Luxottica Shares Lower Following Goldman's Downgrade To Sell

Shares of Luxottica Group SpA (ADR) (NYSE: LUX) were trading lower by nearly 1.5 percent during Friday's pre-market session after analysts at Goldman Sachs downgraded the stock to Sell.

Analyst William Hutchings downgraded the European-listed issue to Sell from Neutral with a price target lowered to €57.1 from €59.4 following its outperformance versus the European Retail group by nearly 20 percent.

According to Hutchings, Luxottica has a low CROCI (cash return on cash invested) business with a higher EV/sales (3.1x 2016E) multiple versus its peers. In addition, the company faces growing risks to its business and does "not have enough control" over distribution of its key brands such as Ray-Ban.

While Hutchings noted that Luxottica is the "clear market share leader" in eyewear frame production, the growing importance of e-commerce presents a challenge. The company has a reliance on store-based growth for its retail network as e-commerce represents just 2 percent of sales. Meanwhile, the company's scale advantage has seen its relevance "reduced" as barriers to entry for new competitors to enter the space are now lowered.

Hutchings continued that the lower cost and capital requirements for Luxottica's peers (and new entrants) to grow their businesses through e-commerce increases the likelihood it will lose market share. E-commerce penetration in eyewear is estimated by the analyst to be low at just 3 percent, but it may prove to be the fastest-growing distribution segment in the industry and reach 16 percent in 2025 and present long-term risks to Luxottica's dominance.

Bottom line, Luxottica demonstrated a "strong" financial and operating performance over the past 10 years, but the analyst sees risks to "already-full" valuation multiples which doesn't accurately reflect competitive threats and concerns.