our business this year. 1600 new style, new SKUs will roll into our stores, what that allows us to do, our customers expect from us to have the latest, to have the exclusives, to have things that can’t find anywhere else by continuing to bring this newness in these fresh flowers into our business, we deliver and we exceed expectation of anybody in sun glass business. We are the authority in premium in fashion sun.
We also change our front doors pretty frequently; frankly very frequently as often as every two weeks, we are a high impulse business, we need to catch consumes eyes when they walk in by our stores through the malls. So we invest significant dollars in changing those windows making them pop, making them to come to life. What that does is drives more traffic indoor store which ultimately drives our business. When a customers enters the store then we need to tell stories, then we need to merchandise. What we need to do is, tell the customer what is behind a Bvlgari frame; we need to tell the customers what it means to have a Chanel on your face. We need to tell the customer how cool it is, we need to tell the customer about the performance in the lens technology in an Oakley. We have to do that through our merchandising.
Finally, we have planing and allocation department that lives by a really simple rule, right product in the right store at the right time in the right quantity, which sound very simple. Fortunately they have all kind of algorithms and things like this that make it happen and we have a team that is second in to none in term of moving product in and out of our stores effectively and efficiently. I would argue this is probably our secret weapon, our associates; we have 1300 highly engaged highly energetic associates. You got a taste of some of them this morning when they greeted at you; we have regional vice presidents nine of them who lead the country, two of those regional vice presidents started as part-time associates more than 20 years ago and today are some of the most important leaders in our business.
Our magic is really our culture, 86% in our recent associates satisfaction survey indicated that they were highly to be with our business our people love our business, we don’t have help on it signs in our we get who we want to work in our stores, we are really, really fortunate, but I think what’s also important in addition to the passion and the energy and the magic is a methodology. We introduced something about a year ago called Sunglass Hut experience is very simple, but we think it’s very powerful.
First step, invite. We welcome the consumer into our house, into our store. We ask them what they’re doing on the Saturday. We’re not trying to sell them right away. Is their football team playing today? Where do they get the handbag they’re carrying? We create a little bit of a connection right away before we sell them anything.
Then we engage. What engage means is why are you in today going on holiday, going to a class reunion? [Indiscernible] last pair of sunglasses, but we want to understand what might have brought them into our store today. they might just be browsing, but by understanding that we can have a better connection with them and have a better chance of selling a pair of sunglasses.
Then we interact. interact means that’s kind of where – that’s where we make our money, that’s where we try to sell something. We have what we call styling tray, we put five or six different frames in that styling tray and we encourage the customer to try them on. We’d tell them when they look good; we’d tell them when they don’t look good. We’d tell them that this is a good frame. This is the history behind the frame and then we try to sell them the second fame when they buy the first frame.
Finally, we appreciate. Our frames are $150, $250. We have an Oakley Pit Boss right now in our stores for $600, when you put that baby on; you look like a rock star. You are ready to conquer the world, so we thank the customer for being with us. we thank them for buying the Oakley Pit Boss and we’d tell them to get back quickly and tell their friends to come back.
Our success has been the product, has been the market they’re talking about, and then it’s the associate front line. The final piece I will tell you on this is our associates are very, very, very performance driven. When you walk into our stores on our tablets behind our POS is exactly where the store sits today. Every store knows every store day, what their plan is for the day where they’re sitting on conversion at that minute, what their AUR is for that minute and several other key metrics that we measure.
About a third of what our front line people make is variable. So everybody is in the game and everybody, every single day knows whether they made their number yesterday and whether they’re going to make it today. So this results driven culture has also been a big key to success.
With that Luca, I’m going to ask you to come up and talk about market.
Luca Lo Curzio
Good morning to everybody. So few words about our brand and about our marketing strategy, let’s start from the brand. Our mission is clear. we think Sunglass Hut wants to be the authority and key destination for fashion, premium and style sunglasses. We wan to build an intimate and close connection with our customer. We want to delight them, we want to excite them and we do believe we have a very unique and solid positioning into the market.
When people shop with us, they feel good. Basically, they have fun, they play with – they can play with different style, they can play with different personality. so in one word, we say, they can find their cool. So find your cool is our brand promise and is what make us completely different from anyone else into the market.
As you can see from the picture, Georgia May Jagger is our brand testimonial, is our brand ambassador. She’s a very strong enabler to communicate our positioning and she truly embodies our values. She is savvy, sexy, inspiring, fun and real. So this is the position that we have in the market and this is what we can propose to our customer today and we think it’s the base of our success.
In terms of marketing strategy, we have doubled, as John said, our marketing investment in the last four years. With 2000 stores and almost 90 million people working in our doors every year, we’ll average our stores as the most powerful media channel. One-third of our marketing investment is in our store, is in our retail merchandising, is in our window, is on all the tool we put together to tell some stories to our customer about product and about brand.
Obviously, we have changed our marketing mix in the recent years to become more and more digital and to target our younger customer. Today, we invest 35% of our marketing investment in digital and we plan to move this number from 35% to 50% in the next three years.
Other two important pillars of our marketing plan are CRM and PR. So our CRM program is a fantastic opportunity for us to know better and better our customer and to build our relationship with them. In terms of PR we have a solid and strategic strategy, because PR should allow us to be perceived in a more consistent way as a fashion authority not only in sunglasses market, but in all the fashion accessories market.
The last point I want to show you is about a research we did in U.S. in August we usually do this kind of research, the brand tracking twice per year in U.S. understanding how health is our brand and what’s going on into the market. So as you can see our brand awareness is really high, it’s almost 97% on our fashion female core target, which means that nine of ten people thinks to Sunglass Hut when its comes to buy sunglasses.
And half of those have put shape sunglasses in Sunglass Hut at least ones in the last 12 months and even more important for me half of this people are completely and extremely satisfied which is the top box satisfaction, top box number about the customer journey they had. So this number as you can see our growing fast and if and are even better upon our fashion female core target which has Andrea and Fabio said is the real strategic point of difference for our future growth.
Now I can ask John to tell you a little bit more about our gross strategy. Thank you.
Next we will go. So let’s talk about premiumisation I’m going to give you a couple numbers. There were 18 – all right premiumisation perfect thanks. there were 18 million frames sold about $50 in the last 12 months. There were 80 million sold below $50. We don’t play in below 50 bucks. Our game is premium we have an opportunity move some of those 80 above $50 there is a big, big opportunity for us.
Second point I want to people to understand we categorize our stores by platinum, gold, silver, department stores, outlet, and of course e-commerce. Our platinum doors the AUR in our platinum doors is 40% higher 40 about 40% higher then our department store business.
So that is a big opportunity for us. When we look at where we can go and how we can premiumize this business we are going to spend the next three years with the define strategy to say not only what we continue to have a storng amazing Ray-Ban and Oakley business, but we are going to drive luxury or going to drive fashion and were going to in cent our associate or going to spend our energy or marketing dollars and drive premiumisation.
The second thing I would tell is Polar. Polarized, Lancers are simply the best Lancers that you are going to put in Pearle sunglasses and our four price business were about 55% Polar which is fantastic, we made great strides over the last few years were up about 500 basis points and that measure this year we think there is continued opportunity to grow our Polar business and every time we sell it Polar frame versus non-Polar frame we add about $50 its about $50 up charge when we add Polar is an overall.
So remember as we increase our AUR premiumizing, selling more fashion in luxury as well as driving more Polar drives our AUR in every 100 basis points of AUR as 100 base points of comp and when we drive our comp we have a very, very good business. Females, in a category were about two-thirds of the businesses women about one-third is guys were about 50/50, a little bit better than 50/50 we are making progress we use to be actually even more guys, we have an opportunity here. Mark mentioned handbags.
Let me talk shoes, I think 10 handbags is crazy let me talk shoes. Women on average have 21 pair of shoes and 10 handbags and 4 watches and only 3 pair of sunglasses. What is wrong with you? We think there is a big opportunities to build the sunglass business. If you think about sunglasses and if you think about wardrobeing [ph], we want every customer to have a blink pair. Think Bvlgari, think Chanel. Then you had better have your minivan pair, all right because shouldn’t be driving a minivan in Bvlgari, should be wearing Tory Burch or Coach really good strong brand. Then you have to have cool pair Ray-Ban cool then you are going to do something sporty and you are going walk, you are going to Lululemon, you are going to play tennis and what else you do were besides Oakley at a minimum you need to have four pairs of sunglasses and we think as the category leader we have an opportunity to build this wardrobe and to build this accessorizing of the business, we sell when you go into a mall often times as a store we are brands that you can’t find anywhere else in the mall Chanel, Bulgari, Tiffany, Prada, Dolce. For many of our customers the Chanel frame they buy from us is the entry to Chanel frankly for many of our customers it will probably be the only Chanel item they ever purchase. We have a tremendous opportunity to bring these brands to consumers and to make them feel great when they’re wearing a brand like a Chanel, like a Bulgari, like a Prada.
So our market is centered on women, we dramatically over face if you go into our stores, we dramatically give more shelf space to our fashion and premium business, our associates are incented and driven to sell this, we believe right now we’re at the early stages of what many other categories have done which is to premiumize their category.
Next, let me talk about department stores. Our expansion is kind of at an early stage but we’ve actually been doing this for a little while, we started with [indiscernible] back in the 90’s is now part of the Federated Macy’s business. In 2010 and 2011, we added about 450 more doors that gets us to about 700 doors within Macy’s. Macy’s is you probably know largest department store chain in the U.S. about $27 billion, our relationships that Macy’s run very, very, very deep. Terry Lundgren, Jeff Gennette, Peter Sachse that the top management are all friends of our business and very happy with us, but every single store manager also considers us critical to their success.
In fact when you look at lease or licensed operation is Macy’s take a biggest one they have, multiple times three that is us. We are three times bigger than their next biggest license operator, so we do this business very well in fact in the last four years, we have quintupled the business 5X, quintupled the business and we think there is a lot of opportunity to still grow, we will grow it through more marketing, we are it is where that you see a Macy’s communication piece catalog we were not involved in part of, we will do more direct marketing, we are taking more of their windows and street locations and we’re doing more cross store marketing the latest number we had said Macy’s consumer only about 33% still knew there was a Sunglass Hut in the store, so as we tap into their database and they are very good at database marketing we can build our business.
Second we will continue to develop product for the Macy’s sunglass to Macy’s customer, we develop what we call caps of collections two, three times a year and they do very well they are only available at Macy’s, next we are continuing to remodel and relocate when we inside of Macy’s can remodel, update the store and relocate it’s silly good news, in fact in Fashion Show at in Las Vegas we remodeled and relocated the other day we’re running a 51 comp done in South Beach we remodeled and relocated, we’re running a 110% comp in Westshore in Tampa we remodeled and relocated, we’re running a 74 comp, now these are three, four, five months in but pretty good strong results.
We continue to work with the Macy’s management team and know that we have got a lot of opportunity to continue to improve our real estate inside Macy’s, we also have two more things what we’re working on men store, we have about 12 of them right we will continue to look for more opportunities to have Macy’s men and then we will end of this month open our first luxury boutique inside the new Macy’s Herald Square store where we will introduce some brands that you normally can find in our Sunglass Hut in Macy’s. So we feel we can continue to grow that business but we’re not just stopping at Macy’s we’re also in deep discussions with several other best in class retailers to help them with their sun business.
Finally I’d like to talk about real estate, when people say what’s your biggest marketing expense they assume it’s print media, digital to look us point a couple of minutes ago the reality is our biggest and most strategic marketing expense is our real estate, we buy we rent stores in the main part of the mall, main in main centre court, centre pitch and what that does is it allows hundreds of millions of people to walk by our stores every single day, so what our team does is fights every single day and it is a fight to make sure that we have the best locations in the mall, one store, two stores, one mall we have six stores when we had a store in a mall, we get incremental business always, always, always accretive to our business.
Our real estate though was focused on four areas number one to increase our size and presence in the top malls in America, number two to go after the megacities, Andrea mentioned megacities before Manhattan we have 19 doors in a city of 8 million people 19, we think there is tremendous opportunity there as an example.
We will also continue to take advantage of any outlet development that happens, outlet is a very good business for us, interestingly for us we manage it very, very well and we have a strong percent of full price business in our outlets, we feel good about that and then our flagships.
We have right now 10 flagships in the U.S. as we designate them. We think there are still some more opportunities, and we’re going to continue to look at those and there is one more piece of real estate that is critical to us, our design compliance. As we have grown, as we made acquisitions over the years, we have too many stores that don’t look like we would like them to look that don’t present our brand as well as we like it to.
We will spend energy in the next two to three years to increase our design compliance and every time we bring an old looking store up to a more contemporary looking store. Our comps are very strong and it’s a good return on investment. So real estate for us would continue to be a big priority and something that we will focus on in the years to come. With that Edward can I pass it to you?
Thank you John, good morning. Sunglass Hut is on a journey to become a fully integrated digital retailer, plus all of our consumer touch points. We are investing in the technology to ensure that we’re connected to our customer where ever they are. We’re investing in trade of solutions to help better romance our brands, engage our customers and drive our business.
And we know that this expertise and technical innovation allows us to know our customer better. And therefore communicate with them better and be more relevant to them. And all of this digital consumer centric view that we’re building, we believe the real power is what John talked about are store footprint. We think that differentiates us from others and allows us to provide fantastic experience.
This experience will ultimately transcend our channels and exist in social media and other web touch points that will come in the future. We have done a lot this year in digital to help expand that connection. We’ve invested in Omni channel, what we call Experience 360 which is our iPads in our stores which connects our web to our stores and essentially gives each one of our associates and customers in an assortment, which is every Sunglass Hut and Sunglass Hut at Macy’s now has the full breadth of assortment of one of our flagships as well as online exclusive they don’t get elsewhere.
We are investing in digital windows and our best stores in order to better romance our product and draw people into our stores in Times Square we even installed the ability for our customers to buy 24x7 via special Sunglass Hut, vending machine, and in the same store our flagship. We also put in a 20 foot what we call ball that allows us to really give a consumer experience that you can’t get anywhere else.
We’ve done a lot to both grow the e-com business, as well as improve the customer experience. I mentioned the in-store connectivity to our website and that not only fulfills the promise of our customers would get exactly what they want when they walk into our store. We’ve also found that the average unit retailer of those purchases are higher than either store or the web individually.
In the last two years we more than doubled our e-commerce business. In September, we launched the Australian website and we will continue that global expansion, next year with Brazil and the U.K and all with the goal of becoming 5% to 10% of our in-store sales.
Unidentified Company Representative
So let me stop a second, I hope we succeeded in telling the story we wanted to tell on a side is a growth story in North America, so we’re very clear about our pillars, our backbones, our key ingredients of this growth are that the people, the brand, the products. So that the three components of this growth on the other side our avenues for growth, our opportunities for growth are equally clear to us.
So premiumization is an opportunity to drive people up more female having the same mix of the market that sunglasses has attracting more female customers, consumers, as we’re doing every single year. Department store and host opportunities representing opportunity, real estate, quality, quantity, megacities, outlets, it’s a tremendous opportunity to see out there and all the opportunity given by digital exertion and digitalized the relationship with customer and experiencing store.
So I hope those five came through as growth avenues pretty clear. I want to touch on a couple of point before leaving. Flagship strategy, we’ve been talking about – Fifth Avenue opening and [indiscernible] we have the Los Angeles. They are prominent. We had Miami and then we had SoHo, still in New York, and then we have London and then this year, London Oxford Street in, sorry, London Oxford Street and then London Covent Garden and this year we opened Times Square. Some of the stores are simply big stores, which already a good news, so in a big store, we can make more money than in the small store, fantastic, but some of them are really becoming more and more flagship in the sense that are opportunity to announce the brand, but also to make the brand reach the new standards in terms of design, in terms of experience, in terms of technology, so they are real labs for us to explore new opportunities.
If you go today in Fifth Avenue, which recently remodeled, is really the place where we can do, I think we deliver the best premium experience in sunglasses in the world with many different way to talk stories about premium and even with the luxury higher end store. Today Times Square is by far the more digitalized store we have in the chain. We’re probably one of the more digitalized store in the world. Certainly the biggest sunglasses store in the world.
Why we do this? We do this, first of all, to celebrate a category. So we want to announce the sunglasses categories as a [indiscernible] sunglass for the company, but then we also want to elevate or give stature to the brand itself, which is compared and also in a metrics about what consumer is thinking about us. And third I think is a super opportunity for us also to change and build our image towards developers.
So just to tell an anecdotal story, but I think pretty relevant on the context or the flexible strategy for us, when we announced internally the company that Times Square was open, I think the more insightful mail arrived from our Hong Kong leader that runs Asia and the guy wrote back to John, say guys you don’t know how many doors this store would make me open in Asia, because it really give stature to the brand in front of consumers, both in front of the real estate community and together with Times Square and Covent Garden we have two corners with highest traffic in the world. So we have a film to see about Times Square and then we go closing.
The flagship store in Time Square is a fantastic vending machine outside. So even the store is opened from eight in the morning till 1 o'clock in the night and when we go sleeping, we are still selling sunglasses, which is good. So just to close, I think I go back to the overall story. I think sunglass has clears today what the brand stands for, our strength and also what are our opportunities in the biggest countries, in the new countries and even very clear what could be future opportunities for new countries to get in. So we know where we go. The team is now being a strongest today, investments behind our operating model are coming and we are doing the right things to produce this growth.
So our focus is under 50% on execution. Consumers are telling us clearly, they appreciate the brand and they appreciate the experience and the relationship with the brand, which for us at the same time, our best price and our biggest reassurance about future business and future growth. So I think this is really, the numbers are pretty clear about where we see our journey to go.
and with those numbers clear in my mind, I pass the word to my friend, Colin Baden, CEO of Oakley. Thank you.
So it’s not quite afternoon yet. just on the odd chance that some of you don’t know who Oakley is, I thought we’d start with a brief video and then we’ll be right down to it.
So Oakley was founded in 1975 as an idea, and the idea was that everything in the world can and will be beaten at some point and what’s started as a small one car garage sport performance handgrip company for bikes has grown to become a global leader of optics.
2014, next year will be our 30th anniversary of inventing sport performance eyewear, we invented the category and it was a heroic moment when Greg LeMond won the 1990 Tour de France wearing the eyeshade. Our core, we’re an innovation and technology company, we obsess about it, and as you saw on the video, we tend to look at things differently. And you look at the slide that I have up right now, those three key words resonate with our culture in a very unique way and I know you’ll be doing a store tour and I think it’s going to be great that you interact with one of our associates and see how those words inspire his passion for our business.
If you think about those three words, I know, if you know the brand you immediately assume that, I must be talking about product and product design. But it’s really talking about every thing that we do, and it’s really our culture, our work, our style, who we ask to represent us in the world that create these inspirational moments.
And if you know us as maybe a great brand in sport performance, really the sport performance aspect of our business are our true authenticators of our disruptive style. Without them we don’t get the credibility that the great work that we have as happened. And as when we are truly disruptive and creative as a company we inspire our athletes to have create their own disruptive and inspiring moments which in turn inspire our consumers and to want to be part of the club.
So, today we’re going to dive into a couple of our key pillars, our key growth pillars, it’s optical and hopefully retail and to help the accomplishes I brought our Vice President of Retail, Eric Schauer and he is going to dive into a little bit to how we bring the consumer experience to life in our own retail.
So, let’s start with Optical. The U.S. is our largest market. It’s also a region with our greatest brand awareness, 74% in sun and 20% in optical. 2013 will be our fourth consecutive year of double-digit sales growth in optical. And were our current U.S. market shares sits, low single-digits.
So, if you look at the numbers on the slide the opportunity is huge. Since we launched our first optical collection in 2000, we have grown the breath of the opportunity to include both frame and lens and the same unique approach that made it successful in sunglasses is making a successful in optical for both men and women.
So, lets talk about some disruptive products in optical. This is Crosslink. And before Crosslink if you wanted to wear a sport performance frame in an activity, you have to buy a dedicated frame and if you wanted to wear that frame to a business meeting you might look a little odd, you might want to show up in lycra. So Crosslink created an opportunity to fuse the two. So if you were wearing a pair of frames at work during the day they actually had the features and benefits to help you workout in the afternoon.
If you look at this frame, it’s very similar to what you see in our men’s – in our sun product. It has Unobtanium ear stems to help you grief when you slip. It has three point fit. It has an O Matter Frame which is lightweight and flexible. It has Unobtanium nose pads, so again it stays secure to your nose, as a 6 base optical lens, so it offers some peripheral protection as well.
And then if you want to change from clear to a tinted lens we have options for that as well. So, in 2010 we launched Oakley True Digital and [indiscernible] will speak a little bit about the quality of that lens. In 2011 we updated all our IR codings to new technology, parse the period anything we had in the past. And then in 2012, we launched True sport optics, so specific lens for specific sports like cycling and golf. The lens that we’re going to launch in Q4 of this year, we talked about a little bit earlier is, it is Oakley Edge and what happens in prescription is because of the high rap of our product, people with prescription corrections over plus four or minus four, they’ll get lenses that look like bottle bottoms. They are really inelegant and so, to get thorough that, to actually reach the 90% of the consumers we need to invent a new platform and build a lens that could actually not have that un unpleasant side effect and the distortion that comes with high corrections. So if you could play that video?
So before I hand it over to Eric, I wanted to talk a little bit about Optical in our own wholly-owned retail platforms. We have a test that we conducted early last year where we actually built an ophthalmic frame destination in our stores. And the test was so successful we rolled it out to an additional 13 doors for a total of 14. And in each case we put one on these destinations, we had a double digit incremental sales growth and if you think about the retail construct it really changes the dynamic of the seasonality of our business where we actually now have a business that really is 365 days a year.
This image that you see on the screen, this is our store in I believe San Francisco, actually yeah, San Francisco. And we actually hire an optician he works at the store. We utilize the similar digital platforms as you heard from Mark and John’s team. And basically you can have a complete consumer experience interacting with Oakley product with true Oakley lens technology.
With that I will turn it over to Eric.
Unidentified Company Representative
Oakley retail presents quite an opportunity for the Oakley brand. And typically when you think of Oakley you don’t necessarily think of a retail chain. Oakley has had a retail of brick and mortar stores for the past 12 years. You will consider it to be a quite mature business. But the growth potential of Oakley in the retail business at Oakley is in its infancy stages. We are fortunate to have an opportunity that we can almost double dip in the success, a) financial success. We are quite successful in our return on investment capital and the amount of money that we invest into our retail channel. But b) representing a single brand and having an opportunity to immerse the customer and give them a glimpse of what Oakley is about.
It creates loyalty and it creates one more Oakley brand fanatic which is what drives our success. Give me some pictures, first and facts. Retail stores from a U.S perspective, we have a 158 in the U.S. and as we look at the globe there are about 210 by the end of the year that are specific Oakley stores. They average about 2000 square feet, they are little bit larger than the rest of the retail chains that you’ve heard today.
And our business encompasses about 68% eyewear and 32% accessories, apparel, footwear. The uniqueness of the brand and the opportunity for the brand is that the customer can walk into an Oakley store and they have an experience and they are able to immerse themselves very quickly into the Oakley brand. The customer walks in, they are greeted by the brand fanatic which is our associates and we’ve hired a team of people that are passionate about Oakley, that love the brand and it is part of who they are. From sports performance eye wear, lifestyle eyewear, apparel performance, apparel accessories everywhere you look it’s all about Oakley.
We build fixtures that are specific to the brand to graphics. As you look through the store there is heritage pieces that give you an idea as to the disruptive design that we have. There is a story to tell everywhere you look. You then turn to the left in all of our stores and we’ve got a customer experience that is unheard of anywhere else. What we've had in our stores prior to next year, we've provided 150 unique customer choices to built, but as we move into 2014 the customer can walk into the store and they’ll have 750 unique customer choices.
From the frame that you choose to the lenses that you choose, year stocks, those pieces, icons, you can even etch your lens. The customer walks in and they can truly digitally build with the associate as well as physically build eyewear that is specific to them and their performance needs. It’s pretty amazing. All of our customers love it and the majority of them take advantage of it. It’s a large portion of our business for retail.
The growth opportunity throughout Oakley we have mall based Oakley stores, optic stores. As Colin spoke to you briefly, we have outlets, flagships, you’ve heard all of these discussed, but I want to speak to one that really speaks to the emerging of the brand, it’s important to what we do.
If you look at the picture on the right, we built a store in Angel Stadium. So if you think about the emerging of Oakley as a brand and representing the brand, 50,000 people again walk into a major league baseball stadium for one game. Over 3 million people in one season, it’s a captive audience, typically lot of dads with their teenage boys walking in to watch a game. They head down to their seats with some food in hand, they sit down and they look throughout the field and everywhere they look they see their hero. Most of the heroes are wearing Oakley eyewear. Day games the majority of the teams on the both sides both angels and otherwise are wearing Oakley eyewear.
The cool part about what we have here, we built a store within the stadium that they have the ability to do exactly what their heroes are doing. So between innings they can stand up, go grab a hotdog, walk over to home play and we built a store that its built around the spots bar, but it’s a custom bar. They can continue to watch the game, they can sit down with our brand fanatics and digitally build any eyewear that they would like within the stadium. Typically it matches what their hero is wearing out on the field.
They build it digitally, complete the transaction, our associates are helping them all along the way. They then head back to their seat and they’re watching their hero. The cool part is 15 or 20 minutes later, especially during a day game our associates shows up at the seat with their eyewear bill and ready to go, anything that they built digitally with the tablets around the bar they have in hand. Now they look exactly like their hero sitting in the stands as they watch the rest of the game. That’s truly a brand emersion that we try to accomplish with every Oakley store that we build.
I would encourage you as we you go to the Kenwood locations tomorrow take some time to talk to our associates, take some time to talk to our brand fanatics they truly encompass who we are as a brand to retail and what we provide for the customers it’s a pretty amazing experience. The opportunity here is incredible. Thanks.
Unidentified Company Representative
Thank you Eric. Thank you all for the very helpful presentations. And we are now ready to take you question.
Allegra Perry – Cantor Fitzgerald
Thank you for all the very helpful presentations. Allegra Perry from Cantor Fitzgerald. Just one on LensCrafters please, I was wondering if you could give us a little bit more details around the 1400 store target you mentioned for North America perhaps little bit more around the timing of that and if how much of that will be in the U.S. and how much will be in other markets. Thank you.
Unidentified Company Representative
So, Allegra, the opportunity is there, so we have been very clear and clean saying what is the objective for Sunglass Hut in the number of stores adding for Sunglass Hut there is an opportunity. So for quite a time we have thought that was no more opportunity for more stores for LensCrafters and we have understood that there is space and I think that as usual we need to put things in a priority list. I think we are in an unbelievable journey of experience transformation that goes from eye exam to the digital measurements to the manufacturing of lenses and to the fit and being able to follow our consumers even when they are off in those famous 18, 24, 36 months. And I think this is the priority number one we have.
The priority number two is moving, on catching the opportunities we have and it’s mainly easy opportunities, because we’re talking about the main 10 cities of United States that is where traditionally LensCrafters has been absent. And therefore, I don’t think that there is a target for 1,400 by a certain year, but the new thing for us, is that we got the opportunity. And probably in the next six, nine months we will be able to say we’re going to cover this by this time and cover this by this other time. So we don’t have a plan today for that 1.4.
Daniel H. Hofkin – William Blair & Co. LLC
Thanks, Dan Hofkin, William Blair & Company. Just following up on LensCrafters, if you could just may be quickly summarize what you think has been one or two sources of the more uneven performance last year or two and what you think are the biggest opportunities whether it’s technology, or other aspects of the consumer experience to improve that?
Unidentified Company Representative
So first of all, LensCrafters profitability in 2013 is the second best ever in our life. So sometimes you grow faster, sometimes you mange your profit and loss better and the third time which is the best, you do the both. We have managed our profit and loss much better in the last one, two, three, four, five years, always better. And understanding a huge profit and loss, the architecture how to move investments, how to be efficient on other lines, entering the world of labs, lenses, jobs. And I think that we have become very efficient and very clean and clear on what we have to do in order to enhance our profitability going forward. So this is clear, clean and done.
Now you have very strong brands that sometimes have to go back and re-understand and rethink on how to take the contemporary their pillars, their main assets. The two main assets of LensCrafters are innovation and convenience. I think innovation, and you will see, you will prove it to yourselves, is there, is visible, people see it, people appreciate it. I think we lost a little bit of the convenience.
I think that we have been a little bit “arrogant” in terms of convenience. And convenience is many different things, is being available where malls and cities have moved. Is finding – doesn’t mean value driven, it means the proper offer, the proper proposition for all American families.
We have never been something else this is who we are. This is our millions and millions of consumers are asking us. So I think that innovation is visible, touchable, admired. I think that we lost a little bit convenience, and I also think that when you know your problems normally and I think we’ve proved it over the years, we know how to fix them.
So we’ve gone through a generation change, we’ve gone through a technological evolution, we’ve gone through a technological breakthrough. I think that there are many things we have done. And we are missing this part and this part especially certain periods of the year are pretty big in terms of volume driven. So this is where we are today exactly.
Bassel Choughari – Joh. Berenberg, Gossler & Co. KG
Hi. Bassel Choughari, Berenberg. I have three questions please. The first one is on Sunglass Hut in the U.S. mainly. By 2016 how do you see this both U.S. versus international? The second question is mid-term, how do see your online sales evolving more driven by brand website or more like Sunglass Hut website? And the last one, given you’re talking about the U.S. maybe you can give us an update on Armani Exchange, where would you like to see that going?
Bassel Choughari – Joh. Berenberg, Gossler & Co. KG
Such a detailed question on…
Bassel Choughari – Joh. Berenberg, Gossler & Co. KG
Yes, but it’s on the U.S.
I will. I will try. Do not know if I am able on Armani Exchange.
Bassel Choughari – Joh. Berenberg, Gossler & Co. KG
So I can give you an update on Armani. Let’s start from here, which is easy and very happy I think that we say that in March and July, I’m repeating again now. It’s moving. It’s moving as we wished with the right combination between men and women, between prescription and sun. So extremely happy of how we have been performing on Armani and obviously as all launches the first year is basically done. Now we need to go to the second and as you all know the first three, four months of the second year are the critical ones. We are going to comp against the selling in period. You need to have a good sell out. So you need to have good reorders, you need to open the right stores. So that’s the point.
Armani Exchange is the third brand of Armani and it’s probably 5% of total Armani and probably could be 10% one day. But let me say we are totally focused and emerged in Giorgio first. We need to get it right, we need to get it positioned right, we need to get the right excitement. Then we moved to Emporio and then we will take care of Armani Exchange as well.
Regarding Sunglass Hut, USA, international and online Sunglass Hut versus brands, my answer is pretty similar. Obviously this plate should be bigger international compared to U.S., but if U.S. fantastically, emotionally, wonderfully continues to grow at 6%, 10% comps it’s very difficult looking to the volumes of that thinking that the ratio can change. So as Fabio was saying, we’ve entered two, three countries a year. We will continue to do that. We said a year ago that we would have entered Mediterranean Europe and this is what we are doing. And as you know, when the job will be completed that will be a huge market for us. So I really do not know what will be the ratio. Normally should expect U.S. to be 5% down in the ratio. So today, where is it 80/20, Fabio, where is it 80/20 U.S. rest, 75/25? Probably it would be 70/30, 65/35 at the maximum.
In terms of online, I think it’s two completely different experiences. So Ray-Ban is moving global. Oakley has already moved global. Sunglasshut.com, as Edward was saying, is moving global. So I don’t care what is the ratio between Sunglass Hut and Ray-Ban and Oakley. What I care is that they are number one, two and three. You pick how they are.
Luca Solca – Exane BNP Paribas
Luca Solca from Exane BNP Paribas. I wonder what the experience of competing against the Specsavers in Australia has taught you and what is the appropriate way for you to compete against discounted chains in markets where they are growing and does it imply necessarily a significant drop in profit and return on invested capital?
Looking forward, second question if I may, when you look at M&A opportunities, would you be having as a priority criteria to continuing growth of business when it comes, for example into investing in more chains or would you be having now higher priority for return on invested capital improvements? Thank you
So I think we know exactly the history of Australia. Australia has been a couple of years of tough time for us and partly has been the [indiscernible] entrance in that market and we have never hidden that. On the other side we had a very negative consumer confidence and consumer spending at that time. What did we do 2010, 2011? We have gone back to our pillars. We made sure that those pillars were absolutely what the consumer were asking us. We worked on what we feel is important eye care and technology, eye care and service and eyewear and I think we won the battle.
We came back, you have seen it we have seen it. We have seen the margins incredible improvement in 2012 and 2013. And there is no reason why we shouldn’t grow next year. If we were in Australia, in Sydney right now, we would enjoy a very social continuous event on how we are telling to our fantastic Sydney inhabitants there is probably time for an eye exam. And this is through a huge social event and going on for sometime in Sydney right now.
So in U.S. situation is very different, I mean as Mark was saying, Walmart has been there since ever, Costco have been there since ever, Target Optical has been – so the markets are pretty clear and clean. Everyone has his own job, everyone has his own homework. Someone is doing homework better than others. And I think that if you look to and also because of the insurance driven mechanisms there has not been huge changes in market shares in the last five to six years, between one particular way of doing the business to another.
In terms of M&A, I think it’s always a question of long-term. We always said one thing, that if we wanted to have net profit of 10% in 2014, we just stop investing in emerging markets retail networks and we jump immediately to 10 and above. I don’t think that is a good move. I think we need to have a good combination of excellent return on capital and a little bit longer term and be sustainable. I think this is the big lesson we learned in 2008, 2009. We were a fantastic growth story. We wanted to become a wonderful sustainable growth story. And this is what we are trying to do today.
Mark Friedman – The Retail Tracker
Thank you. Mark Friedman, Retail Tracker. Andrea, can you elaborate a little bit more on premiumisation within LensCrafter, it seems like there is a fine line between the goal of driving a higher price point, but yet given how LensCrafter sits in the market you don’t want to alienate that customers. So how do you achieve that?
I think it’s what I said before. This is the mistake probably we did. So we have gone a little bit too far and premiumisation I mean offering lenses of a certain kind, offering coatings of a certain kind. I think they had probably gone a little bit too far in that path. And this is a convenience topic I was eluding before, exactly this. So that equation is critical, that equation is so important in any retail business anything that we moved a little bit out.
Hi. What do think the incremental demand will be from the Affordable Care Act?
From the what?
The Obamacare or Affordable Care Act is more a folks getting trend.
I don’t think no one knows. In any interaction with any healthcare player with any insurance player everyone would say, let’s go and see. So for sure there is that group of Medicaid, Medicare that is today or tomorrow will be more solid. But I’ve got no idea and being a foreigner I asked a lot of questions but had no answers. No clean and clear answers, and if you have please give that to me.
Omar Saad – International Strategy & Investment Group LLC
Thank you. Omar Saad, ISI group, two questions if I could. Number one it strikes me on the prescription side of the business that as the category leader one of your goals especially given the lower levels of participation and eye exams one of your goals is to really grow the category. What are the techniques for doing this is – there is a category marketing and we think about some of the other kind of successful, kind of category leaders in other industry whether it’s Nike in athletics or I don’t know Colgate in dental care. You do have to do grass roots campaigns as a category marketing, how do we think about that and then second question is on the online business, are there technologies or you working on developing technologies to somehow integrate this idea fit and facial dimensions that people can kind of try on virtual glasses both sunglasses and prescription glasses virtually. Thank you.
Unidentified Company Representative
So regarding the growth of the category, I think that we have what is it Mark. How many millions of consumers in our database today, in with LensCrafters. It’s between 30 million and 40 million, and in the last 24 months we have seen the first initial fruits of a completely different interaction with the consumers at home.
Frequently you have to remember people that it’s time to go. And all of us wearing glasses we know that we should go, but between that moment and when we go, it’s between 6 and 12 months.
So on one side, the eye exam has to be a more pleasant experience, and on the other side our ability to talk to interact, to make people understand, and this is very much based on a personal base. Every consumer is different, but at the end there is five or six segments of consumers in front of us. And we need to find all ways in the different moments of the year and different moments of life of LensCrafters in the different moments in which we want to promote one thing compared to another. We need to have the proper way of talking and interacting with consumers.
I think we are improving, but we’re not the best in class and I think we have learned a lot and the team today I think it’s the best in class, and we can all improve from there.
In terms of online technology every week there is an improvement, so if you go in the different sites, if you go rayban.com, if you go on Oakley.com or even other sites. The way the virtual tie on is all is better and let me say we are very close to a 3D [indiscernible] and the experience today compared to six months ago, compared to a year ago is completely different. So it’s coming.
Julian Easthope – Barclays Capital
Yeah hi it’s Julian Easthope from Barclays. I have got a couple of questions please first in terms of Sunglass Hut. It has been such an immense success, and just wondered why you haven’t really got a proper competitor and why is this sort of know, was there a big barrier to entry, why have you been so successfully in keeping that as almost by itself out there. And just in terms I don’t know how to ask this question but in terms of – in the labs and I just wanted to how it works with Essilor or if it works with Essilor in developing the lens coatings and all those sort of things, what actually and how it actually interacts with them generally? Thank you.
Unidentified Company Representative
So Sunglass Hut is a secret formula Julian. So we cannot talk about. So the reality is that for a long time people have thought about sunglasses as a very seasonal objects. So people are just scared to enter seasonal businesses. What do I do in October, what do I do in November and if you – I mean probably, there are people that have been looking at Sunglass Hut for a long time, Sunglass Hut was selling watches and one of the first thing we said, let’s demonstrate to ourselves that we can be successful in October, November, February and March, which are the tough months.
I mean you could have stores almost 10 years ago that in November, we’re certainly zero in a day. and I think that that is the secret. we have been able to create a category, which is not seasonal any more, department stores are understanding that my usual joke about scarfs and umbrellas. This is a year long category and I think that we have been able to get it along.
The second point is density. people are scared about businesses where there is not enough density during the day and during the seasons. and again, we have been able with everything Fabio, when people talk about experience, even myself when teams are coming to me talking, we want to show you our new experience, we want to talk to you about our new experience in our stores and some times, my reaction is okay, another one telling me the story.
I think the Sunglass Hut has built an unbelievable compelling story and it’s feasible. I mean you enter a store and you are entering a theatre, you are entering something else. So seasonal density, I think are the big two issues for competition and I think that we solve them with very secret formulas that’s very feasible.
The second is about labs. Here is my usual answer. Whatever we do in our life and whatever Essilor in their life, we will find each other in our path. So it’s better to be partners and this is what we are doing everyday. Sometimes we agree, sometimes we disagree, but it’s a wonderful fantastic partnership and there are things we do with them, there are things we do by ourselves and there are things we do with our other partners, but Essilor was, is and will remain our main partner in lenses.
Julian Easthope – Barclays Capital
Thank you. I just wanted to ask you to put in perspective generally at the Luxottica level, the capital spending plan as we move into the next four years. it looks like and if you fold in the LensCrafters and Sunglass Hut, it looks it’s trade-off in terms of return on investment capital – of incremental, invested capital. So could you kind of tie up that and fold it into the Luxottica equation?
Unidentified Company Representative
Enrico, do you want to take it?
Yeah, we plan to maintain our CapEx in line with our sales as we did in the last three years and as you know, we are spending approximately 5% of CapEx. So this means that since we are growing the company at the rate of high single-digit basically also our CapEx spending would grow that much. and you should consider that already today, probably one-third of the capital that we spend every year is we call maintenance CapEx and the rest two-thirds and so the vast majority of it is just to give us opportunity for growth.
So this means that this will increase other time. And clearly, the mix of this CapEx will change. in the past few years, we had to spend a consider amount of mining in order to bring up to date our IT structure. and as you know, all the project that we have called SAP, transformation absorbed a huge amount of CapEx in the last three, four, five years and now the program is basically is coming to end.
So this means, since we are maintaining the same level of CapEx as a percent of sales as in the past, it means that we have now more money available to spend for – to fuel our growth opportunity. Clearly, all the digital world is there and they are shifting progressively our CapEx in that area. So we will continue to spend against our brand, we will continue to spend against our retail chain; we will continue to spend in order to fulfill our growth opportunity in the digital area.
Luca Solca – Exane BNP Paribas
Just a precision – its Luca Solca from BNP Paribas. When you said SAP has taken a lot of space in the CapEx plan, was it in the one-third of maintenance CapEx? That’s the first question. And the second question is totally unrelated, is with the Sunglass Hut and travel retail. Why is that at least in certain parts of the world we don’t see many Sunglass Hut stores in airports and at train stations?
Unidentified Company Representative
No I don’t consider SCP transformation plan as part of the maintenance CapEx. I mean we had – we have some fixed rate spending every year that is really what we need in order to maintain our city infrastructure, but SAP transformation project came on top.
Luca Solca – Exane BNP Paribas
How many airport are we in 2013 [ph]?
Unidentified Company Representative
Luca Solca – Exane BNP Paribas
85. And let me say the team as usual in companies sometimes you got overlapping interests, so we had a little bit of wholesale a little bit of Sunglass dealing with travel retail. We cleared it off and cleared it off a year ago. And I think that you will see many, many more Sunglass Hut in airports in the next 24 months. It has been a priority, is a priority and what is fantastic today is that the five or six main players are asking Sunglass Hut to be there. We don’t have to do anything. And we will be in Italian airports as well, just…
David Theobald – Global Growth Investments LLC
Hi I’m David Theobald with Global Growth and Investments. I’m a former brand manager and I love everything about your business, but I hate your value, your approach to delivery to the value customer. And here’s my – I have two questions. Why aren’t you are partnering with a winner like COSCO, as appose to Sears? And then the second question is, what is your exposure if Sears goes bankrupt and how do you manage the risk?
Unidentified Company Representative
So in terms of value customers, I would say that first of all is not our core business. I think it is the core business of others. And I think each of us in this specific world, each of us have a very clear homework to be done. The second part of the answer is we love the partnership with Target. And we feel that Target consumer is the perfect consumer in a journey of premiumisation in the U.S. world. Third, we like Sears, it’s not an issue of dislike, it’s a big number of consumers, it’s a big number of transactions and there is a great opportunity to a good job. In terms of your last question, obviously it’s a very special question, that is if it goes bankrupt, we can move away from Sears in our contract pretty fast and on the other side the EBITDA we are doing with them it’s in the region of 15 to – depends on the years $15 million, $25 million a year.
Matthew Benkendorf – Vontobel Asset Management, Inc.
Hi Matthew Benkendorf from Vontobel. You have a very strong history of acquiring brands, fixing brands, growing brands, expanding brands. I was curious why you haven’t done more organically with brands over the years given that choke hold you have on the distribution side?
Organically what you mean?
Matthew Benkendorf – Vontobel Asset Management, Inc.
Creating your own brand, in an industry where brands have been created out of thin air successfully.
It’s a good question. I don’t have an answer. We have built on things that we have acquired. I would say that we have not created brands from scratch and I don’t think that we are good at that. I think that we created contemporary Ray-Ban from scratch. I think we create that Global Personal from scratch. We’re creating Oliver Peoples globally from scratch. There has never been in our DNA to create initially a brand. So there is no answer because there is not even a thought about it and we’re not extremely good with small things and this could be a reason why we’re sometimes like an elephant in a jewelry and so probably we would not be the best in taking that journey. I do not know if Fabio has an answer on this or. Okay. He would agree with my answer, but the basic thing is that there is no answer. Allegra?
Allegra Perry – Cantor Fitzgerald
Hi. Two more questions on Sunglass Hut. Can you perhaps breakdown way you are expecting the additional 300 basis points in operating profitability improvements to come from, and then perhaps an update on your recently created Arnette division please.
The last question was?
Allegra Perry – Cantor Fitzgerald
Just an update on your recently created Arnette division.
Allegra Perry – Cantor Fitzgerald
So Sunglass Hut is basically two things, is leverage on fixed costs and the other part is gross margin. So the ability to work on a wider price range and constantly push on polarization. I think these are three and obviously the strongest we are. There are bits and pieces that we can do on leveraging on real estate. But the main two are the ones I talked about before.
In terms of Arnette, I mean it’s a wonderful story. It’s basically by December we finished the creation that is the integration of Alain Mikli. 90% of what we are going to – probably it’s too much, 80% what we’re going to manufacture in 2014 for Alain Mikli is in our sites. The IT system is one. The team is clean and clear. Integration is over. And let me say, since August is one team driving the path and I think there is a 20% increased opportunity next year and operating profitability will increase more than that.
The ratio is that it’s still small. It’s €100 million. But more and more, I think that this was a good thing to be done. More and more there is another world in the optical market. It’s a world of people that love style, love design, do not love logos, love a different story and consequently there is probably 5,000 stores in the world that love this kind of thing and I think that this is a new journey for them and for us together and I think there will also be opportunities to integrate other brands in the journey, not probably building new ones, but integrate other brands in the journey. It’s a wonderful story so far.
There is another question here.
You’ve been let to take a stake in the Italian retailer to keep them afloat and prevent them from going bankrupt. Could you update us on how they’re doing and whether you want to exit this retailer when they are getting better or you just stay there?
So the journey is long and let me say the Italian environment is not really helping to be more healthy. So they have to be more healthy themselves. They finished the year in September and basically they have substantially improved compared to a year ago, which does not mean that they are doing good. We are following them up, we are working on projects together and I think there is at least another 12 months, 18 months of work together before we take a decision on what to do next.
Italy is not performing well from a optical market point of view and the race, a number of players and assets which are scared about the future and this is the classic thing that is happening in Italy today and let me say also in Spain, people are scared by the future and so more and more people are coming to us and really understanding together with us what are the projects, what are the things, how can we help to navigate in this difficult world and what is good is that at the end Luxottica has been able to grow in Italy in 2013 even if the year is not over I am pretty positive that we will able and think about our first quarter in Italy how it was.
And most probably we will be able to be very close to breakeven in Spain as well. And in Spain, I would like to add another thing, we acquired some plan that we converted to Sunglass Hut basically 14 months ago and we went really far away from a certain kind of commercial policy which was buy one get one free, buy one and get a coke free, buy one and go to Madrid for free, buy one and whatever. And we went back to our dealers, we went back to Sunglass Hut dealers and the team has done an unbelievable job and today we are in the high single digit comps.
High single digits comps in Spain, I would like to understand how many other retail can save such a thing. So on one side going back to your question about sun, are they doing better but not good and on the other side, I think that when you are honest to your brand even in this counters you can do a good job.
Are we ready for lunch? It’s your turn Alessandra, if we don’t have anymore questions.
If there are no other questions, we thank you all for joining us here in Cincinnati. Thank you for the people connected in webcast. Lets go and have lunch.
Just stay, a small advertising piece. So for every one that is in the States you have one unique opportunity in the Christmas season, you can go in an Oakley store and have one of this. Who knows what this is? But why am I showing this to you? This is where Oakley started, motorcycle grips. Oakley invented a new plastic, so the more you start sweating, the more it will glue into your gloves and people were saying but why don’t we have some similar for our goggles. So if you in an O store in November and December, and spend enough money this is a wonderful gift for all of you. Thank you and have a good day.
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