Morning Note: Market news and a positive update from EssilorLuxottica.

Market News

Markets were rattled after two US regional banks disclosed loan problems involving alleged fraud, heightening fears of broader credit market stress. Escalating US-China trade tensions, the prolonged US government shutdown, and growing expectations of further Federal Reserve rate cuts also bolstered appetite for safe haven assets.

The price of precious metals continued to hit new highs – gold currently trades at $4,360 an ounce, leaving it on track for its sharpest weekly advance since March 2020. Silver trades at $54.25 an ounce. The 10-year Treasury yield fell below 4% and currently trades at 3.95%, the lowest level since April.

US equities lost ground last night – S&P 500 (+0.6%); Nasdaq (+0.5%) – and are currently expected to fall another 1.2% at the open this afternoon. Shares of Zions and Western Alliance plunged more than 10% after both banks disclosed bad loans with two counterparties, amplifying worries following recent bankruptcies of auto parts maker First Brands and subprime lender Tricolor.

In Asia this morning, equity markets also fell: Nikkei 225 (-1.4%); Hang Seng (-1.8%); Shanghai Composite (-1.3%). The Bank of Japan will keep tightening if confidence in its economic outlook improves, Governor Kazuo Ueda said. The FTSE 100 is currently 1.5% lower at 9,305, while Sterling trades at $1.3435 and €1.1475.

Donald Trump said he’ll meet Vladimir Putin “within two weeks or so” in Budapest to discuss ending the war in Ukraine. The US president is hosting Volodymyr Zelenskiy at the White House today. Brent Crude fell below $61 a barrel, the lowest for five months, as investors focused on the supply outlook ahead of the talks.

Source: Bloomberg

Company News

Yesterday evening, EssilorLuxottica released very strong Q3 results and described by the company as its ‘best quarterly performance ever. The company’s new products enjoyed continued strong momentum, with ‘booming’ sales of wearable glasses. Essilor doesn’t have guidance in place for the current year, but trading remains strong in the current quarter, and the 2026 revenue target has been reiterated. In response, the shares have been marked up sharply, by 10% this morning against a very weak overall market backdrop.

EssilorLuxottica is the global leader (with a 25% share) in the eyecare and eyewear industry with exposure to the design, manufacture, and distribution of ophthalmic lenses, prescription frames, and sunglasses. We believe the long-term outlook for the industry is positive, driven by an ageing population, increased incidence of screen-related poor eyesight, a growing emerging market middle class, increased education regarding sun protection, and the growth of eyewear as a fashion and technology accessory. By 2050, uncorrected poor vision is predicted to reach epidemic proportions with over 50% of the world’s population expected to suffer from myopia (short-sightedness), many with serious vision-threatening side effects and long-term implications.

The company’s competitive advantage is based on its scale, portfolio of premium brands (such as Ray-Ban and Oakley), product innovation, flexible manufacturing base, quality service, routes to consumer, and partnerships. Essilor owns licences for some of the best-known luxury brands, including Chanel, Prada, Armani, and Jimmy Choo. The group also owns a majority interest in GrandVision (GV), a global leader in optical retail, ownership of which expands its global retail footprint (to 17,692 stores) and reduces the competitive risk of retailer consolidation.

In addition to underlying market trends, growth is being driven by strong innovation across the existing product line and in new markets. The company’s myopia management product Stellest has clinically demonstrated efficacy in slowing down myopia progression in children, and last month the FDA granted market authorisation for the lens in the US following which a new category has opened.

In the smart glasses category, the company has a long-term partnership with Meta Platforms to develop multi-generational smart eyewear products. The collection, which includes Ray-Ban Meta, is performing better than expected with demand outpacing supply and Oakley Meta Performance AI glasses have recently been launched. The company has said that wearables will be margin accretive given the increased level of quality lenses in the products and the addition of service revenue. In addition, Meta Platforms has acquired a near 3% stake in the company (worth €4bn) and is reported to be considering further investments that could build its share to 5% over time.

The company has also diversified into the hearing solutions market with a disruptive new technology (i.e., lenses with acoustic technology) to meet the needs of the 1.2bn consumers suffering from mild to moderate hearing loss. The audio component is completely invisible, removing a psychological barrier that has historically stood in the way of consumer adoption of traditional hearing aids. The product (called Nuance Audio) has now been rolled out in more than 10k ‘doors’ across the US and Europe in both the wholesale and retail channel.

The company has enhanced its presence in the med-tech space through several acquisitions: Heidelberg Engineering (diagnostic solutions, digital surgical technologies, and healthcare IT for clinical ophthalmology); Espansione (design and manufacturing of non-invasive medical devices for the diagnosis and treatment of dry-eye, ocular surface and retinal diseases); Optegra (ophthalmology platform for eye hospitals and diagnostic facilities); PUcore (monomers used in the production of high index ophthalmic lenses), and most recently, Ikerian AG (operating under the RetinAI brand, specialising in AI and data management in eyecare).

Essilor also owns streetwear brand Supreme, known for its lifestyle apparel, footwear, and accessories. The company runs a digital-first business and 17 stores in the US, Asia, and Europe. At first glance, the $1.5bn acquisition looks like a diversification from the group’s core business – the rationale is that it will provide a direct channel to an audience that is very difficult to reach and adds a margin accretive business to the group. We have some reservations and will watch to see if the deal ends up being a misallocation of capital.

The business mix is now optical (c. 75% of total revenue), sun (23%) and the rest being represented by Apparel, Footwear and Accessories (including Supreme brand) and smart-glasses (Ray-Ban Meta).

Back to the results. During the third quarter, revenue grew by 11.7% at constant exchange rates (CER) to €6.9bn. The result is the group’s ‘best quarterly performance ever’ and comes despite the tough year-on-year comparative with 6.7% in Q3 2024. This was above the market forecast of €6.7bn and driven by strong contributions from EMEA and North America, and by booming wearables and strong momentum across vision care and sunglasses. This is an acceleration versus the first half (+7.3%) and leaves the year-to-date growth at 8.8%.

Organic growth was above 9%, with M&A (Supreme and Heidelberg) contributing around 2%. Of that wearables contributed more than 4% to the growth rate.

EssilorLuxottica is a vertically integrated player with two distribution channels. Professional Solutions (PS) includes the supply of products and services to third-party eyecare professionals (i.e., wholesale). In Q3, revenue grew by 11.9% at CER to €3.2bn. Direct to Consumer (DTC) includes the sale of products and services directly to end consumers (i.e. retail), comprised of brick-and-mortar stores and e-commerce platforms. In Q3, revenue grew by 11.6% at CER to €3.6bn, with Supreme providing a positive uplift.

By geography, all the broad regions grew by double-digits. North America, the group’s largest region (44% of sales), grew by 12.1% at CER in Q3, a robust acceleration compared to the two previous quarters of the year. On the call, the company said that the impact of price increases was not the primary driver of overall growth in the region – importantly volume growth was a key contributor. Elsewhere, growth was: EMEA (+12.7%); Latin America (+5.2%); and Asia Pacific (+10.5%).

As expected, there was no commentary on margins or profit in today’s update. However, we note over time, the company has been able to convert its revenue growth into margin expansion, leveraging its vertically integrated business model and successfully absorbing the inflationary pressures on most cost items. Gross margins are high (63.5% in the first half), while the pro-forma operating margin was 18.3%. The business generates strong free cash flow (€951m in H1) and is financially robust. The group ended the first half with net debt (including lease liabilities) of €11.3bn, a comfortable 1.7x EBITDA.

The group’s high US revenue exposure versus minimal sourcing in the country means Essilor is exposed to tariffs, particularly for frames which are made in China and exported to the US. In response, the company is implementing two broad measures. Firstly, diversification of the supply chain in a way that doesn’t compromise product quality. Secondly, price hikes – mid single-digit increases were implemented in Q2, the benefit of which is currently flowing through.

Looking forward, Essilor doesn’t provide near-term guidance, although on the call, management highlighted strong momentum has carried on into the current quarter. The company remains confident in its strategic vision and its ability to deliver on its outlook for annual revenue growth of mid-single digit between 2022 and 2026 and adjusted operating profit margin of 19%-20% in 2026 (vs 17% in 2024). The target of €27bn-€28bn of revenue in 2026 was reiterated.

Source: Bloomberg