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Luxottica Group (LUX)

Q2 2007 Earnings Call

July 26, 2007, 12:00 PM ET

Executives

Alessandra Senici - Head of IR

Andrea Guerra - Managing Director, Director Trade Activity and CEO

Enrico Cavatorta - Executive Director Trade Activity and CEO

Analysts

Lila Covey - Adjacent

Marc Festa - Exane

Flavio Cereda - Merrill Lynch

Daniel Hofkin - William Blair

Francesca Di Pasquantonio - Deutsche Bank

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the Luxottica '2Q07 Results Conference Call. My name is Stephanie and I will be your coordinator for today's conference. For the duration of the call you will be on listen-only and at the end of the call there will be an opportunity for you to ask question.

[Operator Instructions]

I will now hand over to Alessandra Senici to begin today's conference.

Alessandra Senici - Head of Investor Relations

Good afternoon and thank you for joining us today. Before we begin, first I have a couple of quick items to cover. As a reminder, a slide presentation, which we will informally follow during this call is available for download from our website under the heading Investor Relations' Conference Call & Webcast section.

This presentation includes certain non-GAAP financial information within the meaning of Regulation G under the Securities Exchange Act. Further information including additional information required by Regulation G is available in Luxottica Group's press releases relating to its results for the second quarter of 2007, which may be found on our website under the heading Investor Relations' Press Release section.

This conference call is being recorded, and is also available via audio webcast from our website Conference Call & Webcast section.

During the course of today's call, 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 projection or statement are based upon current information and expectation and actual results may differ materially from those projected in the forward-looking statements.

We also refer you to our filings 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's projection or forward-looking statements.

Before we begin the discussion of our second quarter results, I would like to note that we are limited in what we can say about the previously announced merger agreement with Oakley. Therefore, today's call... during today's call we will restrict our comments to the second quarter results. And we will not address transaction related question.

We will begin with our CEO, Andrea Guerra. Also on this call are Enrico Cavatorta, Valerio Giacobbi, Kerry Bradley, and Jack Dennis.

Let me now turn the call over to Mr. Guerra.

Andrea Guerra - Chief Executive Officer

Welcome all to this call. It is a pleasure to have all of you online for... to come online together... our second quarter, and therefore our first half of 2007. As we said during the first quarter call... at the end of that call, we told you that if the business would have continued as we have seen it in the first three months it was probable that at the end of the second quarter we would have upgraded our guidances looking forward full year '07.

So here we are, we are feeling fine about the second semester, we are happy about the first half results. The environment... the economic environment around us is a little bit tougher. On one side the US evaluation is almost there... US dollars evaluation. On the other side in this stage, there is not saying wrong, but there is a little bit of a slowdown in terms of consumer demand, on which I think we had good responses.

Having said so, we are feeling comfortable after our results, and also looking to July that we can upgrade our net profits guidance, always to have a reference point, even if it looks very far away in time, on a constant exchange rate on 2006, we feel that excluding any kind of non-recurring gain that we had in the second quarter, we can increase our EPS guidance to a plus 23, 25%. So we were at 16, 18%, positive at the beginning of the year. Now we are upgrading it to a plus 23, 25%.

Obviously then there is a currency effect, and if we take into account dollar euro at 1.35 for the full year '07, the increase in EPS in euro terms can be in the region of 1.08 to 1.10. All of the numbers and guidance I have given you are without the non-recurring gains, as we had in this quarter that refers to a sale of a real estate property here in Milan, Italy.

If we include the non-recurring gain, which is in the region of 3 cents, obviously then our EPS guidance moves up to €1.11 to €1.13. So we are looking forward to the remaining part of the year with positive eyes.

We are going through many different operational plans across different countries, across divisions, integrating the different acquisitions we have done during the last 12 months, rebranding many different retail stores, launching Polo Ralph Lauren, getting ready for the launch of Tiffany, the new worldwide advertising campaign of Ray-Ban, the re-launch in past.

So I think really we have a fantastic group of people engaged in many different projects in order to make sure that we are able to bring home our results.

First six months we are happy, plus 13% at current... constant exchange rate in terms of sales, 130 basis points on the EBIT margin, 21% up in net profit, plus 30% in EPS in dollars. I think that we have been really committed to execute our plans in order to be at this level now.

Looking to some more specific details related to second quarter '07, we had another brilliant quarter in wholesale to third parties at constant exchange rate again at plus 26. It's the 8th quarter in a row having a plus... over plus 20% in wholesale sales to third parties above 20%. Operating margin at our... all high for second quarter, 28.8.

And we will go through some of the main reasons why we are having such a good performance in wholesale. I have said it more than once, and I will repeat it now.

And I always invite all of you to look more and more to our numbers as a single company, and then we can go in the details of the divisions, but the more we are selling Luxottica branded products in our retail networks, that is surely helping our wholesale margins, sometimes maybe losing something in the retail margin. So, overall in the company, it's very profitable, it's very positive.

If we look into the two divisions, it's never accurate how the two margins are split. Retail, we are happy, plus... almost plus 7% worldwide increase in retail sales. Plus one very similar to what we had in the first quarter in terms of comps with very different geographic split. So, we have almost just less than 900 new stores in the last 12 months.

Some are organic openings, some are integration of acquisitions, and there has been a lot of work, there has been a lot of work also about something else that we would also talk about this evening, which is the ILORI launch, the new luxury sun... luxury retail network that we will talk about later. A good free cash flow, a net-debt to EBITDA ratio of 1.39. So I would like Enrico to give you some more details on our numbers now. Thank you.

Enrico Cavatorta - Chief Financial Officer

Thank you, Andrea. Just a quick snapshot on our number. A summary on page 6, number for the quarters. As Andrea was mentioning, first of all, let's remember that in this quarter the euro/dollar exchange rate was 6.7% worse than the same quarter a year ago.

Our net sales in nominal terms grew up 8%, it would have been close to 13% excluding the exchange rate effect, so very much in line with the first quarter. Higher performance in wholesale segment at 17.5, on a third party only, it has been much higher, have been 23.5% that will be 26% excluding the currency effects.

Lower performance in retail, 1%, excluding currency up 6.7, most of it due to the contribution on new store, and in fact our like-for-like sales for the quarter has been up 1.5%, so again very much in line with the first quarter.

If you look at operating profitability, our group posted an all-time high record margin for the second quarter of 19.8%. As we have said many times, we have included extraordinary gains. So taking this out, our operating profitability would have been 18.3%, so up 140 basis point versus same quarter of last year.

In the retail division, the profitability was down 160 basis points, and we will talk about that in a minute, when we talk about retail performance and why we had the dilution in margin.

In the wholesale, we had a full 100 basis points improvement, and the real estate gain has nothing to do with that, since we have booked that gain into the so-called corporate inter-company division. So, it's not affecting the profitability of... in either wholesale or retail, but just the total group level.

Our net income was up 33%, and again if I exclude extraordinary gain, it is strong and solid, that's up 22%. And our net income margin that is 11%, the extraordinary gain contributed for approximately 1%, so without that it would have been 10.7%, so 120 basis points versus same quarter of last year.

And the following page is the first half, but basically those numbers are very similar to the second quarter, so I would not comment on them for now. If you look at the assets and liability, balance sheet, what we can see is we had an increase in net working capital in absolute terms.

Now we should, if you look only at the so-called operating working capital, that is the sum of receivable, inventories, less payables, that was basically flat number of days as compared to June 30, 2006. And this was due to a improvement in receivables that went down 11 days versus a year ago.

Payable went up 11 days again versus a year ago. Inventory rose in by three days versus a year ago. But in any case given the different mix between wholesale and retail, and since the wholesale is growing much faster than retail, and as you know wholesale saw a much higher working capital.

We had an operating working capital that was flat in number of days versus a year ago. The reason why you are seeing such an increase in absolute terms is due to a fiscal effect, because last year we had a huge cash payment for taxes that happened in June.

For North American tax, last year was mostly non-cash payments due to some carry-forward losses that were utilized last year, while this year we paid taxes in cash. So, that's why we had a huge decrease in that for taxes.

Our net debt to EBITDA, as I've said is, 1.4, is down versus year-ago, that was 1.7, and up of course versus the December 31, '06. Let me recall that during this quarter, we paid €190 million... 190 of dividends, and also we paid €25 million for acquisition, mainly for our Indian tender offer, where we raised our participation from 44 to 70%, and for our two South African acquisitions. Andrea?

Andrea Guerra - Chief Executive Officer

If we look to the two different divisions starting from retail, on one side as we said from day number one, 2007 would have been a year of investments, of increases, of new stores, of rebrandings, remodellings, refurbishings. Probably we were a little bit optimistic in this market scenario to look to another what would have been the fourth year in a row of a 5% comps.

Probably we have been so... a little bit too optimistic. I don't think that we will reach that level in '07. I still think that a plus 2, plus 3 is still reachable. And on the other side, I still think that a breakeven with last year in terms of percentage margins in terms EBIT is still reachable. Considering we lost our margins, but on the other side, we have to integrate 3 or 4 different acquisitions.

We are going into a large start-up in China. We are growing and walking away from watches. We have been heavily working on this new retail chain, ILORI. So if we look to the different divisions and in different core business, our margin is flat or slightly positive.

So I am not at all worried about our retail activities and retail profitability. Obviously with all these stores, we have also been able to increase our overall sales in retail side by 6.7%. Just to give you an idea, it's a small number, but China sales were 88% above last year.

So ILORI, ILORI is a new retail brand. It's a response to this great growth of premium and luxury segments in eyewear. ILORI will be present only in North America. As you know, I always talk about the North America as being the real emerging market for luxury.

Luxury accessories is really one of the fastest growing segment in retail. We have been working quite heavily on this project. Sometimes, I have heard rumors that Luxottica in the past was not able to manage such a kind of retail network. We never had one, and I really think that we have done everything to work. Really ILORI is luxury at its best. We will have the first store in September in SoHo, just some weeks later we will have a second store in Los Angeles.

We will have so around 10 stores by the end of the year, to which we will add another 150 stores in the next two years. It's quite relevant in terms of... as I mentioned in stores, will be around 1 million and over per store, and our products will represent in the region of 60%.

We are really confident reorganization is... I think, is the correct one. We had, I think, a nice design concept. If you go to this in SoHo, you would immediately understand where we are based, and we are optimistic, we will work hard, we will be humble, but I think that there is a real great opportunity for Luxottica to be a big player in this part of the market.

Having said that, we go through the wholesale, it's very difficult to say specific what was good. I think, we were happy all across regions, brands, products, and as we go in the different regions, we are happy even where we have not been so happy with our Japanese results in the last quarter, we are a bit happy in the last two quarters.

Obviously, the brand portfolio is stronger. And the sell through in our stores, as I was telling you at the beginning, is higher. Ray-Ban is still performing at double-digits. All our luxury, fashion, and premium are performing well.

Just to go back... sometimes I think it's proper to go back to our wholesale evolution in terms of organization, I think, that we are compared to some years ago a totally different organization in terms of legally more to adapted like business model between mature markets and emerging markets.

Our strategy in terms of brand, in terms of distribution is quite different in terms of luxury brands on one side, premium fashion on the other side, and core Ray-Ban on the third side. We have really strong skews in key accounts and in new channels, department stores and retail sales. We are focused on the more productive doors. I think that we have closed in the last six months around 15 to 16,000 doors across the world.

A lot of marketing spending, much more investments in the brand, I think, this is quite visible across the world, and I think, even in terms of PR around movie, television, sports. And shows I think that we have literally improved in the last three years in these important activities. So, this is the quarter.

We are really happy to have some weeks of vacation that would start in 10 days with this result. So we are over. If you have comments, questions, doubts, here we are, and I give the word to the operator.

Question and Answer

Operator

[Operator Instructions]

All questions will be asked in order received, and you will be advised while you ask your question. Thank you.

The first question comes from the line of Lila Covey.

Lila Covey - Adjacent

Hi. Yes, I have two questions, please. The first one just on retail. If we try to expect a 2 to 3% comp growth for this year, given the first half, it implies the second half growth basically doubled. Is that feasible really just because the comps get easier?

Or are there other things we should look to as to why the performance could improve? The second question I have is about just Polo Ralph Lauren license, I just want to have an idea of how much it contributed to the wholesale business in the second quarter? And I'm correct in saying in the first quarter it was a very minimal? Thank you.

Andrea Guerra - Chief Executive Officer

So in terms of retail comps, the third quarter last year was a little bit less strong compared to the other three quarters. So I expect that we can do a slightly better job. I think we are really committed to improve in this second part of the year.

We have less work in terms of integration, in terms of rebranding, in terms of many different operational activities. So we can really commit and concentrate 100% of our time on consumers. So I am quite confident and I really hope that I'm not getting the second mistake on this.

Polo Ralph Lauren has become a real contributor and it's doing what we have to do. We're going towards the 100 million at the end of the year. Probably we are more in the region of the 95 million at the end of the year. Let's say that the old licensor has done a good job in the last six months... no licensee or licensor, they never know.

The people who have the license before has really done a good job. So we had a very strong welcome to the brand in many different part of the world. In some countries the market was a little bit blocked. We are seeing this rapidly changing in the last 45 days. So I'm confident and I am really optimistic about reaching 95 to 100 million at the end of the year.

Lila Covey - Adjacent

Can I just ask a follow-up question?

Andrea Guerra - Chief Executive Officer

Yes.

Lila Covey - Adjacent

It's just regarding the elimination. As you mentioned, it's more important looking at the company overall and because we continue to see the eliminations decreased as a proportion of the business, because you're selling more and more profitable products to your own stores. That trend we are seeing, should be expect to continue or should we think of a reversal, because --?

Andrea Guerra - Chief Executive Officer

We have gone through in the last nine months to a big project in terms of inventory decrease in our retail network business. This has gone through from November and will last another two, three months. So you will see that part decrease for another two, three months.

Lila Covey - Adjacent

And then come back up again?

Andrea Guerra - Chief Executive Officer

And then it is one of those very difficult predictable numbers and then should be... we had a large increase because we increased our rent, then we took inventory out and then we think should stabilize and this is likely positive, but we shouldn't see any more of those big swings.

Lila Covey - Adjacent

Okay. Thank you.

Andrea Guerra - Chief Executive Officer

Bye.

Lila Covey - Adjacent

Bye, bye.

Operator

Thank you. The next question comes through from the line of Marc Festa from Exane.

Marc Festa - Exane

Hi, guys. Good afternoon. Marc Festa from Exane BNP Paribas. I have two questions. Firstly, could you update us on your 2007 sales guidance approximately for the wholesale division. In January you had 15% excluding sales guidance and also a plus 22% in H1, what do you expect for the full year? And secondly just one-shot question on the new ILORI network, will you also sell Luxottica brands in the semi-luxury stores?

Andrea Guerra - Chief Executive Officer

So, in terms of guidance for wholesale, as we've said, probably retail will be a little bit lower than what we have said in the beginning of the year. Wholesale will be a little bit higher than what we've said at the beginning of the year. I really hope that we will keep up with such a reason that is really difficult to commit to such a result. In terms of products, I do not comment.

Marc Festa - Exane

Okay. Thank you.

Operator

Thank you. The next question comes through from line of Flavio Cereda from Merrill Lynch.

Flavio Cereda - Merrill Lynch

Hi, good afternoon. I have just one question in two parts quickly. For Sunglass Hut, North America, could you give us what the comp sales were please quarter-on-quarter or H1-on-H1? And also could you remind us roughly what the sell-through number or your sales Sunglass Hut run out now? Thank you.

Andrea Guerra - Chief Executive Officer

So, in terms of Sunglass Hut, North America, when we say Sunglass Hut worldwide, I mean 90% is Sunglass Hut in North America. We had in terms of Sun in the region of the 3.1% in North America that was made by a very good May, a very good June, and a very bad April. And then you were asking us, Flavio, about, sorry I forgot?

Flavio Cereda - Merrill Lynch

The other... the sell-through range.

Andrea Guerra - Chief Executive Officer

We are in the region of 65%.

Flavio Cereda - Merrill Lynch

65?

Andrea Guerra - Chief Executive Officer

65%

Flavio Cereda - Merrill Lynch

65?

Andrea Guerra - Chief Executive Officer

Yes, 65.

Flavio Cereda - Merrill Lynch

Okay. Thank you very much.

Andrea Guerra - Chief Executive Officer

Sure.

Operator

Thank you. The next question comes to you from the line of Daniel Hofkin from William Blair.

Daniel Hofkin - William Blair

Good afternoon. I was hoping you might be able to quantify or at least rank the order some of the high-end list that you talked about particularly on the retail side in terms of how much they would have impacted the operating profitability.

You mentioned new store openings obviously the reduced leverage on the comp sales softness and then remodel activity, acquisitions etcetera, it would just be helpful to kind of understand what the... how those were ranked and if you can provide some quantification on that?

Secondly, if you could talk a little bit about the expectations for the second half, I certainly hear what you're saying regarding being able to sort of focus more on the consumer experience, do you think that was an issue in the first half and I guess what sorts of things specifically do you think might be addressable on that end that would help get to a little bit higher comp rate in the second half? Thank you.

Enrico Cavatorta - Chief Financial Officer

Related to your question, we didn't have any specific issues in the first semester. I am just saying that we've gone through a lot of activities digestions and now everyone is back 100% on the retail store floors and getting everything there. So no, we didn't have any kind of issues. In terms of your first question, sorry but I didn't understand what you were meaning, sorry.

Daniel Hofkin - William Blair

I was just... thank you for clarifying that second part. And the first part I was just looking for some sense of how... what the relative importance was of the factors that you cited for that made operating profitability less than what it might have been, you obviously... the weaker consumer environment has some effect yet?

Andrea Guerra - Chief Executive Officer

I will tell you, immediately... our core business in terms of retail US, was flat in terms of operating margin. And we had some obviously start-up cost on ILORI and some cost related to the watch walk away [ph], we had the rebranding in the DOC that we finalized, did the rebranding in Canada that we finalized.

We had a lab closing in Canada and warehouse closing. So we had a lot of different activities. So but the core business in U.S. was positive. The other element is still obviously, as we said of the China... the China start-up, I think these were the two main contributors to the decline in the margin.

Daniel Hofkin - William Blair

In terms of... just a follow-up on that, how would those items have compared obviously you finalized the D.O.C acquisition in the first quarter. How would those various factors have compared in the first quarter. As I recall your underlying margin... EBIT, once you took out last year's gains, your underlying overall retail operating margin was actually up slightly?

Andrea Guerra - Chief Executive Officer

And in the second quarter we were flat up slightly. I mean, what I can tell you is really in the wholesale and retail our two quarters were quite similar. In retail, we had a low February and in this quarter we had a low April. And the same thing that should repeat in the same... in the two quarters.

Maybe I was so optimistic at the beginning of the year with all this integration activities talking about a comp of plus five also looking for the tightening of the economic environment in U.S.

Daniel Hofkin - William Blair

Thank you.

Operator

Thank you, the next question from come from the line of Francesca Di Pasquantonio from Deutsche Bank.

Francesca Di Pasquantonio - Deutsche Bank

Yes, hi, good evening. I have two questions as well, the first is very quick and is when do you think you're going to complete the Watch phase out? The second question is to go back to the U.S. consumer environment and if you could provide a little bit of more color as because you mentioned that was... that there was no specific issue, and probably that means that it was all a function of lower traffic in your stores.

But going back to your experience over the last years since you have been operating with LensCrafters for more than ten years, and Sunglass Hut for more than five years. Going back to past consumer down, do you think any... do you see any difference this time? Are we really going to see... is it really the first sign of more worrying developments to come or do you think it is still pretty contained?

Andrea Guerra - Chief Executive Officer

In terms of Watch, Francesca we are going definitely out by the end of '07. We still have around 40, 45 stores and some more combos. By the end of the year with the Christmas sales, we are completely out of the watch business.

In terms of consumers, when we look to the different segmentation in terms of stores geographically in the state and we look to different products segmentation that they buy in terms of lens, single lens, multiple, of course coatings. We're not seeing a change in terms of upturns.

I mean the percentages are even in terms of conversion in Optical and Sun are very, very similar to what we had a year ago. What happened is that, in ten weeks there s much less traffic than compared to before. This... there real issue that we're having.

And I think as our team was really efficient in really being able to climb up and take the hand of the Labor hours in this stores and in fact that the end of our margins were good. But anyway, essentially disgusting.

Francesca Di Pasquantonio - Deutsche Bank

But in your own experience, also looking at past events, is it lower traffic referred to signal that is impacting same store sales growth and we should therefore, we could therefore expect that like-for-like development is a little bit under pressure, or I mean, do you see any difference at this time compared to five years ago?

Andrea Guerra - Chief Executive Officer

What happened five years ago was definitely--.

Francesca Di Pasquantonio - Deutsche Bank

No. I know. But--

Andrea Guerra - Chief Executive Officer

Definitely a different story. No. We don't see any similar factor into 4, 5 years ago.

Francesca Di Pasquantonio - Deutsche Bank

And where do you think the... most of the growth should come in your US retail in the second part of the year from a same-store sales point of view? Is it still from... I mean, our volumes going to pick up, that's your assumption?

Andrea Guerra - Chief Executive Officer

Well, assumption is that the churn is going through an easier com in the second six months. I'm not expecting much from Sears and the Target, but as I think that things will more or less go on at that time in the first months. I'm expecting a better result in Sun and with LUX after still keep a good pace with some good activities that we have in mind for the month of August and then October, November.

Francesca Di Pasquantonio - Deutsche Bank

And do you think this is, I mean, this is the finest question I promise, do you think these change in the consumer environment could somehow change your premium price strategy?

Andrea Guerra - Chief Executive Officer

No. No doubt. Not at all, I mean, we didn't change one comma.

Francesca Di Pasquantonio - Deutsche Bank

Okay. Thanks.

Andrea Guerra - Chief Executive Officer

Bye.

Operator

Thank you. We have a follow-up question from the line of Lila Covey from Adjacent [ph].

Lila Covey - Adjacent

Sorry, it's Lila, again. Actually, it was already answered, but I did think of something else, which was just in the wholesale, which has been a very, very good performance for many quarters.

The one question I had though is, if Polo Ralph Lauren is picking up in terms of the contribution based on getting to 95 or so million for the year, then if you try and look at the like-for-like growth in wholesale, it does seem when you strip that out that there actually wasn't a noticeable slowdown even though it was still a very, very good growth rate.

And I was just wondering if there was something, maybe a region in particular or a brand in particular, or maybe I'm reading into it too much? Thanks.

Andrea Guerra - Chief Executive Officer

No. You are... last year, you had a gain an initial contribution of Dolce & Gabbana. So, if you strip the both, you have same growth.

Lila Covey - Adjacent

Okay. Even excluding Ralph Lauren?

Andrea Guerra - Chief Executive Officer

If you take in 2006 out Dolce & Gabbana and you look to the growth, if you are in 2007, takeaway for sure and look to the remaining growth, the comp growth, lets call it like this but they will never call it this way.

Lila Covey - Adjacent

Of course.

Andrea Guerra - Chief Executive Officer

Because I hope say it is another story, it's a similar amount, we are talking about in the region of 13%, 14%.

Lila Covey - Adjacent

Okay, got it. And just that your comments about the consumer environment, I mean, as we look beyond kind of this year to slightly more medium-term period, I mean, do you tend to see this really in cycles when you look at the historical performance of your business, it's kind of repeating a bit an earlier question.

But I wonder how... how much a lot of the efforts you've been doing in the last few months and quarters in terms of the store renovations and new formats, how much they can kind of offset what we see as maybe a more medium term threat?

Andrea Guerra - Chief Executive Officer

As we said, since day number one of 2007, we've had... we are doing all of this, and one of the reasons why we are doing all of this is because we were somehow, everyone of us was expecting some kind of slowdown. We were really protecting ourselves with a lot of new stores, with a lot of re-branding, and lot of refurbishing in order to attract our usual consumers and new consumers to the stores.

Obviously, the reverse question would have been, if we were not going through all those investment plans, where would we have been with our comps and I think that we are yet positive, I mean, we never have to forget as we come from, and if you take Q2 in '06 and Q2 in '05, we are really coming from a big region of comp sales increase and yet, we are a plus one in something. So I'm not negative. I am positive.

Lila Covey - Adjacent

Okay. Thank you.

Operator

Thank you. We have another follow-up question from Flavio Cereda from Merrill Lynch.

Flavio Cereda - Merrill Lynch

Hi. It's me again, just one question. For what you can tell us, where do we stand on Ray-Ban Sun Optics? Now, obviously, I've read that but what we stand in terms of control of the company, but are you in a position to say more in terms of looking forward what are you going to be doing there? Thank you.

Andrea Guerra - Chief Executive Officer

We're happy as we are today.

Flavio Cereda - Merrill Lynch

So you leave... the company stays bolted and you're not committing any particular CapEx or any particular strategic decision to develop back in any ways for the time being, is that correct?

Andrea Guerra - Chief Executive Officer

Today the situation is this.

Flavio Cereda - Merrill Lynch

Okay. Thank you.

Operator

Thank you, the next question comes to you from the line Daniel Hofkin of William Blair.

Daniel Hofkin - William Blair

Thank you. I guess, just a little more regarding the comp store sales. It sounds like, I mean am I correct in inferring that the slowdown has been exclusively traffic as apposed to any impact on average ticket. And if there has been some or even aside from that have you seen any signs of consumers particularly in the US trading down let's say to lower priced models particularly at sunglass types, anything of that nature?

And then secondly, going forward I guess what would you anticipate regarding just the sun business itself. I understand that you expect that to show a little bit stronger rate of growth in the second half given a little bit easier comparisons, but given that that is the more discretionary category what... how would you expect that to flow through? Thank you.

Andrea Guerra - Chief Executive Officer

Probably, we are also altogether, me as first, a little bit spoiled of our... what we have done in terms of cost. I know in '05 it was down, plus 5 and something in '06 globally in the states we've done plus... almost plus 8. And yet today with this tighter economy considering the only... I mean let's take away one second Sears and Target, we are in the region of 3... 2.8 comps positive.

So, if and I mean, I'm... we're fine, it's okay then... obviously, as I said at the beginning, and I take full responsibility of that. We were probably too optimistic again to save that five.

But I mean in the first six months with the tighter results and records and indicators are there in the market, we had a plus 3 with our core brand and I assure you that the comps we lost with Sears and Target were profit losses. I mean, we only lost things that we were not looking for. So, we didn't have any trade down, as I said all our indicators are very similar. We had in some weeks less traffic.

Daniel Hofkin - William Blair

Okay, No, I just was trying to understand a little bit more fully of the dynamics involved obviously understanding that you guys are continuing to take market share. So, it has been pretty much exclusively traffic and you have not gained any sort of noticeable change in the type of purchase when people do come into the stores?

Andrea Guerra - Chief Executive Officer

Exclusively traffic, I would say.

Daniel Hofkin - William Blair

Okay.

Andrea Guerra - Chief Executive Officer

Thank you.

Daniel Hofkin - William Blair

Thank you.

Andrea Guerra - Chief Executive Officer

Bye, bye.

Operator

Thank you. We have a follow-up question from Francesca Di Pasquantonio from Deutsche Bank.

Francesca Di Pasquantonio - Deutsche Bank

Yes, just a quick one, just to clarify, in your EPS guidance do you include any impact from Oakley?

Andrea Guerra - Chief Executive Officer

No.

Francesca Di Pasquantonio - Deutsche Bank

Not even the transaction cost?

Andrea Guerra - Chief Executive Officer

No.

Francesca Di Pasquantonio - Deutsche Bank

Nothing?

Andrea Guerra - Chief Executive Officer

Nothing.

Francesca Di Pasquantonio - Deutsche Bank

Okay. Thanks.

Enrico Cavatorta - Chief Financial Officer

Thank you, Francesca.

Operator

Thank you. We have no further question coming through. So, I will hand back to Alessandra Senici to wrap-up today's conference.

Alessandra Senici - Head of Investor Relations

Okay. Thank you very much everybody. And for any question, feel free to call us in the office in Milan. Thank you and have a good evening. Bye, bye.

Andrea Guerra - Chief Executive Officer

Bye, bye.

Operator

Thank you for attending this afternoon's conference. You may now replace your handset.

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Source: Luxottica Group Q2 2007 Earnings Call Transcript
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