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17 March 2017 Europe/ Equity Research Luxury Goods

Luxottica Group (LUX.MI) Rating OUTPERFORM Price (14 Mar 17, €) 50.10 INCREASE TARGET PRICE Target price (€) (from 50.00) 58.00 Market Cap (€ m) 24,262.1 Increase target price given merger synergies Enterprise value (€ m) 25,296.5 Target price is for 12 months. ■ Reiterate Outperform and increase target price to €58 from €50. Research Analysts Luxottica’s share price is back towards pre- merger announcement Catherine Tillson levels and appears to be pricing in little to no synergies for the deal. We 44 20 7888 6052 [email protected] believe this creates an attractive entry point into a value-generating merger. Guillaume Gauvillé, CFA Luxottica now trades in line with the luxury sector vs. a 10-year historical 44 207 888 0321 premium of 21%. EssilorLuxottica ex synergies trades just below its 5-year [email protected] 12-month forward consensus EV/EBIT of 17.3x, and on 15.6x FY18E. ■ Investment story intact. We do not believe the merger timing was a sign the equity story at Luxottica had derailed, and we continue to think the investment plan will run to completion. We believe this merger was driven by i) the synergies of becoming purely vertically integrated, creating a fully independent company with no sacrifice of profits along the value chain; ii) the end to the capital-intensive and lower-return divestment into each other’s businesses; and iii) the need to solve the succession issues at Luxottica. ■ We believe EssilorLuxottica can outperform. With the merger, we believe some of the legacy problems at each company are removed. This includes under penetration of emerging markets, Luxottica’s weakness with the independents, particularly in the US, and the online strategy. See our detailed EssilorLuxottica model in Seeing EssilorLuxottica , also published today. ■ Risks to our investment case: i) the merger does not happen, ii) the eyewear industry experiences a significant slowdown, especially in the US, and iii) the company initiative is executed poorly. ■ New target price of €58. We back out Luxottica’s target price from Essilor’s given the stated exchange rate of 0.461. This target price is derived from a 50:50 weighting of a pro forma DCF for EssilorLuxottica and a Credit Suisse HOLT® Linker including synergies of €540m, in line with company guidance of €400-600m. Share price performance Financial and valuation metrics

7 0 Year 12/16A 12/17E 12/18E 12/19E Revenue (€ m) 9,085.7 9,779.9 10,301.7 10,837.8 6 0 EBITDA (€ m) 1,945.0 2,021.8 2,250.2 2,434.9 Adjusted net income (€ m) 881.70 919.17 1,041.46 1,130.62 5 0 CS EPS (adj.) (€) 1.84 1.91 2.17 2.36 4 0 Prev. EPS (€) 1.75 1.94 2.18 2.39 Ju l- 1 5 Jan - 1 6 Ju l- 1 6 Jan - 1 7 ROIC (%) 13.7 13.3 14.5 15.3 P/E (adj.) (x) 27.3 26.2 23.1 21.3 LUX.M I FT SEURO FIRST 3 0 0 IN D EX P/E rel. (%) 108.0 214.8 224.7 232.1 The price relative chart measures performance against the EV/EBITDA (x) 13.1 12.5 11.1 10.1

FTSEUROFIRST 300 INDEX which closed at 1472.5 on Dividend (12/17E, €) 1.00 Net debt/equity (12/17E,%) 16.7 14/03/17 Dividend yield (12/17E,%) 2.0 Net debt (12/17E, € m) 1,034.4 On 14/03/17 the spot exchange rate was €1/Eu 1.- BV/share (12/17E, €) 13.2 IC (12/17E, € m) 7,225.4 Eu.94/US$1 Free float (%) 27.7 EV/IC (12/17E, (x) 3.5 Performance 1M 3M 12M Source: Company data, Thomson , Credit Suisse estimates Absolute (%) 0.2 -3.8 0.2 Relative (%) -1.0 -7.8 -9.9

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 17 March 2017

Luxottica Group (LUX.MI) Price (14 Mar 2017): €50.1; Rating: OUTPERFORM; Target Price: (from €50.00) €58.00; Analyst: Catherine Tillson Income statement (€ m) 12/16A 12/17E 12/18E 12/19E Company Background Revenue 9,086 9,780 10,302 10,838 Luxottica Group is engaged in the design, manufacture and EBITDA 1,945 2,022 2,250 2,435 distribution of fashion, luxury and sporting eyewear. It operates Depr. & amort. (478) (538) (587) (639) through two arms; and wholesale, with the retail arm made up EBIT 1,432 1,484 1,663 1,795 of brands such as and LensCrafters. Net interest exp. (66) (67) (57) (52) Associates - - - - Blue/Grey Sky Scenario PBT 1,406 1,417 1,606 1,743 Income taxes (466) (496) (562) (610) Profit after tax 939 921 1,044 1,133 Minorities (2) (2) (2) (2) Preferred dividends - - - - Associates & other (56) 0 0 0 Net profit 882 919 1,041 1,131 Other NPAT adjustments (31) (0) 0 0 Reported net income 851 919 1,041 1,131 Cash flow (€ m) 12/16A 12/17E 12/18E 12/19E EBIT 1,432 1,484 1,663 1,795 Net interest (95) (74) (65) (62) Cash taxes paid (275) (496) (562) (610) Change in working capital (50) (102) (76) (55) Other cash and non-cash items 365 471 530 587 Cash flow from operations 1,378 1,284 1,489 1,655 CAPEX (651) (700) (738) (758) Free cashflow to the firm 632 510 686 834 Acquisitions 0 0 0 0 Divestments 0 0 0 0 Other investment/(outflows) (136) (156) (165) (173) Cash flow from investments (787) (857) (903) (932) Net share issue/(repurchase) 0 0 0 0 Dividends paid (427) (441) (478) (521) Issuance (retirement) of debt 195 (1) (36) 20 Our Blue Sky Scenario (€) (from 56.00) 63.00 Cashflow from financing (231) (442) (514) (501) Our blue sky scenario is backed out of the EssilorLuxottica valuation Changes in net cash/debt (171) 143 273 376 of €137 at the 0.461 exchange ratio. This assumes the merger goes through faster than expected and synergies are realised faster than Net debt at start 1,006 1,177 1,034 761 we forecast. This leads to a 10% uplift in EBIT. We use the average Change in net debt 171 (143) (273) (376) historic ex synergy EssilorLuxottica EV/EBIT multiple of 17x. This Net debt at end 1,177 1,034 761 386 leads us to derive a blue sky scenario of €63. Balance sheet (€ m) 12/16A 12/17E 12/18E 12/19E Assets Our Grey Sky Scenario (€) (from 32.00) 41.00 Total current assets 3,028 3,330 3,684 4,177 We base our grey sky scenario on the merger between Total assets 10,300 10,764 11,269 11,881 EssilorLuxottica falling through. We also assume FY18 operating Liabilities profits decline by 15% as i) the company executes poorly on its Total current liabilities 2,216 2,275 2,308 2,354 investment strategy, ii) LensCrafters fails to reaccelerate growth and Total liabilities 4,515 4,573 4,578 4,640 iii) wholesale organic growth does not reaccelerate. Total equity and liabilities 10,300 10,764 11,269 11,881 Taking the historical average EV/EBIT multiple of 15x leads us to Per share 12/16A 12/17E 12/18E 12/19E derive a grey sky scenario of €41. No. of shares (wtd avg.) (mn) 480 480 480 480 CS EPS (adj.) (€) 1.84 1.91 2.17 2.36 Share price performance Dividend (€) 0.92 1.00 1.09 1.18 Free cash flow per share (€) 1.32 1.06 1.43 1.74 70 Key ratios and valuation 12/16A 12/17E 12/18E 12/19E Growth/Margin (%) Sales growth (%) 0.8 7.6 5.3 5.2 60 EBIT growth (%) (0.7) 3.6 12.1 8.0 Net income growth (%) 3.2 4.2 13.3 8.6 50 EPS growth (%) 3.7 4.2 13.3 8.6 EBITDA margin (%) 21.4 20.7 21.8 22.5 40 EBIT margin (%) 15.8 15.2 16.1 16.6 Pretax profit margin (%) 15.5 14.5 15.6 16.1 May- 15 Sep- 15 Jan- 16 May- 16 Sep- 16 Jan- 17 Net income margin (%) 9.7 9.4 10.1 10.4 LUX.MI FTSEUROFIRST 300 INDEX Valuation 12/16A 12/17E 12/18E 12/19E EV/Sales (x) 2.8 2.6 2.4 2.3 EV/EBITDA (x) 13.1 12.5 11.1 10.1 The price relative chart measures performance against the FTSEUROFIRST EV/EBIT (x) 17.8 17.0 15.0 13.7 300 INDEX which closed at 1472.5 on 14/03/17 Dividend yield (%) 1.84 1.99 2.17 2.35 On 14/03/17 the spot exchange rate was €1/Eu 1.- Eu.94/US$1 P/E (x) 27.3 26.2 23.1 21.3 Credit ratios (%) 12/16A 12/17E 12/18E 12/19E Net debt/equity (%) 20.3 16.7 11.4 5.3 Net debt to EBITDA (x) 0.6 0.5 0.3 0.2 Interest coverage ratio (x) 21.7 22.3 29.0 34.4 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates

Luxottica Group (LUX.MI)2 17 March 2017

New TP of €58, reiterate Outperform We reiterate our Outperform rating for Luxottica. Following the announcement of the merger with Essilor, due to close in 2H17 pending regulatory approval, we reiterate our Outperform and raise our target price to €58 from €50. We continue to believe in the underlying story at Luxottica where self-help measures should support growth and margin accretion. We think the €1.5bn investment plan will run to completion and initiatives such as the retail portfolio review in the US and the rollout of mono-brand stores in will continue. Some of the company initiatives should be easier with the help from Essilor… Luxottica has invested in three centralised lens labs so that it can start offering Ray-Ban branded lenses to selected wholesale clients. We believe this offering was fairly limited due to the costs associated with setting it up and the implications it had on the Essilor/Luxottica relationship given it is a direct move into Essilor’s business. As EssilorLuxottica, this concern is removed and Luxottica can use Essilor’s already functioning lens labs to offer more wholesale clients this option and cover more brands. Moreover, Luxottica had been removing third-party distributors in China to gain greater control of the distribution of its products. In doing this, we think it may have lost some valued retail partners and was compelled to stay with some wholesale distributors given their size and influence in the market. As EssilorLuxottica, both companies should have greater leverage in these negotiations, in our view, and become fully independent in the region. …and the final chapter of the founder’s book has been written. We believe that as part of EssilorLuxottica, the company is relieved of the management overhang as Luxottica founder Mr Del Vecchio now has a succession plan. Although it is not immediately clear how it will pan out in the short term, we expect a transition of control over the next 2-3 years post the initial merger of the companies. We also see it as a positive that both managers remain committed to the deal to ensure swift and correct execution. We continue to model Luxottica independently… As with the Essilor model, we continue to report the individual company forecasts. These forecasts then flow into our pro forma EssilorLuxottica model. …and make adjustments to our estimates following FY16 results and new FY17 guidance. Luxottica reported FY16 operating margins just above expectations at 15.8% versus consensus at 15.6% (source: Reuters). However, the focus of the day was on the new guidance. For FY17 the company is expecting low-to-mid single-digit organic growth, operating income to grow at 0.8-1.0x sales growth and net income to grow at 1x sales. We believe this is lower than the market was expecting with consensus pre results forecasting 7-9% growth in EBIT for FY17 (source: Reuters and Bloomberg). We believe the lower operating profit guidance is driven by continued reinvestment in the business, at perhaps a faster rate than was expected initially as Luxottica prepares itself for the merger with Essilor. We adjust our FY17 estimates by 2%. We reduce our organic growth expectations for FY17, lowering our LFL to 2.8% from 3.2%. We adjust our wholesale North America expectations given readings from the OBB survey (introduced in ‘Visions are changing’ published in conjunction with this report today) and positive North America commentary from Essilor, which suggests December and January saw a reacceleration of growth in the US. We forecast -2% in 1Q versus 5% in 4Q16, -11% in 3Q16 and 3% in 1Q16 as, despite the positive commentary, we still include some impact of MAP. This leaves us estimating organic growth of 4.1% for the group, towards the top end of guidance. On the bottom line, we forecast operating profit to grow at 3.6%, in line with guidance. This leads to a margin contraction of 60bps in 2017E to 15.2%. We now sit on average 1% ahead of consensus across FY17/18/19 on topline and operating profit.

Luxottica Group (LUX.MI)3 17 March 2017

We note the patent box could provide an upside surprise. We have not included in our models any benefit on the tax rate from the current negotiations around the patent box or potential if the Trump administration reduces the corporate tax rate in the US. We believe both of these could indicate potential upside. If we assume c30% of NOPAT is from the US and the corporate tax rate declines from 35% to 15%, we could expect a 400-500bps reduction in the tax rate. Similarly for the patent box, we have seen the negotiations at Ferragamo lead to a proposed reduction in the tax rate from 31% to 24% over the next five years. However, we would note any change in tax rate in the US is likely to be negated by proposed import taxes. This is despite the possibility of the company moving into the US for its non-'' brands. Currently, the US Oakley plant accounts for 10% of production and we believe this could be scaled up easily. We back out the target price from Essilor now that the 0.461 exchange ratio exists. As we assume the merger will be completed, we back out our target price from our Essilor target price. Note, the Essilor target price is based on a 50:50 weighting of our EssilorLuxottica merger model DCF and HOLT Linker. The merger model is driven by i) the underlying Essilor model, ii) the underlying Luxottica model and iii) estimated synergies. Given that we forecast a €127 target price for Essilor, this implies a Luxottica target price of €58 using the 0.461 ratio, according to the terms of the deal. Taking these share prices for both companies and our FY18 operating profit forecasts puts the combined entity on a EV/EBIT of 17.7x. This is slightly higher than EssilorLuxottica ex synergies historical multiple of 17.3x but in our opinion justified by the greater and barriers to entry of the combined entity. We follow the same Blue Sky/Grey Sky methodology for Luxottica. Similarly we alter our Blue Sky/Grey Sky scenario to match Essilor. Our Blue Sky scenario is based on the EssilorLuxottica merger being executed faster than expected and achieving synergies sooner than expected, leading to a 10% uplift in operating profit for the combined entity in FY18 to over €3.5bn. Applying the historical average EssilorLuxottica ex synergy 12mth forward consensus EV/EBIT multiple of 17x gives a blue sky valuation of €137 for Essilor, and therefore assuming a 0.461 exchange ratio, a Blue Sky valuation of €63 for Luxottica. We base our Grey Sky scenario on the stand alone Luxottica entity. Our Grey Sky scenario is based on the assumption the merger does not go through. Additionally we assume this disruption derails the investment plans causing a 15% reduction in FY18 operating profits. We therefore forecast an operating profit of c€1.4bn. Applying Luxottica’s average historical EV/EBIT multiple of 14.6x leads us to a Grey Sky valuation of €41.

Luxottica Group (LUX.MI)4 17 March 2017

Figure 1: Our detailed pro forma EssilorLuxottica DCF model used in calculating Luxottica’s target price DCF model based on our pro forma EssilorLuxottica model FY16 FY17e FY18e FY19e FY20e FY21e FY22e FY23e FY24e FY25e FY26e Net sales 7,115 17,550 18,719 20,019 21,335 22,693 24,023 25,259 26,378 27,358 28,179 Growth 6% 147% 7% 7% 7% 6% 6% 5% 4% 4% 3%

Clean EBIT 1,230 2,868 3,254 3,719 4,116 4,478 4,441 4,355 4,219 4,034 3,804 Margin 17.3% 16.3% 17.4% 18.6% 19.3% 19.7% 18.5% 17.2% 16.0% 14.7% 13.5%

Depreciation & Amortization 378 912 987 1,067 1,151 1,242 1,257 1,278 1,287 1,284 1,268 As a % of capex 128% 87% 87% 89% 93% 97% 94% 96% 97% 99% 100%

Change in working capital 8 (195) (143) (160) (157) (202) (240) (253) (264) (274) (282) As a % of sales -0.1% 1.1% 0.8% 0.8% 0.7% 0.9% 1.0% 1.0% 1.0% 1.0% 1.0%

Cash Tax (250) (825) (948) (1,095) (1,226) (1,346) (1,334) (1,309) (1,268) (1,212) (1,143) Cash tax rate (as a % of EBIT) 20% 29% 29% 29% 30% 30% 30% 30% 30% 30% 30%

Capex (294) (1,050) (1,129) (1,194) (1,237) (1,284) (1,331) (1,333) (1,324) (1,302) (1,268) As a % of sales 4.1% 6.0% 6.0% 6.0% 5.8% 5.7% 5.5% 5.3% 5.0% 4.8% 4.5% FCFF 1,073 1,710 2,021 2,337 2,647 2,890 2,793 2,738 2,651 2,531 2,379 y-o-y change 17% 59% 18% 16% 13% 9% 5% -2% -3% -5% -6% Source: Credit Suisse estimates

Figure 2: Our 12-month forward target price using our DCF WACC FY17e Gross debt 4,734 Pre-tax cost of debt 3% Levered beta 0.79 Cost of equity 7% WACC 6% Terminal growth rate 3% Fair value Total EV 58,411 FY1E net debt (2,214) Market value of minorities (564) Pensions (509) Fair value of equity 55,124 Equity value per share (12-month) 127 Luxottica equity value per share (12-month) 58 Source: Credit Suisse estimates

Luxottica Group (LUX.MI)5 17 March 2017

Figure 3: HOLT pro forma EssilorLuxottica Linker for Luxottica target price

ESSILOR - LUXOTTICA PRO- FORMA (ESSI) Current Price: EUR 110.80 Warranted Price: EUR 127 Valuation date: 14-Mar-17

Sales Growth (parallel % point change to forecasts) Dec 14A Dec 15A Dec 16E Dec 17E Dec 18E

EUR -2.0% -1.0% 0.0% 1.0% 2.0% Sales Growth, % 11.9 174.3 4.2 8.3 6.7

e

g EBITDA Mgn, % 22.2 22.7 22.0 21.5 22.7

n -2.0% -30% -17% -3% 13% 32% a

h Asset Turns, x 0.85 0.9 0.9 0.9 0.9 c

t n i

o -1.0% -22% -9% 6% 23% 43% p

) CFROI®, % 14.8 18.3 17.5 16.9 17.8 s % t

l s e a l l

c Disc Rate, % 4.1 3.4 3.3 3.3 3.3 a e 0.0% -15% -1% 14% 33% 53% r r a o f

p Asset Grth, % 9.7 148.0 5.3 5.9 4.8

(

o t n i g

r 1.0% -8% 6% 23% 42% 64% a

M Value/Cost, x 5.2 5.0 4.5 4.3 4.1

A

D Economic PE, x 35.2 27.5 25.7 25.1 22.7 T

I 2.0% -1% 14% 32% 52% 75% B

E Leverage, % 14.0 15.0 15.6 16.3 17.0 a t

a More than More than Sales Growth (%) D 10% Within 10% 20 10% upside o downside 18 i r 16 a

n 14 e

c CFROI & Discount Rate (in %) 12 S 10

t 8 s 25 y

l 6

a 4 n 20

A 2

e 0

s 15 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 s i u S

10

t EBITDA Margin i 30 d

e 5 r 25 C

- 20 0

2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 T Historical CFROI Historical Transaction CFROI 15 L Forecast CFROI Forecast CFROI

O CFROI Discount Rate 10 H 5 Asset Growth (in %) 0 20 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029

15 Asset Turns (x) 1.0 10 0.9 0.8 5 0.7 0.6 0 0.5 0.4 -5 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 0.3 0.2 Historical Asset Growth Rate Forecast Growth 0.1 Forecast Growth RAGR Normalised Growth Rate 0.0 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029

Source: Credit Suisse HOLT®. CFROI and HOLTare trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the and other countries. For display purposes, these charts have been capped as follows. Asset Growth and Sales growth are capped at 20%.

Source: Company data, Credit Suisse HOLT

Luxottica Group (LUX.MI)6 17 March 2017

Figure 4: Topline growth drivers for our underlying Luxottica model € millions unless otherwise stated FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e Retail 3,766 4,313 4,321 4,459 5,244 5,558 6,050 6,335 6,596 Reported growth 5.7% 14.5% 0.2% 3.2% 17.6% 6.0% 8.8% 4.7% 4.1% Underlying growth 9.1% 5.8% 4.7% 4.3% 2.3% 6.8% 4.4% 4.6% 4.1% Comparable growth 5.5% 5.8% 3.4% 4.0% 3.9% 0.6% 2.8% 4.0% 3.9% Wholesale 2,456 2,773 2,991 3,194 3,593 3,528 3,730 3,966 4,242 Reported growth 9.8% 12.9% 7.9% 6.8% 12.5% -1.8% 5.7% 6.3% 6.9% Underlying growth 11.2% 10.0% 12.0% 8.6% 6.9% -0.4% 3.6% 6.3% 6.9% Net sales 6,222 7,086 7,313 7,652 8,837 9,086 9,780 10,302 10,838 Reported growth 7.3% 13.9% 3.2% 4.6% 15.5% 2.8% 7.6% 5.3% 5.2% Constant currency growth (not adj) 9.9% 7.5% 7.5% 6.1% 4.3% 3.9% 4.1% 5.3% 5.2% Source: Company data, Credit Suisse estimates

Figure 5: Per share data for our underlying Luxottica model (€) Per share data FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e Average basic number of shares (‘000s) 460,437 464,643 472,057 475,948 479,554 479,226 479,226 479,226 479,226 Average diluted number of shares (‘000s) 463,296 469,574 476,273 479,247 482,073 480,026 480,026 480,026 480,026 % change 0.6% 1.4% 1.4% 0.6% 0.6% -0.4% 0.0% 0.0% 0.0%

Basic EPS (from continuing operations) 0.98 1.17 1.15 1.35 1.68 1.77 1.92 2.17 2.36 Diluted EPS 0.98 1.15 1.14 1.34 1.67 1.77 1.91 2.17 2.36

Basic Adjusted EPS 0.99 1.22 1.31 1.44 1.78 1.84 1.92 2.17 2.36 Diluted Adjusted EPS 0.98 1.21 1.30 1.44 1.77 1.84 1.91 2.17 2.36 % change 12.6% 23.5% 7.4% 10.8% 23.0% 3.7% 4.2% 13.3% 8.6% Source: Company data, Credit Suisse estimates

Luxottica Group (LUX.MI)7 17 March 2017

Figure 6: Full P&L for our underlying Luxottica model €m unless otherwise stated FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e Net sales 6,222 7,086 7,313 7,652 8,837 9,086 9,780 10,302 10,838 Reported growth 7.3% 13.9% 3.2% 4.6% 15.5% 2.8% 7.6% 5.3% 5.2% Constant currency growth 9.9% 7.5% 7.5% 6.1% 4.3% 3.9% 4.1% 5.3% 5.2%

Cost of sales (2,168) (2,379) (2,524) (2,575) (2,835) (3,153) (3,376) (3,514) (3,654) Growth 8.9% 9.7% 6.1% 2.0% 10.1% 11.2% 7.1% 4.1% 4.0% % of net sales 34.8% 33.6% 34.5% 33.6% 32.1% 34.7% 34.5% 34.1% 33.7%

Gross profit 4,054 4,707 4,789 5,078 6,001 5,932 6,404 6,788 7,184 Gross margin 65.2% 66.4% 65.5% 66.4% 67.9% 65.3% 65.5% 65.9% 66.3%

Adjusted gross profit 4,054 4,650 4,725 5,078 6,002 5,951 6,404 6,788 7,184 Adjusted gross margin 65.2% 65.6% 64.6% 66.0% 66.6% 65.5% 65.5% 65.9% 66.3% Bps change (52) 47 (101) 134 65 (111) (2) 41 39

Adjusted operating costs Selling (1,988) (2,255) (2,242) (2,352) (2,773) (2,838) (3,112) (3,224) (3,390) % of net sales 31.9% 31.8% 30.7% 30.6% 30.8% 31.2% 31.8% 31.3% 31.3% Royalties (106) (124) (145) (150) (169) (170) (186) (196) (206) % of net sales 1.7% 1.8% 2.0% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9% Advertising (407) (443) (480) (511) (590) (568) (636) (670) (704) % of net sales 6.5% 6.3% 6.6% 6.6% 6.5% 6.3% 6.5% 6.5% 6.5% General and administrative (732) (823) (794) (887) (1,027) (943) (986) (1,036) (1,088) % of net sales 11.8% 11.6% 10.9% 11.5% 11.4% 10.4% 10.1% 10.1% 10.0% Total operating expenses (3,233) (3,646) (3,660) (3,900) (4,559) (4,519) (4,920) (5,125) (5,388) % of sales 52.0% 51.4% 50.0% 50.7% 50.6% 49.7% 50.3% 49.7% 49.7% Adjusted income from operations 821 1,004 1,065 1,178 1,443 1,432 1,484 1,663 1,795 Adjusted operating margin 13.2% 14.2% 14.6% 15.3% 16.0% 15.8% 15.2% 16.1% 16.6%

Adjusted EBITDA 1,136 1,362 1,431 1,562 1,920 1,945 2,022 2,250 2,435 margin (%) 18.3% 19.2% 19.6% 20.3% 21.3% 21.4% 20.7% 21.8% 22.5%

Other income/(expense) (112) (126) (99) (98) (99) (27) (67) (57) (52) Profit before taxation 695 856 956 1,060 1,278 1,319 1,417 1,606 1,743 Adjusted profit before tax 709 878 966 1,080 1,344 1,406 1,417 1,606 1,743

Provision for income taxes (237) (310) (408) (414) (471) (466) (496) (562) (610) Tax rate 34.1% 36.3% 42.6% 39.1% 36.9% 35.4% 35.0% 35.0% 35.0% attributable to Luxottica stockholders (cont.) 452 542 545 643 804 851 919 1,041 1,131 Non-controlling interests 6.0 4.2 4.2 3.4 2.8 1.8 2.0 2.2 2.4 Net income from continued operations 458 546 549 646 807 852 921 1,044 1,133 growth (%) 18% 19% 1% 18% 25% 6% 8% 13% 9% margin (%) 7% 8% 8% 8% 9% 9% 9% 10% 10%

Adjusted net income attributable to Luxottica 456 567 617 687 854 882 919 1,041 1,131 Source: Company data, Credit Suisse estimates

Luxottica Group (LUX.MI)8 17 March 2017

Companies Mentioned (Price as of 14-Mar-2017) Essilor International SA (ESSI.PA, €110.8) Luxottica Group (LUX.MI, €50.1, OUTPERFORM, TP €58.0) Salvatore Ferragamo Spa (SFER.MI, €28.2)

Disclosure Appendix Analyst Certification Catherine Tillson and Guillaume Gauvillé, CFA, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Luxottica Group (LUX.MI)

LUX.MI Closing Price Target Price Target Price Closing Price LUX.MI Date (€) (€) Rating 55 15-Jun-16 44.82 52.00 O * 07-Oct-16 40.85 50.00 50 * Asterisk signifies initiation or assumption of coverage.

45

40 01- Jul- 2016 01- Sep- 2016 01- Nov- 2016 01- Jan- 2017 01- Mar- 2017

O U T PERFO RM

3-Year Price and Rating History for Salvatore Ferragamo Spa (SFER.MI)

SFER.MI Closing Price Target Price Target Price Closing Price SFER.MI Date (€) (€) Rating 35 17-Mar-14 21.01 21.00 U 26-Jun-14 21.54 21.00 N 30 12-Aug-14 20.22 22.00 O 29-Jan-15 25.15 26.00 25 27-Mar-15 28.60 26.00 N 13-Jul-15 26.41 28.00 O 20 18-Nov-15 21.37 24.00 15 28-Apr-16 20.70 22.00 N 01- Jan- 2015 01- Jan- 2016 01- Jan- 2017 31-Jan-17 24.45 24.00 * Asterisk signifies initiation or assumption of coverage. U N D ERPERFO RM N EU T RA L O U T PERFO RM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Luxottica Group (LUX.MI)9 17 March 2017

Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:

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Target Price and Rating Valuation Methodology and Risks: (12 months) for Luxottica Group (LUX.MI)

Method: Our target price of €58 and Outperform rating is based on applying the guaranteed exchange ratio of 0.461 Essilor shares for each Luxottica share. The Essilor share price is a simple average of our DCF and a HOLT Linker model (using a 15-year competitive advantage period window) and the EssilorLuxottica proforma. With the stock having de rated signficantly post deal and valuation coming back in line with its the 5yr consensus 12mth fwd EV/EBIT of EssilorLuxottica ex synergies, we think current levels represent an attractive entry point and rate the stock Outperform. Risk: Key risks to our target price of €58 and Outperform rating include: (i) the merger deal falls through (ii) broad macro weakness (iii) a significant decline in US domestic purchases (iv) loss of key licenses such as (v) key proprietary brand Ray-Ban loses brand equity.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (LUX.MI, ESSI.PA) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (LUX.MI, ESSI.PA) within the next 3 months. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit- suisse.com/disclosures/view/report?i=285278&v=401n61cvwe0ngk9cce6h9mfs2 . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

Luxottica Group (LUX.MI) 10 17 March 2017

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