EL Essilorluxottica

By Carol Ryan 

This year's economic slump could shine a harsh light on dysfunctional governance at the company behind Ray-Ban, Oakley and other sunglasses brands. But shareholders will struggle to do much about it.

EssilorLuxottica said Tuesday that sales in the first quarter of 2020 fell by 11% at constant exchange rates compared with the same period a year earlier -- weaker than analysts were expecting.

That said, it is clearer than ever why French lensmaker Essilor and Italian sunglasses business Luxottica, which struck a troubled merger in 2017, are better off together. The prescription lenses division that generates 70% of group revenue is more defensive than the sunglasses unit, which tends to shine when the economy is strong. Delivery of cost savings from the combination also looks to be on track.

A power struggle between Luxottica's formidable founder, Leonardo Del Vecchio, and Essilor Chairman Hubert Sagnières rumbles on, however. The departure of EssilorLuxottica's co-CEO and co-CFO in March was the perfect opportunity to simplify the management team. Instead, EssilorLuxottica will stick with its cumbersome setup of two chairmen, two chief executives and two finance bosses.

Uncertainty about who is really in charge is unhelpful given the challenges ahead. The second quarter will be more difficult than the first. EssilorLuxottica makes just 5% of group sales in China, according to Bernstein estimates. Low exposure to the world's most important market for luxury goods means it won't get much benefit from any recovery in Chinese spending. With travel flows depressed, the airport-dependent sunglasses business could remain a drag for years.

Another question that would benefit from strong leadership concerns EssilorLuxottica's acquisition of smaller rival GrandVision. The target's shares are now trading roughly 15% below the takeover offer made last year, suggesting doubts about the deal going ahead or the terms.

EssilorLuxottica already has an activist investor on its case: Daniel Loeb's Third Point disclosed a stake in the business late last year. However, demands from hedge funds will be easier to ignore during the crisis. Management may argue that now isn't the time to bring in a new CEO, despite promising investors to hire in 2020.

EssilorLuxottica's shares, down 20% this year, have now lost most of the gains made since the merger was announced at the beginning of 2017. Investors who see that as an opportunity put themselves at the mercy not just of a souring economy, but also EssilorLuxottica's warring bosses.

Write to Carol Ryan at carol.ryan@wsj.com

(END) Dow Jones Newswires

May 05, 2020 08:42 ET (12:42 GMT)

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