Risk management

Market risks

a) If current economic conditions continue to deteriorate...

... demand for products of the Group will be adversely impacted, access to credit will be reduced and customers and others with which the Group does business will suffer financial hardship, all of which could reduce sales and in turn adversely impact its business, results of operations, financial condition and cash flows

Operations and performance of the Group depend significantly on worldwide economic conditions. Uncertainty about current global economic conditions poses a risk to its business because consumers and businesses may continue to postpone spending in response to tighter credit markets, unemployment, negative financial news and/or declines in income or asset values, which could have a material adverse effect on demand for its products and services.

Discretionary spending is affected by many factors, including general business conditions, inflation, interest rates, consumer debt levels, unemployment rates, availability of consumer credit, conditions in the real estate and mortgage markets, currency exchange rates and other matters that influence consumer confidence.

Many of these factors are outside its control. Purchases of discretionary items could decline during periods in which disposable income is lower or prices have increased in response to rising costs or in periods of actual or perceived unfavorable economic conditions. If this occurs or if unfavorable economic conditions continue to challenge the consumer environment, its business, results of operations, financial condition and cash flows could be materially adversely affected.

In the event of renewed financial turmoil affecting the banking system and financial markets, additional consolidation of the financial services industry or significant failure of financial services institutions, there could be a new or incremental tightening of the credit markets, decreased liquidity and extreme volatility in fixed income, credit, currency and equity markets.

In addition, the credit crisis could continue to have material adverse effects on business of the Group, including the inability of customers of its wholesale distribution business to obtain credit to finance purchases of its products, restructurings, bankruptcies, liquidations and other unfavorable events for the Group’s consumers, customers, vendors, suppliers, logistics providers, other service providers and the financial institutions that are counterparties to its credit facilities and other derivative transactions.

The likelihood that such third parties will be unable to overcome such unfavorable financial difficulties may increase.

If the third parties on which the Group relies for goods and services or the Group’s wholesale customers are unable to overcome financial difficulties resulting from the deterioration of worldwide economic conditions or if the counterparties to its credit facilities or its derivative transactions do not perform their obligations, the Group’s business, results of operations, financial condition and cash flows could be materially adversely affected.

b) If business of the Group suffers due to changing local conditions...

... its profitability and future growth may be affected

The Group currently operates worldwide and has begun to expand its operations in many countries, including certain developing countries in Asia, South America and Africa. Therefore, the Group is subject to various risks inherent in conducting business internationally, including the following:

  • exposure to local economic and political conditions;
  • export and import restrictions;
  • currency exchange rate fluctuations and currency controls;
  • cash repatriation restrictions;
  • application of the Foreign Corrupt Practices Act and similar laws;
  • difficulty in enforcing intellectual property and contract rights;
  • disruptions of capital and trading markets;
  • accounts receivable collection and longer payment cycles;
  • potential hostilities and changes in diplomatic and trade relationships;
  • legal or regulatory requirements;
  • withholding and other taxes on remittances and other payments by subsidiaries;
  • investment restrictions or requirements; and
  • local content laws requiring that certain products contain a specified minimum percentage of domestically produced components.

The likelihood of such occurrences and their potential effect on the Group vary from country to country and are unpredictable, but any such occurrence may result in the loss of sales or increased costs of doing business and may have a material adverse effect on business, results of operations, financial condition and prospects of the Group.

c) If vision correction alternatives to prescription eyeglasses become more widely available...

... or consumer preferences for such alternatives increase, profitability of the Group could suffer through a reduction of sales of its prescription eyewear products, including lenses and accessories

Business of the Group could be negatively impacted by the availability and acceptance of vision correction alternatives to prescription eyeglasses, such as contact lenses and refractive optical surgery. According to industry estimates, over 39 million people wear contact lenses in the United States, and the disposable contact lens market is the fastest growing segment of the lens subsector. In addition, the use of refractive optical surgery has grown in the United States since it was approved by the US Food and Drug Administration in 1995.

Increased use of vision correction alternatives could result in decreased use of prescription eyewear products of the Group, including a reduction of sales of lenses and accessories sold in Group retail outlets, which could have a material adverse impact on its business, results of operations, financial condition and prospects.

d) Unforeseen or catastrophic losses not covered by insurance...

... could materially adversely affect the Group’s results of operations and financial condition

For certain risks, the Group does not maintain insurance coverage because of cost and/ or availability. Because the Group retains some portion of its insurable risks, and in some cases self-insure completely, unforeseen or catastrophic losses in excess of insured limits could materially adversely affect its results of operations and financial condition.

 

Operational risks

e) If the Group is unable to successfully introduce new products and develop its brands...

... its future sales and operating performance may suffer

The mid– and premium-price categories of the prescription frame and sunglasses markets in which the Group competes are particularly vulnerable to changes in fashion trends and consumer preferences. The Group’s historical success is attributable, in part, to its introduction of innovative products which are perceived to represent an improvement over products otherwise available in the market and its ability to develop its brands, especially its Ray-Ban and Oakley house brands.

Group future success will depend on its continued ability to develop and introduce such innovative products and continued success in building its brands. If the Group is unable to continue to do so, its future sales could decline, inventory levels could rise, leading to additional costs for storage and potential write-downs relating to the value of excess inventory, and there could be a negative impact on production costs since fixed costs would represent a larger portion of total production costs due to the decline in quantities produced, which could materially adversely affect its results of operations.

f) If the Group is not successful in completing and integrating strategic acquisitions to expand or complement its business...

... its future profitability and growth could be at risk

As part of its growth strategy, the Group has made, and may continue to make, strategic business acquisitions to expand or complement its business. Its acquisition activities, however, can be disrupted by overtures from competitors for the targeted candidates, governmental regulation and rapid developments in its industry.

The Group may face additional risks and uncertainties following an acquisition, including

(i) difficulty in integrating the newly-acquired business and operations in an efficient and effective manner,

(ii) inability to achieve strategic objectives, cost savings and other benefits from the acquisition,

(iii) the lack of success by the acquired business in its markets,

(iv) the loss of key employees of the acquired business,

(v) a decrease in the focus of senior management on its operations,

(vi) difficulty integrating human resources systems, operating systems, inventory management systems and assortment planning systems of the acquired business with its systems,

(vii) the cultural differences between the Group’s organization and that of the acquired business and (viii) liabilities that were not known at the time of acquisition or the need to address tax or accounting issues.

If the Group fails to timely recognize or address these matters or to devote adequate resources to them, the Group may fail to achieve its growth strategy or otherwise realize the intended benefits of any acquisition. Even if the Group is able to integrate its business operations successfully, the integration may not result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that may be possible from the integration or in the achievement of such benefits within the forecasted period of time.

g) If the Group is unable to achieve and manage growth...

... operating margins may be reduced as a result of decreased efficiency of distribution

In order to achieve and manage its growth effectively, the Group is required to increase and streamline production and implement manufacturing efficiencies where possible, while maintaining strict quality control and the ability to deliver products to its customers in a timely and efficient manner.

Group must also continuously develop new product designs and features, expand its information systems and operations, and train and manage an increasing number of management level and other employees.

If the Group is unable to manage these matters effectively, its distribution process could be adversely affected and the Group could lose market share in affected regions, which could materially adversely affect its business prospects.

h) If the Group does not correctly predict future economic conditions and changes in consumer preferences...

... its sales of premium products and profitability could suffer

The fashion and consumer products industries in which the Group operates are cyclical. Downturns in general economic conditions or uncertainties regarding future economic prospects, which affect consumer disposable income, have historically adversely affected consumer spending habits in its principal markets and thus made the growth in sales and profitability of premium-priced product categories difficult during such downturns.

Therefore, future economic downturns or uncertainties could have a material adverse effect on its business, results of operations and financial condition, including sales of designer and other premium brands.


The industry is also subject to rapidly changing consumer preferences and future sales may suffer if the fashion and consumer products industries do not continue to grow or if consumer preferences shift away from its products. Changes in fashion could also affect the popularity and, therefore, the value of the fashion licenses granted to the Group by designers.

Any event or circumstance resulting in reduced market acceptance of one or more of these designers could reduce its sales and the value of its models from that designer. Unanticipated shifts in consumer preferences may also result in excess inventory and underutilized manufacturing capacity.

In addition, the Group’s success depends, in large part, on its ability to anticipate and react to changing fashion trends in a timely manner. Any sustained failure to identify and respond to such trends could materially adversely affect its business, results of operations and financial condition and may result in the write-down of excess inventory and idle manufacturing facilities.

i) If the Group does not continue to negotiate and maintain favorable license arrangements...

... its sales or cost of sales could suffer

The Group has entered into license agreements that enable it to manufacture and distribute prescription frames and sunglasses under certain designer names, including Chanel, Prada, Miu Miu, Dolce & Gabbana, D&G, Bvlgari, Tiffany & Co., Versace, Burberry, Polo Ralph Lauren, Donna Karan, DKNY, Paul Smith Spectacles, Brooks Brothers, Anne Klein, Tory Burch and Coach.

These license agreements typically have terms of between three and ten years and may contain options for renewal for additional periods and require us to make guaranteed and contingent royalty payments to the licensor. The Group believes that its ability to maintain and negotiate favorable license agreements with leading designers in the fashion and luxury goods industries is essential to the branding of its products and, therefore, material to the success of its business.

For the years ended December 31, 2011 and 2010, the sales realized through the Prada and Miu Miu brand names together represented approximately 4.0% and 4.2% of total sales, respectively. For the years ended December 31, 2011 and 2010, the sales realized through the Dolce & Gabbana and D&G brand names together represented approximately 3.1% and 3.5% of total sales, respectively.

Accordingly, if the Group is unable to negotiate and maintain satisfactory license arrangements with leading designers, its growth prospects and financial results could materially suffer from a reduction in sales or an increase in advertising costs and royalty payments to designers.

j) As the Group operates in a complex international environment...

... if new laws, regulations or policies of governmental organizations, or changes to existing ones, occur and cannot be managed efficiently, the results could have a negative impact on its operations, its ability to compete or its future financial results

Compliance with U.S. and foreign laws and regulations that apply to its international operations increases its costs of doing business, including cost of compliance, in certain jurisdictions, and such costs may rise in the future as a result of changes in these laws and regulations or in their interpretation or enforcement.

The Group has implemented policies and procedures designed to facilitate compliance with these laws and regulations, but there can be no assurance that Group’s employees, contractors or agents will not violate such laws and regulations or its policies. Any such violations could individually, or in the aggregate, materially adversely affect its financial condition or operating results.

Additionally, as a U.S. government contractor through its Oakley and Eye Safety Systems subsidiaries, the Group must comply with, and is affected by, U.S. laws and regulations related to its government business.

These laws and regulations, including requirements to obtain applicable governmental approvals, clearances and certain export licenses, may impose additional costs and risks on the Group’s business. The Group also may become subject to audits, reviews and investigations of its compliance with these laws and regulations.

k) If the Group is unable to protect its proprietary rights...

... its sales might suffer, and Group may incur significant costs to defend such rights

The Group relies on trade secret, unfair competition, trade dress, trademark, patent and copyright laws to protect its rights to certain aspects of its products and services, including product designs, proprietary manufacturing processes and technologies, product research and concepts and recognized trademarks, all of which the Group believes are important to the success of its products and services and its competitive position.

However, pending trademark or patent applications may not in all instances result in the issuance of a registered trademark or patent, and trademarks or patents granted may not be effective in thwarting competition or be held valid if subsequently challenged. In addition, the actions the Group takes to protect its proprietary rights may be inadequate to prevent imitation of its products and services.

Its proprietary information could become known to competitors, and the Group may not be able to meaningfully protect its rights to proprietary information. Furthermore, other companies may independently develop substantially equivalent or better products or services that do not infringe on its intellectual property rights or could assert rights in, and ownership of, its proprietary rights. Moreover, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States or of the member states of the European Union.

Consistent with the Group’s strategy of vigorously defending its intellectual property rights, the Group devotes substantial resources to the enforcement of patents issued and trademarks granted to it, to the protection of its trade secrets or other intellectual property rights and to the determination of the scope or validity of the proprietary rights of others that might be asserted against it.

However, if the level of potentially infringing activities by others were to increase substantially, the Group might have to significantly increase the resources that it devotes to protecting its rights. From time to time, third parties may assert patent, copyright, trademark or similar rights against intellectual property that is important to the Group’s business. The resolution or compromise of any litigation or other legal process to enforce such alleged third party rights, regardless of its merit or resolution, could be costly and divert the efforts and attention of the Group’s management.

The Group may not prevail in any such litigation or other legal process or the Group may compromise or settle such claims because of the complex technical issues and inherent uncertainties in intellectual property disputes and the significant expense in defending such claims.

An adverse determination in any dispute involving its proprietary rights could, among other things, (i) require the Group to grant licenses to, or obtain licenses from, third parties, (ii) prevent the Group from manufacturing or selling its products, (iii) require us to discontinue the use of a particular patent, trademark, copyright or trade secret or (iv) subject the Group to substantial liability. Any of these possibilities could have a material adverse effect on the business of the Group by reducing its future sales or causing the Group to incur significant costs to defend its rights.

l) If the Group is unable to maintain its current operating relationship with host stores of its Licensed Brands division...

... Group could suffer a loss in sales and possible impairment of certain intangible assets

The Group’s sales depend in part on its relationships with the host stores that allow it to operate its Licensed Brands division, including Sears Optical and Target Optical. The Group leases and licenses with Sears Optical are terminable upon short notice. If the Group’s relationship with Sears Optical or Target Optical were to end, the Group would suffer a loss of sales and the possible impairment of certain intangible assets.
This could have a material adverse effect on the Group’s business, results of operations, financial condition and prospects.

m) If the Group fails to maintain an efficient distribution network in its highly competitive markets...

... its business, results of operations and financial condition could suffer

The mid- and premium-price categories of the prescription frame and sunglasses markets in which the Group operates are highly competitive. The Group believes that, in addition to successfully introducing new products, responding to changes in the market environment and maintaining superior production capabilities, its ability to remain competitive is highly dependent on its success in maintaining an efficient distribution.

If the Group is unable to maintain an efficient distribution, its sales may decline due to the inability to timely deliver products to customers and its profitability may decline due to an increase in its per unit distribution costs in the affected regions, which may have a material adverse impact on its business, results of operations and financial condition.

n) If the Group was to become subject to adverse judgments or determinations in legal proceedings to which the Group is, or may become, a party...

... its future profitability could suffer through a reduction of sales or increased costs and damage to its reputation due to its failure to adequately communicate the impact of such proceedings or their outcome to the investor and business communities

The Group is currently a party to certain legal proceedings as described in its consolidated financial statements as of December 31, 2011. In addition, in the ordinary course of its business, the Group becomes involved in various other claims, lawsuits, investigations and governmental and administrative proceedings, some of which are or may be significant.

Adverse judgments or determinations in one or more of these proceedings could require the Group to change the way it does business or use substantial resources in adhering to the settlements and could have a material adverse effect on its business, including, among other consequences, by significantly increasing the costs required to operate its business.

Ineffective communications during or after these proceedings could amplify the negative effects, if any, of these proceedings on its reputation and may result in a negative market reaction in the trading of its securities.

o) Changes in the Group tax rates or exposure to additional tax liabilities could affect its future results

The Group is subject to taxes in Italy, the United States and numerous other foreign jurisdictions

Its future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation. Any of these changes could have a material adverse effect on the Group’s profitability.

The Group also is regularly subject to the examination of its income tax returns by the U.S. Internal Revenue Service, the Italian tax authority as well as the governing tax authorities in other countries where it operates.

The Group routinely assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for taxes. Currently, some of the Group’s companies are under examination by the tax authorities in the United States, Italy and other jurisdictions. There can be no assurance that the outcomes of the current ongoing examinations and possible future examinations will not materially adversely affect its business, results of operations, financial condition and prospects.

p) If there is a material failure, inadequacy, interruption or security failure of its information technology systems...

... whether owned by the Group or outsourced or managed by third parties, this may result in remediation costs, reduced sales due to an inability to properly process information, and increased costs of operating business of the Group

The Group relies on information technology systems both managed and outsourced to third parties, across its operations, including for management of its supply chain, point-of-sale processing in its stores and various other processes and transactions.

The Group’s ability to effectively manage its business and coordinate the production, distribution and sale of its products depends on, among other things, the reliability and capacity of these systems.

The failure of these systems to operate effectively, network disruptions, problems with transitioning to upgraded or replacement systems, or a breach in data security of these systems could cause delays in product supply and sales, reduced efficiency of its operations, unintentional disclosure of customer or other confidential information of the Company, or damage to its reputation, and potentially significant capital investments could be required to remediate the problem, which could have a material adverse effect on the Group’s results of operations.

q) If the Group records a write-down for inventories... 

... or other assets that are obsolete or exceed anticipated demand or net realizable value, such charges could have a material adverse effect on its results of operations

The Group records a write-down for product and component inventories that have become obsolete or exceed anticipated demand or net realizable value. The Group reviews its long-lived assets for impairment whenever events or changed circumstances indicate that the carrying amount of an asset may not be recoverable, and the Group determines whether valuation allowances are needed against other assets, including, but not limited to, accounts receivable.

If the Group determines that impairments or other events have occurred that lead the Group to believe it will not fully realize these assets, Group records a write-down or a valuation allowance equal to the amount by which the carrying value of the assets exceeds their fair market value.

Although the Group believes its inventory and other asset-related provisions are currently adequate, no assurance can be made that, given the rapid and unpredictable pace of product obsolescence for fashion eyewear, the Group will not incur additional inventory or asset-related charges, which charges could have a material adverse effect on its results of operations.

r) Leonardo Del Vecchio, the Group chairman and principal stockholder, controls 66.8% of Group voting power...

... and is in a position to affect the Group’s ongoing operations, corporate transactions and any matters submitted to a vote of the Group’s stockholders,including the election of directors and a change in corporate control

As of January 31, 2012, Mr. Leonardo Del Vecchio, the Chairman of the Group’s Board of Directors, through the company Delfin S.à r.l., has voting rights over 312,533,339 Ordinary Shares, or 66.8% of the outstanding Ordinary Shares. As a result, Mr. Del Vecchio has the ability to exert significant influence over the corporate affairs of the Group and to control the outcome of virtually all matters submitted to a vote of its stockholders, including the election of its directors, the amendment of its Articles of Association or Bylaws, and the approval of mergers, consolidations and other significant corporate transactions.

Mr. Del Vecchio’s interests may conflict with or differ from the interests of the Group’s other stockholders.

In situations involving a conflict of interest between Mr. Del Vecchio and its other stockholders, Mr. Del Vecchio may exercise his control in a manner that would benefit himself to the potential detriment of other stockholders. Mr. Del Vecchio’s significant ownership interest could delay, prevent or cause a change in control of the Group, any of which may be adverse to the interests of the Group’s other stockholders.

s) If the Group procedures designed to comply with Section 404 of the Sarbanes–Oxley Act of 2002...

... cause the Group to identify material weaknesses in its internal control over financial reporting, the trading price of its securities may be adversely impacted

The management of the Group evaluated its internal control over financial reporting, as required under Section 404 of the U.S. Sarbanes–Oxley Act of 2002, as amended. There are inherent limitations on the effectiveness of internal controls, including collusion, management override and failure of human judgment.

In addition, control procedures are designed to reduce, rather than eliminate, business risks. As a consequence of the systems and procedures the Group has implemented to comply with these requirements, the Group may uncover circumstances that it determines, with the assistance of its independent auditors, to be material weaknesses, or that otherwise result in disclosable conditions. Any identified material weaknesses in its internal control structure may involve significant effort and expense to remediate, and any disclosure of such material weaknesses or other disclosable conditions may result in a negative market reaction to securities of the Group.

 

Financial risks

t) If the Euro or the Chinese Yuan strengthens relative to certain other currencies...

... or if the U.S. or Australian dollar weakens relative to the Euro, the Group’s profitability as a consolidated group could suffer

The Group’s principal manufacturing facilities are located in Italy. The Group also maintains manufacturing facilities in China, India and the United States as well as sales and distribution facilities throughout the world. As a result, its results of operations could be materially adversely affected by foreign exchange rate fluctuations in two principal areas:

  • the Group incurs most of its manufacturing costs in Euro and in Chinese Yuan, and receives a significant part of its revenues in other currencies such as the U.S. dollar and the Australian dollar. Therefore, a strengthening of the Euro or the Chinese Yuan relative to other currencies in which the Group receives revenues could negatively impact the demand for its products or decrease its profitability in consolidation, adversely affecting its business and results of operations; and
  • a substantial portion of its assets, liabilities, revenues and costs are denominated in various currencies other than Euro, with most of its revenues and operating expenses being denominated in U.S. dollars. As a result, its operating results, which are reported in Euro, are affected by currency exchange rate fluctuations, particularly between the U.S. dollar and the Euro.

As its international operations grow, future changes in the exchange rate of the Euro against the U.S. dollar and other currencies may negatively impact its reported results, although the Group has in place policies designed to manage such risk.

u) If economic conditions around the world continue to worsen...

... the Group may experience an increase in its exposure to credit risk on its accounts receivable which may result in increased costs due to additional reserves for doubtful accounts, and a reduction in sales to customers experiencing credit-related issues

A substantial majority of the Group’s outstanding trade receivables are not covered by collateral or credit insurance. While the Group has procedures to monitor and limit exposure to credit risk on its trade and nontrade receivables, there can be no assurance such procedures will effectively limit its credit risk and avoid losses, which could have a material adverse effect on its results of operations.

Last updated: Mar 29 2016