EssilorLuxottica buys Supreme from VF

Updated July 17 at 4:00 PM EST

There is something about Supreme that makes companies see themselves differently and are willing to try new things.

That was the case for VF Corp. when it bought the exclusive and often elusive luxury streetwear brand for $2.1 billion in 2020 — and it’s the same story for EssilorLuxottica, which agreed Wednesday to acquire the brand for $1.5 billion in cash.

“We see an incredible opportunity in bringing an iconic brand like Supreme to our company,” said Francesco Milleri, chairman and CEO of EssilorLuxottica, in a joint statement with Paul du Saillant, deputy CEO.

That Supreme was sold was hardly a surprise. Struggling VF has openly admitted it plans to trim its portfolio — which also includes Vans, The North Face, Timberland and Dickies. And WWD reported in May that Supreme was quietly being offered to potential buyers while Goldman Sachs helped VF review its assets.

The fact that the buyer was optical giant EssilorLuxottica raised some eyebrows, but Milleri and du Saillant said the deal fit perfectly with their strategy.

“It fits perfectly into our innovation and growth journey, offering us a direct connection to new audiences, languages ​​and creativity,” they said. “With its unique brand identity, completely direct commercial approach and customer experience – a model we will be working towards – Supreme will have its own place in our own brand portfolio and will also complement our licensed portfolio. They will be well-positioned to leverage our group’s expertise, capabilities and operating platform.”

EssilorLuxottica also advanced its medical technology strategy, striking an agreement on Wednesday to acquire an 80 percent stake in Heidelberg Engineering, a German company specializing in diagnostic solutions, digital surgical technologies and medical informatics for clinical ophthalmology.

Multitasking gave EssilorLuxottica investors pause for thought. Shares fell 4.5% to €189.85, leaving the company with a still-huge market capitalization of €86.5 billion.

James Grzinic of Jefferies said in a report titled “More Than Meets the Eye?” that the “tepid investor reaction” to the two acquisitions “likely reflects the market’s lukewarm assessment of Supreme’s prospects. And how that fits in with a group that has proactively sought to move away from its historical consumer focus.”

“What this acquisition will be synergistic for EssilorLuxottica is not obvious to investors, judging by today’s price reaction. We assume EL’s thinking is very similar to the historic purchase of Oakley.”

VF investors, on the other hand, welcomed the deal, which sent the company’s share price up 13.6 percent to $16.16, giving it a market capitalization of $6.3 billion.

The fact that VF is selling Supreme for $600 million less than it paid for it probably says more about the state of VF’s finances overall than it does about the state of the brand itself, even if it is no longer a fashion hot spot.

Supreme has grown its presence at VF, but not dramatically. And despite some supply chain issues amid the pandemic, the business remains highly profitable.

The source told WWD that the Supreme deal is surprising but “in line with what Milleri told investors in May, that the future of EssilorLuxottica is going to be through iconic brands, medical technology and smart glasses. The brands are platforms and means of communication with consumers who may not buy medical or technology items, but they will get them through the brand,” citing Ray-Ban Meta smart glasses as an example. The Supreme deal “is in that direction. EssilorLuxottica is buying a brand, a business model that is a gem that should not be touched. It’s a good deal because the brand is profitable, with good margins, so it’s financially interesting, but it didn’t fit into the VF group and was probably the easiest to sell.”

Input and output in VF

VF said in a regulatory filing that Supreme had revenue of $538 million and operating income of $116 million last year. Supreme operates a digital business with 17 stores in the U.S., Asia and Europe.

“Under VF’s leadership, Supreme has expanded its presence in key markets like China and South Korea and has once again enjoyed strong growth,” said Bracken Darrell, chairman and CEO of VF.

“However, given the brand’s distinct business model and VF’s integrated model, our strategic portfolio review determined there were limited synergies between Supreme and VF, making a sale a natural next step,” he added.

“While we will always seek to adjust the VF portfolio from time to time, this transaction gives us greater balance sheet flexibility,” Darrell said. “It also supports our overall program to better position the company for long-term growth and more normalized debt levels.”

Tom Nikic, a Wedbush analyst who covers VF, described the deal as a “double-edged sword.”

“On the bright side, it will give them much-needed balance sheet flexibility (with) $1.75 billion of debt coming due in the next nine months,” Nikic said.

He also noted that Supreme had “limited synergies” with other VF brands and that “there’s something poetic about divesting a brand that many market observers see as the deal that broke the camel’s back.”

It’s a nod to the dramatic turn of events VF has had in recent years, as its biggest brand, Vans, has struggled and debt repayments for the Supreme purchase have loomed. But at the same time, selling Supreme gets rid of what has been a generally strong and profitable business for VF.

Simeon Siegel, an analyst at BMO, said: “We believe this is a significant win for VFC, far exceeding investor expectations and providing a breather so management can move past liquidity concerns and focus on improving the business.

“The next step is to stabilize Vans and The North Face,” Siegel said. “While it won’t be easy, we expect stabilization to be a matter of when, not if. We think skepticism about the ability to repay this debt has been a major negative for the stock. If the liquidity issue is behind us, now is the time to get it done.”

If VF shareholders see themselves moving on, so does Supreme founder James Jebbia, who described EssilorLuxottica as “a unique partner who understands that we are at our best when we stay true to the brand and continue to operate and grow as we have for the past 30 years. This move allows us to focus on the brand, our products and our customers while positioning ourselves for long-term success.”

The new look of EssilorLuxottica

Supreme also brings something new to EssilorLuxottica.

One source said the eyewear giant could help improve Supreme’s eyewear business, which is still small. “Perhaps Supreme Meta will be next? EssilorLuxottica is also a retailer and could help Supreme expand its reach while maintaining the rarity it’s known for. Both companies can do new things, but I don’t think expanding into apparel is what EssilorLuxottica is looking for. Supreme is a lifestyle, and that’s what EssilorLuxottica is interested in; the brand will give the eyewear group a new window into the world. I see it as a win-win situation.”

Claudia D’Arpizio, a senior partner at Bain & Company, also expressed her approval of the Supreme deal. “The transition from being a category specialist to brand management is very interesting,” said D’Arpizio, who has long advocated for such a move. “It’s a logical leap and opens up EssilorLuxottica to a broader market. They are a leader in eyewear and will now be able to offer customers an expanded portfolio while also better understanding a cross-section of their target audience. It’s a strategic move with significant growth potential.”

Still, not all deals work out. Just ask VF.

Bernstein senior analyst Luca Solca called the Supreme deal surprising because it “seems to be outside of the eyewear ‘comfort zone’,” because Luxottica “has a successful track record of acquiring eyewear brands like Ray-Ban and Oakley in the eyewear space,” and because it “seems to be focused on streetwear, at a time when streetwear brands seem to be seeing significantly lower consumer engagement globally — Off-White is a case in point. We wonder if EssilorLuxottica sees an ‘Oakley opportunity’ in Supreme, since Oakley has significant exposure to non-eyewear products like apparel, backpacks, etc.”