Luxottica Group: Corporate Research Paper

Lam Tran

FIN 456

June 10th, 2015

Corporate Research Paper

Luxottica Group S.p.A.

Luxottica Group S.pA. is the world’s largest eyewear company involving the designing, manufacturing, wholesale, and retailing of high end prescription eyeglasses and high quality sunglasses. Luxottica was founded by Leonardo Del Vecchio in 1961. The company is publicly listed on the New York Stock Exchange (LUX) and the Telematic Stock Exchange. Its global wholesale organization covers more than 130 countries and is complemented by an extensive retail network of over 7,000 stores mostly located in North America, Latin America and Asia-Pacific. Product design, development, and manufacturing take place in six production facilities in Italy, three in the People’s Republic of China, one in India, one in Brazil and one in the United States devoted to sports and performance eyewear. Luxottica Group dominates the market of eyewear, with net sales over Euro 7.6 billion in 2014, approximately 78,000 employees and a strong global presence. House brands include Oakley, Oliver Peoples, and Vogue. In addition to the Luxottica house brands, Luxottica licenses, manufactures, and distributes licensed brands, including Giorgio Armani, Bvlgari, Chanel, Ralph Lauren, Prada, and other leading names. In addition to eyewear, Luxottica also owns retailers such as Pearle Vision, LensCrafters, Sunglass Hut, Oliver Peoples, Target optical, and Sears optical. The company also owns EyeMed vision insurance.

Distribution of Sales and Assets by Geographic Area in 2014

The adequacy of the organizational, administrative, and accounting structure of Luxottica and of the strategically relevant subsidiary companies is annually assessed through the examination of a report prepared each fiscal year, as well as the adequacy of the internal control and risk management system. The Board of Director carries out its assessments taking into account the information supplied by the executive bodies, which, on the basis of the guidelines issued by the Board, supervise all business structures and formulate proposals to be submitted to the Board with regard to the organizational structure of the Group, the general development and investment plans, the financial plans and provisional financial statements as well as any other matter submitted to them by the Board itself.

The assets of Luxottica are exposed to different types of financial risk: market risk (including exchange rate risks, interest rate risk relative to fair value variability and cash flow uncertainty), credit risk and liquidity risk. The risk management strategy of the company aims to stabilize the results by minimizing the potential effects due to volatility in financial markets. The company uses derivative financial instruments, principally interest rate and currency swap agreements, as part of its risk management strategy.

Financial risk management is centralized within the Treasury department which identifies, evaluates and implements financial risk hedging activities, in compliance with the Financial Risk Management Policy guidelines approved by the Board of Directors, and in accordance with the Group operational units. The Policy defines the guidelines for any kind of risk, such as the exchange rate risk, the interest rate risk, credit risk and the utilization of derivative and non-derivative instruments. The Policy also specifies the management activities, the permitted instruments, the limits and proxies for responsibilities.

At the date the derivative contract is entered into, derivative instruments are accounted for at their fair value and, if they are not designated as hedging instruments, any changes in fair value after initial recognition are recognized as components of net income for the year. If, on the other hand, derivative instruments meet the requirements for being classified as hedging instruments, any subsequent changes in fair value are recognized according to the following criteria.

The company designates certain derivatives as instruments for hedging specific risks associated with highly probable transactions. For each derivative financial instrument designated as a hedging instrument, Luxottica documents the relationship between the hedging instrument and the hedged item, as well as the risk management objectives, the hedging strategy and the methodology to measure the hedging effectiveness. The hedging effectiveness of the instruments is assessed both at the hedge inception date and on an ongoing basis. A hedging instrument is considered highly effective when both at the inception date and during the life of the instrument, any changes in fair value of the derivative instrument offset the changes in fair value or cash flows attributable to the hedged items.