Eyecare promises rose-tinted future

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The Independent Online
Investors are beginning to realise that an exciting future looms for spectacle manufacturer Eyecare Products, at 46p. Interest has been slow to build because the main factories are located in France, the biggest shareholder is American and the chief executive, Andre Cohen, though British by birth, has spent much of his life abroad. But as understanding grows of just how good prospects are, the shares should move smartly higher.

The aim is to "become one of the top eyewear companies by the end of the decade", says Mr Cohen, talking of operating margins of 20 per cent by then. Even on last year's turnover of pounds 61m that implies operating profits of pounds 12m against a market capitalisation of pounds 40m. But such progress will only be made if turnover also rises sharply.

Mr Cohen has added incentive because of option schemes giving him a major interest in how the shares perform. In total, he has options over 3.25 million shares at prices ranging from 30p up to pounds l expiring in 2001.

The recovery in the fortunes of then cosmetics minnow Kitty Little, as Eyecare was previously known, began earlier in the 1990s when a US importer of eyewear products, BEC Group (formerly known as Benson), acquired a stake with the idea of building up an eyewear business in the fragmented European market. Before their arrival the shares had dropped from 120p to 4p. Kitty Little had a range of interests including importing and supplying sunglasses and spectacle frames and supplying other items such as pot- pourri. The non-eyeglass interests were sold and the group transformed by the purchase of a struggling French manufacturer of spectacle frames, Group L'Amey. Mr Cohen was recruited to knock the enlarged group into shape.

Latest results show good progress being made with a turnaround at pre- tax level from a pounds 3.3m loss for calendar 1994, including exceptional losses of pounds 2.6m, to a profit to pounds 3.2m for 1995. In part, the improved performance reflected a much stronger balance sheet. L'Amey, France's largest manufacturer of optical frames and glasses, was acquired for pounds 8.9m but was funded by a share placing to raise pounds 18.4m. Additional funding was needed to cope with the heavy indebtedness of the French business at a time when recession in continental Europe was driving down sales.

There is still ample scope for improvement. Operating margins in 1995 were less than 5 per cent yet Mr Cohen believes he can quadruple that figure on a medium-term view. Specifically, he has a target gross margin of 60 per cent against the current figure of 54 per cent and is looking to cut operating expenses to 40 per cent of sales against some 50 per cent in the latest figures. That includes a further target of lifting the marketing budget from 5 or 6 to nearer 8 per cent of sales, implying a spectacular improvement in overhead recovery.

Part of the strategy involves traditional business housekeeping - more automation and improved logistics. These are important for spectacle frame manufacturers given that opticians require a fast service in supplying a vast range of sizes and shapes.

The group is also taking other initiatives to boost sales. Mr Cohen believes that for the foreseeable future it will be right to source the more expensive branded frames in France. These include Lunette L'Amey, the group's midpriced own-label brand. But a cheaper own label, Visions, is also being launched, initially in the US and sourced in the Far East from dedicated factories in Korea and China. Since 60 per cent of L'Amey's sales are outside France this additional production flexibility holds great promise for the future.

Stockbrokers' forecasts see these initiatives and a strategy of hedging against currency risk taking profits to pounds 3.6m this year and pounds 5m in 1997. That would leave the prospective p/e ratio on a notional full tax charge to around 12. But those numbers could be beaten if the group is successful in its acquisition plans.

Improved international distribution and more brands are the key to boosting sales. At present, L'Amey has licences for Nina Ricci, Lacoste, Ted Lapidus and Chevignon, a well-known brand in France, in addition to its two main own-label brands. Mr Cohen hopes to add to that portfolio either by launching new brands for fashion groups that do not yet have a spectacles business or by acquiring rights (if necessary buying licence-holding companies) to existing brands. Investors buying now could be in for an exciting ride.