Shrinking Demographics And E-Commerce Will Undermine Eyewear Value

Key Takeaways

• Market dynamics like shrinking demand, income inequality, and disruptive technologies threaten revenue growth, volume opportunities, and long-term profitability.
  
• Increased competition from e-commerce and risks in brand licensing may erode market share, price power, and operating margins over time.
  
• Innovation in smart eyewear, demographic trends, operational discipline, effective partnerships, and strategic acquisitions collectively position EssilorLuxottica for sustained growth and market leadership.

Catalysts

Designs, manufactures, and distributes ophthalmic lenses, frames, and sunglasses in North America, the Middle East, Africa, Europe, Latin America, and the Asia-Pacific.

• The long-term outlook for EssilorLuxottica's revenue growth could be challenged by a shrinking global addressable market for eyewear, as persistent declines in birth rates worldwide ultimately outweigh the short-term gains from aging populations and myopia trends, leading to slower revenue growth and a diminished long-term volume opportunity.
  
• Rising income inequality in both developed and emerging markets threatens the company's premium brands strategy by increasing price sensitivity and reducing discretionary spending on luxury eyewear, likely putting sustained pressure on top-line expansion and eroding net margins over time.
  
• The rapid advance of e-commerce and direct-to-consumer business models by new and agile market entrants is expected to continuously erode EssilorLuxottica's traditional retail dominance, resulting in market share losses, greater price competition, and long-term compression in operating margins.
  
• Overreliance on brand licensing renewals for flagship lines exposes EssilorLuxottica to significant risks as key contracts could be renegotiated on less favorable terms or lost entirely in a more competitive environment, directly impacting revenue stability and operating profitability in future years.
  
• The growth of refractive surgeries and disruptive technologies, such as 3D-printed eyewear and alternative smart eyewear solutions, is poised to shrink long-term demand for prescription lenses and weaken EssilorLuxottica's pricing power, creating structural headwinds for both revenue and earnings growth through the next decade.

EssilorLuxottica Société anonyme Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on EssilorLuxottica Société anonyme compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming EssilorLuxottica Société anonyme's revenue will grow by 6.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.9% today to 10.7% in 3 years time.
• The bearish analysts expect earnings to reach €3.4 billion (and earnings per share of €7.38) by about July 2028, up from €2.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 32.2x on those 2028 earnings, down from 48.1x today. This future PE is lower than the current PE for the GB Medical Equipment industry at 42.6x.
• Analysts expect the number of shares outstanding to grow by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.9%, as per the Simply Wall St company report.

EssilorLuxottica Société anonyme Future Earnings Per Share Growth

Risks

• The company is experiencing robust growth in new product categories such as wearable tech (Ray-Ban Meta) and audio-enabled glasses (Nuance Audio), with strong consumer demand, expanding capacity to up to 10 million units, and plans for future AI-enabled features. These innovations have the potential to drive significant incremental revenue and diversify the top line.
  
• EssilorLuxottica benefits from powerful long-term demographic trends, including global population aging and rising incidence of myopia, highlighted by products like Stellest which experienced 60% annual growth in China and strong uptake in Europe, supporting both volume increases and expansion into unmet vision needs, which will bolster revenue over time.
  
• The company demonstrates operational strength through sustained double-digit margin expansion, continued cost discipline, and consistent free cash flow generation, as well as strong regional performance, including 15 consecutive quarters of revenue growth in EMEA and ongoing double-digit growth in Latin America and Asia Pacific, all of which set a foundation for stable or improving net margins and earnings.
  
• Rapid pace of technological innovation and effective partnerships, especially with Meta, is positioning the company at the forefront of smart eyewear and digital health solutions, creating high barriers to entry for competitors and unlocking new service and subscription revenue streams.
  
• Strategic acquisitions in medical diagnostics (Heidelberg Engineering), success in brand expansion and renewal of lucrative long-term licenses, plus the growing penetration of direct-to-consumer and e-commerce channels, all add to EssilorLuxottica's resilience, market share, and potential for long-term earnings growth.

Valuation

• The assumed bearish price target for EssilorLuxottica Société anonyme is €192.19, which represents two standard deviations below the consensus price target of €260.22. This valuation is based on what can be assumed as the expectations of EssilorLuxottica Société anonyme's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €300.0, and the most bearish reporting a price target of just €180.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €31.6 billion, earnings will come to €3.4 billion, and it would be trading on a PE ratio of 32.2x, assuming you use a discount rate of 6.9%.
• Given the current share price of €246.2, the bearish analyst price target of €192.19 is 28.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.