Luxottica Group S.p.A. Q3 2007 Earnings Call Transcript

Oct.31.07 | About: Luxottica Group (LUX)

Luxottica Group S.p.A (NYSE:LUX)

Q3 2007 Earnings Call

October 30, 2007, 01:00 PM ET

Executives

Alessandra Senici - Group IR Director

Andrea Guerra - CEO

Enrico Cavatorta - CFO

Kerry Bradley - COO, Retail North America

Analysts

Luca Cipiccia - Goldman Sachs

Evian Rambo - HSBC

Flavio Cereda - Merrill Lynch

Daniel Hofkin - William Blair & Company

Luca Orsini - One Investment

Allegra Perry - Lehman Brothers

Domenico Ghilotti - Euromobiliare SIM

Francesca Di Pasquantonio - Deutsche Bank

Operator

Ladies and gentlemen, good afternoon and thank you for participating in the Luxottica Group Third Quarter Results Conference Call. My name is Isabella and I will be your coordinator for today's conference. For the duration of call you will be on listen-only, and at the end of the call there will be an opportunity for equity analysts and investors to ask questions.

At this time, we would like to turn the call over Alessandra Senici, Investor Relations Director. Miss Senici, you may begin.

Alessandra Senici - Group Investor Relations Director

Thank you. Good afternoon and thank you for joining us today. Before we begin first, I had 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 readings Investor Relations, Conference Call and Webcast section. This presentation includes certain non-GAAP financial information within the meaning of Regulation G under the Securities and Exchange Act.

Further information including additional information required by Regulation G is available in Luxottica Group's press release, relating to its results for the third quarter of 2007, which may be found on our website and under the reading Investor Relations, Press Releases section. This conference call is being recorded and is also available via audio webcast from our website conference call and webcast section.

During the course of today's call, certain projections or other forward-looking statements maybe made regarding Luxottica Group's future financial performance or future events. We wish to caution you that such projection or statements are based upon current information and expectation, and actual results may differ materially from those projected in forward-looking statements. We also refer you to our filings with the SEC and the Italian Securities Authorities. These filings contain additional information concerning factors that could cause actual results to differ materially from those contained in management projection of forward-looking statements.

Before we begin the discussion of our third quarter results, I would like to note that we are limited in what we can say about the previously announce merger agreements with Oakley. Therefore during today's call, we will restrict our comments to the third quarter results and we will not address transaction-related questions.

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 to all of you also from my side. Today we are focusing on three items. The first will be third quarter performance. Second is the end of the year forecast. Third, a first look at plan and projects for 2008. One and only comment about the roadmap to Oakley merge closing. We expect the closing date to be around mid November. So far so good, everything had been very smooth. Long-term planning sessions are taking place. At closing we would call an audio conference with all of you, and in January, we will disclose a full detailed plan of activities.

Today, first topic and probably the most important one, is our end of year guidance, and our feelings about business conditions. We first confirm the updated outlook of July. We are confident that the rest of the year will give us the opportunity to close the year at guidance. This also means that if dollar stays at the average of the first thirty days of this quarter, we will be targeting more 1.08 versus 1.10, obviously excluding non-recurring gains.

Our feelings about business conditions... our feelings about North America business conditions; business conditions in North America today are quite segmented. Some business is still and will continue to perform very well, due particularly to the under penetration of premiums in business compared to other western markets. Premium optical retail business is continuing a solid trend. More mass-oriented business, as our license brands in retail in this year faced somewhat more challenging environment. North America wholesale business, also due and we already discussed many different times in this last three years, we were for sure under-represented in our wholesale position in North America in the last three years, we think that the growth trend that we've seen, so far will continue yet for another couple of years.

In the nine months and in the last quarter, the underlying performance of our company has been very strong. I think this demonstrates the effectiveness of our strategic decisions and the efficiency in the execution of our operating results. Sales at 11.4% up, has countered to exchange rates, EBIT margin at 18% and 90 basis points over the last year, EPS in dollar at plus 25% are the three main indicators. The dollar devaluated, we have not been standing still. We seriously responded during this quarter and we will discuss this aspect later in the presentation.

Fourth quarter profit and loss forecast; we expect to be obviously standalone, somewhere in between third quarter results and the first sixth months. October has been a better month compared to our quarter. When we look in detail... or better we start to overview third quarter, first of all, group sales were up by 8% as cost of [ph] exchange rates. Retail; retail sales again were significantly up in the quarter. Following the trend of the first six months, comps improved in the quarter finishing just to come a way of 3%.

In retail division, we have four very good news and one challenging one. The first good news is LensCrafters and Pearle Vision performing very well and we will discuss about this. Second good news is Sun retail and under wealth [ph] after three years of that work we can really talk about the success story. Third Asia-Pacific accelerating growth and looking at the positive long-term trends. Four, the great export, the step-up in our retail network is there almost completed. That shows again our degree of efficiency in being able to basically touch in the last 9 months, 12 months, one quarter of our store network base and being more modern and more effectible for our consumers. Our license plans suffered during the quarter and later we will focus on this.

Wholesale, this is the tenth quarter with sales growth of double-digits and a significant improved in profitability. I know I am boring, but I keep on saying that more and more our mix of sales in our retail network moved towards Luxottica brand of frames and away from private labels, retail price and will always influence more into future that the overall company profitability will improve. On the other side some of the divisional metrics have some work lost a bit of their importance. But in wholesale, there are a number of very good news on which to focus and we will talk about that. Again stricter control of our balance sheet, around Ä150 million of free cash flow. So the summary of the quarter from my side is somewhat profit environment, we keep on moving.

Now please Enrico, if you walk through the details of the quarter and then we will have some qualitative comments on different divisions.

Enrico Cavatorta - Chief Financial Officer

Thank you Andrea. Let me comment some of the number of the key figures of our group. In the third quarter again, it was a quarter of growth, under asset that of net sales of the group, were up almost 3% included the devaluation of the dollar. 8.1% has been the growth, if you exclude the exchange rates exact. This was in particular, a strong growth in the wholesale area. 13% excluding currency effect, to wholesale customer, slightly less than 10%, if we include the dollar devaluation.

Year-to-date, sales up 6.5% excluding currency, almost 3% comp. Of course when translated into Euro, these translate into reflect number. Operating income again, we've been able to increase our operating margin by almost 30 basis points from 16.6% to 16.9% of sales. This was particularly driven by the strong performance of our sale, which reached close to 26% of operating profitability; this is the all time high results for the third quarter indeed and was up almost 1.5 percentage point.

Retail, we are seeing the margin instead was down approximately 370 basis point and this was due to a number of reasons. Some of them are non-recurring and I mention that first of all, our operation in China. They are profitable on a store contribution level and that profit margin is increasing quarter-after-quarter. But of course, in China, there is a huge start-up cost due to the branding, conversion of stores and also due to our fiscal structure that of course, has been sized for a much bigger operation than it is today. For China alone contributed to several millions of euros of loss, during the quarter. Excluding net effect, the retail margin was... would have been negative, but largely more than 100 basis points and again this was due to mainly as Andrea mentioned, the challenging situation we are facing in our licensed brands in North America, but also and Andrea will go in more detail into it later on; the effect of the huge investment on the new stores that we have done in the last month. The new store effects contributed alone by approximately 70 basis point of decrease quarter-on-quarter.

Next, our net income has increased by 5%, but if we include the exchange rate effect, it would have been a double-digit growth, 13.2% in the same currency of last year. If we turn more briefly to the nine months results, of course those are better than the later quarter, because as you might recall we had a very strong result in the first half and for just recap, our net sales were up 11.4% on constant exchange rate, particularly strong has been our wholesale result in excess of 20% to third party customers excluding exchange rate effects. And also retail, was positive in the 6.5%, again if the current effect.

In terms of operating income, we have reached the 18%. You might recall, this includes an extraordinary gain on real estate sales, it was executed last May and this has contributed to 50 basis points. So our net result operating income has been 17.5% excluding that effect. In wholesale, we have an outstanding 27.6% and margin, up approximately 1.5% as of the last year in the nine months, while retail as compared to the third quarter, has been down. And again, I would say two of the main drivers of this decrease has being the China investment from the nine months and the effect of the new stores opening in North America, coupled with the challenging situation we are facing in our licensed brands. If you look at the bottom line; our net income has increased by 20%, 16% excluding the extraordinary gain on real estate. But on a constant exchange rate, that would have been 25%.

On terms of financial allies, first of all the strong cash contribution in the quarter, Ä149 million of free cash flow and free cash flow again is before dividend, acquisition and current effects. So is the real cooperating contribution of the group, after CapEx has lowered our net debt-to-EBITDA ratio to 1.2 as compared to 12 months ago that was 1.4. And 12 months ago, we cashed the [Inaudible] from sale of increment.

In terms of net working capital, the numbers as they appeared on the balance sheet are somewhat misleading. On September 30, 2006, we had a huge tax payable in our balance sheet. That has reduced the working capital amounts that we don't have in 2007 and the reason is mainly the timing of payments of the taxes in North America that has been different in the two years. And also because of utilization of some carry forward loss that we had in 2006; and we don't have any longer in 2007. So, if we focus only on the operating net working capital that is receivable inventory and payables, net as compared to 12 months ago; we have been up 2 days. This was driven by a higher inventory than 12 months ago by approximately 5 days that is partly related to the slow down in sales, while we had very positive results in terms of receivable that were down fourteen days as compared to year ago. And payable is up, so positive for us four days as compared again to twelve months ago.

Going in the details of our different divisions in terms of income. Let's focus first on optical retail in North America; and I will divide my description in two. First, we'll talk about premium brands, growing and improving core profitability and talking about LensCrafters and Pearle. License brands more challenging, talking about Sears and the Target. Let's talk first about the first two LensCrafters and Pearle. In our last survey again LensCrafters resulted by far the most preferred brand in optical retail in North America.

LensCrafters journey together with an evolving U.S. consumer is going on. Store design evolution is on track. The great work on lens product strategy and lens marketing is allowing us to lead radical a change in the traditional U.S. lens market. Anti-reflective lenses with different coatings, the ability to add prescription to fashion wraps and glasses is allowing us today to upgrade our average dollar revenue per transaction. We expect some people less in the market nowadays and we are everyday, more focused on higher conversions. I think this is the main segment which we focus the most. We have been successful. We always had a good number of profitable and applicable proposals for our LensCrafters consumers. Same thing can be said about Pearle Vision. Again on lenses; as we have been discussing in the last eighteen months, we are really gave content to the eye care positioning of Pearle.

The eye exam is a totally different experience today and the launch of free form of progressive lenses has beaten our expectations. What is also fair to say and it's a thank you to our Pearle team is that, today they are totally free from any kind of integration effort that we have been delivering and executing in the last 24 months... 18 months especially in order to give to Pearle, the correct scale in North American markets. So we are pleased with the results of these two chains and we also look with positive eyes to the remaining part of the year and 2008.

Licensed brands were more difficult. Obviously consumer is different and hit more by the outside factors. We worked in the previous months and previous quarters and previous periods, extensively to eliminate useless transactions and enhance profitability. We have been successful with all of this. On the other side, this business model also need some scale in each store. These are by far, much smaller stores than what we have at in our other two chains. Unfortunately we had to add some more promotions to attract somewhat more customers and profitability declined. We are today, reassessing strategy and focus.

As you know, we are managing three different brands today. Probably we need to streamline our strategy. When we move to Asia-Pacific, we really had another strong quarter. Only good news are coming for us from Asia and China. Strong growth, improving comps, good profitability. In Australia and New Zealand the market penetration of optical is improving and we are growing faster. OPSM is today a real power brand. Profitability whole year around in 2007 at store levels, so eliminating scale effect is exactly at LensCrafters standards. We really feel that we can look at this part of the world as a long-term growth plans. I am extremely pleased of the first nine months.

In China we are settled. We are over. In Beijing, Shanghai, and Hong Kong, just 1.5 half year ago, we were acting at acquisition at projects, at mergers. Today, its one single organization. We are happy from onwards to host you to visit and experience the work we did so far. Store operating profits is improving month-after-month as Andrea [ph] was saying, and sales growth is getting to a faster velocity, 17% comps in this quarter. 2008 will be a year of further expansion, organic, and non-organic to reach our first milestone of Ä 100 million in revenue in greater China.

Let's move on to Sun retail. During our 2004 and 2005 discussions, when we were presenting our plans and objectives around Sunglass Hut, some parts of the audience were a little bit skeptical about the project. We are happy today to show brilliant results. In this three years, North America comps have been 44%. If you remember, we were targeting 10% a year. At the end of the year, we are out finally from the watch business. Mix of products and brands evolved. Third quarter sunglasses comps in North America were again in line with luxury department stores. Our teams of associates around the world have all evolved. And today are making their consumer experience totally different buying and design process.

The new store design is really booming. It's giving us over than expected results. Profitability around the world significantly improved. Great start in Middle East, South Africa, and Hong Kong has been smooth, simple, well received by consumers, and immediately profitable. And order in the market, we are happy to say it's too early. It's already three weeks, four weeks that we are hitting a totally different consumer. In Southward New York, ILORI is 150 meters away at Sunglasses Hut. It was a tough test. Both had significant sale levels in this three weeks, and the Sunglasses Hut comps were up double-digit.

Two stores of its ILORI are now open. Please visit them whenever you have a chance. Obviously it's too early to make any other comment. When we move to the last chapter about retail, I think that really building a greater retail platform is the other exciting chapter of the year. We are the leaders, we want to keep our leadership and we are investing for the future. Fifteen months ago, we decided that we were ready for an heavy uplift in our retail network worldwide. Obviously, we were thinking that this would have represented a cost, but we were also convinced that we could have covered this cost with our extremely positive results in our ordinary operative plans. The American slowdown changed somewhat of our results. Yet and more, we are convinced that during 2008 and onwards, we will be thankful to this plan. As Enrico was saying in this first quarter, North America overall profitability was hit by 70 basis points, which is not a lot considering to the number of stores that we got to during the quarter.

Let's move to wholesale. Again good news. Plans are really marching on, execution is there. 2008 collections have been very well received by the markets. We had the tenth quarter of double-digit growth. Unfortunately summer season in Europe has been rather short. But after having said that, immediately things went back to our normal standards.

In terms of brands, usual news from Ray-Ban and Luxury Collections. Finally and happily, the new Polo floor and brand familiar [ph] strategy is paying off. The effect of the destocking of our past license store is almost over. And now our customers and consumers are now appreciating the new store. Emerging markets are continuing their track record of growth and profitability, and now represent approximately 14% of our total sales.

In Cannes, in Cannes and Venice festivals we have reached the whole time high placements, most of which free to stars, actors and filmmakers. The PR network on which we have been building, working, and investing, around the world during last year is really paying off. In North America, our market share compared to three years ago, to two years ago and to one year ago has significantly improved. Numbers are there to be demonstrate it. And Chanel brand is underway and we are happy about the turns.

New chapter today in our wholesale business is different. We are proud of the works so far done, and we are targeting for the Christmas season in U.S. Now, we would be waiting for the consumer response. December 1st, we are in the market. During 2008, we would cover most of the relevant worldwide regions. Tiffany's is really set to become another jewel grade brand in our portfolio. We are also working hard on leveraging the great continued success of Ray-Ban. Ray-Ban is very well positioned and the brand is very well covering different segments of the market in terms of gender, age and trends. We have been in the last nine months working on a new segment called Ultra. The first collection of Ultra was launched in Ray-Ban prescription in July, full titanium and innovative design, great acceptance, and sold out.

Now for Christmas we are back with an Aviator Ultra collection available very soon in the markets exactly for Christmas in a very selective distribution outlets and priced at almost Ä400. This is also celebrating Ray-Ban's 70th anniversary. I think and we think that these special editions, limited editions are one of the of recipes of today's success and future success.

At Christmas for example, we will be in the market with a number of these collections. First a precious Camellia and a special edition for [Foreign Language] all priced above Ä500. We are also ready in certain market first of all Middle East and London with a number of very precious collection from our luxury collections priced between Ä1000 and Ä2000.

So we are really looking through another good quarter for wholesale. We're almost over with 2007 and we are today, in the middle of 2008 plan discussions. We're ready and set to deliver another year of growth. When we look to optical North America, sales execution. Another setup on lenses and new beautiful ideas from our fantastic labs. In a period of probably less people in the markets, we will continue to work first of all, on conversions but on the other side, our fantastic tool of managed vision care, we're really working to make it stronger yet again. And we will keep you updated on this subject.

Asia Pacific, the headline is easy. The execution will be there, it's continue to grow, continue to expand and be profitable. I'm confident that this story will continue. We're targeting another year around the world at 8% cost. 460 stores around the world will benefit form new design; and we're running to be ready before next summer season.

When we look to wholesales, 2008 is a very clean year. 2007, we had some end of lines of the four brands that we didn't carry over. We had a rebirth of the Polo, Ralph Lauren different brand positioning. We had a very, very first year of great success with Burberry. With different in our portfolio, the brand portfolio in 2008 is stronger than ever. We're targeting again, a year, well above 10% in growth and increased profitability.

We worked extensively also in our operations and manufacturing; capacity already there built in order to respond to 2008. In China as well, we are basically there and we will be ready soon with the capacity. We will experience further benefits of greater planned flexibilities. And the ability due to our expanded effort in R&D in our last 24 months is allowing us doing sorts some very delicate and absolutely precious added value activities. So we are really happy to move also to a strong 2008. Needless to say, obviously as the slide says and with Oakley, it's really a whole new journey.

With this I have finished my presentation, obviously now we are here to answer to any of your questions. Please, operator you can take the line back.

Question And Answer

Operator

Thank you sir. Ladies and gentlemen, the Q&A session is open.[Operator Instructions]. Now the first question comes from Mr. Mark Stogner from Exane [ph]. Mr. Stogner please proceed with your question.

Unidentified Analyst

Yes. Good evening, Mark Stogner [ph] from Exane BNP Paribas. I have two questions if I may. The first one is on the operating cost. If I am correct, it was only Ä5 million over the Q3. Could you let us know if there were any exceptional items or it was a trend of a lower operating cost is there for the mid term? And my second question is on the guidance for the retail in 2007. Could you also confirm to us that you still expect the 22% comparable stock sales growth of 2007?

Andrea Guerra - Chief Executive Officer

Yes. So, I will answer to your second question first. Then we move back to the first. So, we expect another quarter around the 3% comps that we were able to deliver in quarter two. Regarding your first question, Enrico?

Enrico Cavatorta - Chief Financial Officer

I would like to be sure which corporate cost are you're referring about?

Unidentified Analyst

The elimination, the plus Ä39 million for the nine months including the exceptional gain. So if I'm correct it was Ä5 million for Q3.

Enrico Cavatorta - Chief Financial Officer

Yes, that's correct. And as you know this is a much lower number than Q3 of last year.

Unidentified Analyst

Yes.

Enrico Cavatorta - Chief Financial Officer

We normally have in this corporate cost ...where the corporate cost that was quite stable during the year; and year after year. Then we have amortization of our retail trademark. This again quite a simple number and the third component is the elimination, consolidation of the profit makeup. And that is the number that is less predictable of the three, in particular in this quarter, we had a positive effect. While last year, it was negative; and it was simply due to the movement of the inventory of the supplementary product in our retail division.

Unidentified Analyst

Okay, thank you.

Operator

Next question comes Luca Cipiccia from Goldman Sachs. Mr. Luca Cipiccia please proceed with your question.

Luca Cipiccia - Goldman Sachs

Hi. Good afternoon. Just a couple of questions on the retail division; just if you could give more details on the... well, if we look at the profitability of Pearle Vision and LensCrafters standalone maybe in the nine-month period. If you could comment on the year-on-year trend particularly for Pearle, just to understand where we stand in that development. And secondly, the merger operation on your license business; referring back to your comment. If you could explain, given the dilution that is having on the group performance and your increased focus on the say... premium segment. What is the strategic need or benefit of that business going forward? And my third question is again linking back to some of the comments in your presentation. With regards to the labs and the lens business; we've seen I think with a couple of weeks ago, Essilor posting almost 11% organic growth in the U.S., showing no signs of slowdown whatsoever; and they put that down largely to the Labs business. Given the environment that you're seeing now; are you tempted or are you considering to maybe expand that part of the business throughout going forward? Thanks.

Andrea Guerra - Chief Executive Officer

Yes. Hello so, regarding LensCrafters and Pearle Vision, profitability increased compared to a year ago. When we look to licensed brands, we like the business. We may not like all the business. But it's a ... let me say a simple and profitable business year-to-date and we're confident that it can dilute us in this specific period but help us in the long term. Regarding labs and lenses, we are extremely happy as I said before during the presentation of what we're doing. We have invested significant amount of money in our labs. We think we have really state-of-art technology. I think that we developed a number of excellent ideas. I think that 2008 will be a year where we expand our lab services through our franchising network. So, we will continue in 2008 to focus inside our --.

Luca Cipiccia - Goldman Sachs

And where would your franchise network now this ... we could say this by as number of players. Is it fragmented in that sense or --

Andrea Guerra - Chief Executive Officer

Very, very fragmented.

Luca Cipiccia - Goldman Sachs

And again on the license comment that you made, without being specific, but are you... is there a divergence in performance between the three full months or right now you are let's say the pressure that you're witnessing is pretty much consistent. It depends more on the price positioning maybe rather than model itself.

Andrea Guerra - Chief Executive Officer

No that is difference between the brands and we will take some decisions.

Luca Cipiccia - Goldman Sachs

Okay. Thank you.

Andrea Guerra - Chief Executive Officer

Thank you.

Operator

: Next question comes from Mr. Evian Rambo from HSBC. Mr. Rambo, please proceed with your question.

Evian Rambo - HSBC

Yes. Hi good evening; Evian Rambo from HSBC in London. Just coming back to the license brands, you were mentioning streamlining the license brand strategy for the existing three licensed brands. Can that imply exiting one of the three; and what would be the implications of that? Two, other questions. You mentioned for wholesale that the Chanel contract was underway and looking good. I don't know if that's the term you'd use exactly, but just as if you can say a bit more on that front and then finally on the Sunglass Hut's concept. Can we expect watches to out as of Q4? Is that correct?

Enrico Cavatorta - Chief Financial Officer

Yes. So watches will be out by Q4. And Chanel contract as soon as we sign it, I will give you the details as we usually do. As I said we're happy about the global turns. And a guiding license brand, if I could have been little bit more precise, I would have been today in discussions and I will be back to you. But I mean nothing extraordinary, no cost related and profitability enhancements.

Evian Rambo - HSBC

Okay and just one quick follow-up, because there's an element I missed I think, the comps in retail accelerated in Q3 versus the first two quarters. Do you expect is that correct you are close to 3% as well as in Q4, did I misunderstand that?

Andrea Guerra - Chief Executive Officer

Yes, and probably Kerry do you want to give some more color on this?

Kerry Bradley - Chief Operating Officer, Retail North America

Well I'll simply say that we had a good solid start to the quarter and we have some strong programs in front of us. So we're fully expecting in North America to have a good solid quarter. Probably slightly ahead of what we had in third quarter.

Evian Rambo - HSBC

Thank you very much. Thanks.

Operator

Next question comes from Mr. Flavio Cereda from Merrill Lynch. Mr. Cereda please proceed with your question.

Flavio Cereda - Merrill Lynch

Hi good evening. Two questions one of them is on North American retail and perhaps some I can pick up Kerry on the last comment that you made. It seems to me that I am looking on the various website, both LensCrafters and Pearle, you have fairly aggressive promotions going on at the movement. So I was wondering if you could clarify, clearly this helped to build up traffic. I am not sure what the impact would be on margins and profitability, so I am wondering whether am I wrong that you are running more promotions that you were running this time in last year and the other question I have is to the wholesale and specifically in Europe it seems that your sales in Europe have slowed down in the quarter and I was wondering whether you could give us a sense of what you are seeing? Thank you.

Andrea Guerra - Chief Executive Officer

Flavio I would just rather give you the answer on Europe wholesale and I would ask Kerry to give you feedback on retail U.S. and I said summer has been short or nil in some European countries. We had some weeks in July of basically no reorders August, September and October have been back to normal standards, so and as I said the acceptance of new collections has been strong. So I am looking really to a end of the year. I mean we all experienced this summer around Europe. So especially this sum has been hit, Kerry do you want to keep on answering to Flavio.

Kerry Bradley - Chief Operating Officer, Retail North America

Yes. And Flavio you are right, we have added some promotions during this year. If you look to our premium brands LensCrafters and Pearle, we find there our promotions that are almost profitable of those that allow them to buy the very best products, very best lens products with a discount of the top and we are offering discount at LensCrafters and at Pearle on the lens purchases and on the complete pairs, and we find that we are sell multiple payers and trade people up, so that our average dollar per transaction actually goes up and we are very happy with the profitability building traffic and conversion.

Our value brands tend to be our license brands, we intend to do more price point... entry price point type promotions and again those would not be real healthy for LensCrafters or Pearle, but these types of promotions yes indeed do build profitability.

Flavio Cereda - Merrill Lynch

Okay. Thank you.

Operator

Next question comes from the line of Mr. Daniel Hofkin from William Blair. Mr. Hofkin please proceed with your question.

Daniel Hofkin - William Blair & Company

Good evening everyone. Just a quick question on with the Sunglass Hut and I guess particularly in North America a very nice sequential trends there. I am just curious to know on the mix between let's say there's been a built up in sales momentum. What's been the profitability trend would you say year-to-year in the third quarter within Sunglass Hut and then compare that to the first half that would be my first question. The second question is can you quantify to what degree the, I guess the unfavorable weather in Europe may have impacted your wholesale margins and what the improvement of what you have done greater in a more normal environment? Thank you.

Enrico Cavatorta - Chief Financial Officer

Regarding profitability of the different brands, I can tell you that I'm really happy to see that quarter after quarter; compared to a year ago we are able to increase it. We are yet today not exactly reporting profit and loss by brands. Probably when we start to do it in the future, but I mean has increased and has significantly increased in the last three years. Regarding profitability on wholesale I think that it was not much hitting our profitability, but possibly more our top line and I mean, has been a month has gone and we have forgotten it.

Daniel Hofkin - William Blair & Company

Okay, I guess just to clarify that the first point, I thought you would indicate us maybe misheard this. There are a couple of points when the audio was fading and I don't know if that was just my line. But the question I guess would I think you indicated that both LensCrafters and Pearle Vision, had higher year-to-year profitability, compared to last year's quarter and I just was wondering, it sounds like a Sunglass Hut maybe not as favorable comparison, but still a better performance relative to the first half, if you could just comment on that and then I guess.

Enrico Cavatorta - Chief Financial Officer

I agree with what you said, I mean, that's what happens.

Daniel Hofkin - William Blair & Company

Okay and then in Europe what's enabled you to given that the even though it was the month that obviously showed up in the quarter, and obviously encouraging to see that that has picked back up. I am just wondering how you were able to adjust or is it a fact that the trend did deal the following the first month, what kind of help there.

Enrico Cavatorta - Chief Financial Officer

It was one month then I mean everything started to be.

Daniel Hofkin - William Blair & Company

Fair enough.

Enrico Cavatorta - Chief Financial Officer

It's fine.

Daniel Hofkin - William Blair & Company

Okay.

Enrico Cavatorta - Chief Financial Officer

No particular, as I said I didn't talk much about it, because I mean if you look that this was the 2005, 2006, 2007, third quarter in a row and to be at that level and increasing profitability on time.

Daniel Hofkin - William Blair & Company

Okay I appreciate it. Thank you.

Enrico Cavatorta - Chief Financial Officer

Thank you.

Operator

Next question comes from Mr. Luca Orsini from One Investments. Mr. Orsini please proceed with your question.

Luca Orsini - One Investment

Okay good Afternoon, just have a small question. You mentioned that the profitability the drop in profitability in the third quarter of the retail division was 70 basis points of that was due to the opening of shops and refurbishment and kind of investments in the retail segment. My question is the following, this is obviously you must have had an acceleration in that quarter, but it is not an isolated factor. if I had to ask you the same question, what would it had been on a sequential basis that number and what number been on year-on-year basis, just to get some sense, you see what I mean?

Enrico Cavatorta - Chief Financial Officer

Yes I think that overall year-on-year in you are say between the 50 basis points and 75 basis points cost into that investment, here we are.

Luca Orsini - One Investment

So if you look on year-on-year the extra cost should have been between 60 basis points and 70 basis points and sequentially?

Enrico Cavatorta - Chief Financial Officer

What do you mean by sequentially?

Luca Orsini - One Investment

In the nine months, is that what you said?

Enrico Cavatorta - Chief Financial Officer

This is what, I mean its 70 basis point in the quarter in the quarter, in the nine months it's between 50 and 75.

Luca Orsini - One Investment

Okay. And how do you explain the other 120 basis points? Or it's only insisting is the only the brand

Enrico Cavatorta - Chief Financial Officer

No, no. What I mean, I think that we like to highlight our good things and we are ready to highlight our not so great things. We talked about China and we talked about license brands profit dilution. I mean we talked about the three topics, and I think we have repeated them six or seven times. So here we are. And always keep in mind, and I am boring on this that some basis points are given to wholesale markets. Like I mean it's a very easy equation; retail was much focused on private labels. And private labels they had a higher percent in margin, and Luxottica wholesale had no margins. With our branded products, retail had a little bit less percentage margin and the wholesale has a good percentage margin. Overall the company is gaining a lot of money. The two divisions are a little bit off-balance.

Luca Orsini - One Investment

Well thank you very much.

Andrea Guerra - Chief Executive Officer

It's a pleasure.

Operator

Next question comes from Ms. Allegra Perry from Lehman Brothers. Ms. Perry please proceed with your question.

Allegra Perry - Lehman Brothers

Yes. Good evening. I have three questions, please. Firstly on retail full year guidance. Apologies, if I missed it, but I wondering if you could give us some specific guidance on retail margins for the full year. Specifically are you still guiding towards flat margin. Secondly on North America Retail overall. I was wondering if you could give us some flavor for how momentum evolved between the months during the quarter, as well as the transient footfall and conversion rate. And lastly on Tiffany, I was wondering if we could have a little more color on the pricing of the range and also how your distribution will planned for that... for that collection?

Andrea Guerra - Chief Executive Officer

The last questions you referred To Tiffany I guess?

Allegra Perry - Lehman Brothers

Yes, sorry Tiffany, I was just wondering what the pricing of the range will be. How it compares to other brands and also how the distribution will be organized?

Enrico Cavatorta - Chief Financial Officer

So Tiffany will be priced between $380 and $1100, standard optical. Obviously it's a quite selective distribution as you can imagine we are targeting a penetration similar to Chanel and the Bulgari One. We're starting in North America. In December we will move in Q1 2008 in Japan, China, Australia, Hong Kong, Mexico and UK. And we will move in all other European and other Asian markets during the course of 2008, so we are accelerating the path compared to the initial project. Kerry do you want to answer the retail questions.

Kerry Bradley - Chief Operating Officer, Retail North America

I'll just take you through the question around momentum month-to-month and we saw a clear growth each month. We started with our slowest month in July and that happened to be one of the slowest months in all of retail North America across all categories. And then we had a very good August and a very strong September and again we are carrying some momentum into Q4, but we do expect to build throughout this quarter as well.

Enrico Cavatorta - Chief Financial Officer

Regarding retail margin compared to last full year. I think that to consider a full 100 basis points to last the last year is a correct number.

Allegra Perry - Lehman Brothers

Okay thank you. And just had last question, on footfall and conversion rates in the U.S.. I don't know if we can get a little more color on that.

Kerry Bradley - Chief Operating Officer, Retail North America

As Andrea has said conversion is what it's all about, We have seen a very solid foot traffic with the moderate-to-high end customer with the more value end customer, which we do have some of those in each one of our businesses, we have seen a pull back in a deferral, so our traffic is overall down, but those who are coming are spending, and so we focus 100% on conversion, and our conversion rates are up versus last year.

Allegra Perry - Lehman Brothers

Thank you.

Operator

Next question comes from Mr. Domenico Ghilotti from Euromobiliare. Mr. Ghilotti please proceed with your question.

Domenico Ghilotti - Euromobiliare SIM

Good afternoon. First of all I would like to have some indication on the level of revisions you add on the list by season wholesale. You mentioned this upward revision in prices. If you can give us also some range. And second is a clarification on the guidance, I presume you are factoring in an comp exchange rate, but I would like check on this and also on the retail side. You mentioned that 8% comp sales for some, and could you provide also an indication there for the retail division overall?

Enrico Cavatorta - Chief Financial Officer

Regarding the list price, I think that during...I started off saying it, and during the presentation. I forgot to talk about it. So we had a solid, more than 5% increase, 6% or 7% increase in North America in July. And in September, rest of the world, we had a 7% to 9% increases. In all our new collection, which means an average of 5% on our sales in September.

Domenico Ghilotti - Euromobiliare SIM

Okay. Thank you. On the guidance?

Andrea Guerra - Chief Executive Officer

: Guidance I mean, I think we are anticipating too much.

Domenico Ghilotti - Euromobiliare SIM

Just to check, that it is a compact exchange rate I presume.

Andrea Guerra - Chief Executive Officer

No, no, no. I mean when you talk about end of year forecast, and we talk about 108, 110, we were referring to a 135.

Domenico Ghilotti - Euromobiliare SIM

Okay.

Andrea Guerra - Chief Executive Officer

If that moves above the 135 we are obviously targeting more 108 than 110.

Domenico Ghilotti - Euromobiliare SIM

And also it was mentioned in the outlook for 2008. So when you are saying that wholesale is expected about 10%, so double digit, and retail comp sales.

Andrea Guerra - Chief Executive Officer

We are really, to date we are making a plan at 140, and that number refers to 140.

Domenico Ghilotti - Euromobiliare SIM

My last question, sorry, would you expect a contribution from watches [ph]

to 2007 sales, just to have a more clear base say base for 2008.

Enrico Cavatorta - Chief Financial Officer

Peanuts, for cost and revenue.

Domenico Ghilotti - Euromobiliare SIM

Okay. Thank you.

Operator

Next question comes from Ms. Francesca Di Pasquantonio from Deutsche Bank. Ms. Di Pasquantonio, please proceed with your question.

Francesca Di Pasquantonio - Deutsche Bank

Yes good evening. I have a few follow-up questions, if I may. The first one is, going back to European wholesale business. You mentioned that the business is back to normal standard. Does it mean 20% organic growth? That's the first question. The second question is, you are obviously planning ... I expect you would be planning your 2008 without assuming that the slowdown which currently is affecting the value brands that will spread out to the high end brands. Can you confirm this? The third question is regarding again, I'm sorry the retail profitability. But I just want to clarify if my understanding is correct, because the significant amount of non-recurring that you refer to both for the third quarter and the nine months to year would really imply that the underlying business excluding the value brands...I mean the underlying profitability excluding the value brands for LensCrafters and Sunglass Hut, has not been heard. So, that's the third question. If you could confirm that?

Enrico Cavatorta - Chief Financial Officer

I confirm the third. I confirm the second. I do not confirm the first. I mean, when you say that the organic growth continues at 20% in our sales, we are targeting that, I'm not committing to that and obviously more and more it's a tougher number.

Francesca Di Pasquantonio - Deutsche Bank

Okay. If I may follow-up a question on retail margins. I was just curious to understand how much of you total sales over the last three... over the last quarter was made out of just promotional activities and if that had any vested margins, if you could somehow quantify that. And just to understand what we could extrapolate going forward?

Andrea Guerra - Chief Executive Officer

I don't think that we are able to extrapolate any specific item there. As Kerry was saying I think we have been quite clever in our premium retail brands to grow and have some good proposals and obviously compare.

Francesca Di Pasquantonio - Deutsche Bank

Well, you mean that you are giving out internally of gross margin on the promotion you try to recover by improving the [inaudible] basically

Andrea Guerra - Chief Executive Officer

Yes

Francesca Di Pasquantonio - Deutsche Bank

for each consumer.

Andrea Guerra - Chief Executive Officer

And this works.

Francesca Di Pasquantonio - Deutsche Bank

Okay. Final question if I may. Is it possible to have an idea of the Managed Vision Care cost with retail profitability?

Andrea Guerra - Chief Executive Officer

Managed Vision Care is not a cost.

Francesca Di Pasquantonio - Deutsche Bank

Its not.

Andrea Guerra - Chief Executive Officer

Managed vision care is an excellent tool to have traffic in the store. Managed Vision Care is to bring people in the store and then it is our job to driven them up at least the mix and have somewhat a lower ticket, but not consistent. I mean normally we are able to extract with values also from Managed Vision Care consumers that we can if you want to have a more detailed and deeper analysis of Managed Vision Care and other... in another region.

Francesca Di Pasquantonio - Deutsche Bank

The reason why, I was asking is that I shouldn't be worried, if you decide to be more expensive in your Manage Vision Care reach, in order to improve the traffic.

Andrea Guerra - Chief Executive Officer

No.

Francesca Di Pasquantonio - Deutsche Bank

So, there is no cost side to the equation or not significant anyway?

Andrea Guerra - Chief Executive Officer

Not significant.

Francesca Di Pasquantonio - Deutsche Bank

Thank you.

Andrea Guerra - Chief Executive Officer

Thank you Francesca.

Operator

Next question comes from Mr. Stefano Corneliani from Intermonte Securities, Mr. Corneliani, please proceed with your question. Mr. Corneliani is not available at the moment. Next question comes from Mr. Daniel Hofkin from William Blair. Mr. Hofkin please proceed with your questions.

Daniel Hofkin - William Blair & Company

Hi just a quick follow-up Andrea you are answering a question as to little bit ago regarding 2008 and unfortunately the sound faded out. I was hoping you might be able to just repeat what you had said apologize for that, the other question was regarding traffics trends between the North American concept, I assume and may be this is wrong, if you take out the licensed retail brands and look if you were to compare let's say the Optical versus Sun that the traffic trend is more impacted on the Sunglass side but, if that's true if you could give some sense of that? Thank you.

Andrea Guerra - Chief Executive Officer

So regarding traffic Sun is not at all hurt by any kind of traffic slow down today. So...

Daniel Hofkin - William Blair & Company

Is that changed?

Andrea Guerra - Chief Executive Officer

Excuse me.

Daniel Hofkin - William Blair & Company

Is that a change? It sounded like after the quarter there had been some softer customer traffic, maybe just overall mall traffic being slower.

Andrea Guerra - Chief Executive Officer

No, not in our Sun business.

Daniel Hofkin - William Blair & Company

Okay.

Andrea Guerra - Chief Executive Officer

Regarding guidance I think the only thing I added was that we are today working on a basis of a dollar-euro exchange rate at 1.40. I don't think I added anything else.

Daniel Hofkin - William Blair & Company

Okay. Thank you.

Andrea Guerra - Chief Executive Officer

Thank you.

Operator

Next question comes from Francesca Di Pasquantonio from Deutsche Bank. Ms. Di Pasquantonio please proceed with your question.

Francesca Di Pasquantonio - Deutsche Bank

Yes sorry two follow-up questions from me, one is on the, I know it's too early, but the retail margin on 2008, considering the 50, 75 basis points cost for the let's say network investment. Considering that the non-recurring cost from China should somehow decrease and assuming that the value brand profitability has to at least to remain flat. That should mean just refers to significant improvement with respect to the 2007 12.1% to 12.2% expected margins. Should we should we be aware of any other non-recurring factors which could make... spoil the picture the picture slightly for 2008 and in particular more cost for ILORI that you haven't foreseen a faster development of the network in terms ILORI, compared to original expectations?

Andrea Guerra - Chief Executive Officer

When we look to what we have been doing on our retail network, I am very happy about what we have been doing. I mean we could pulled and pushed our profitability to really other levels. But I don't think we would be happy here standing and looking to our 2008, 2009, 2010 and saying what we do next. So we decided to go further in doing a number of different activities that will for sure turn to be more profitable in the future. We are targeting a higher a profitability level, compared to this year. I think it is too early to give any specific number. This is all I want to say but I really hope that the message of the great work we did on store network is not seen as negative, but we feel extremely happy and positive of the enhancement of Sunglass Hut, LensCrafters will be the same in Australia, the LensCrafters network in China. I am proud of what we have been doing.

Francesca Di Pasquantonio - Deutsche Bank

Okay. I mean we can expect additional work to be done on the network in 2008 which could --

Andrea Guerra - Chief Executive Officer

As we have written, I mean the first thing we write is execution 2008.

Francesca Di Pasquantonio - Deutsche Bank

Okay. Thank you.

Andrea Guerra - Chief Executive Officer

Thank you.

Operator

Mr. Guerra there are no more questions.

Andrea Guerra - Chief Executive Officer

So thank you to everyone and see you in mid... probably, hopefully mid-November and then mid-January. Thank you. Bye-bye.

Operator

Ladies and gentlemen. Thank you for attending this afternoon conference. You may now replace your handsets. Thank you.

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