EssilorLuxottica unveils surprise $1.5 billion deal for Supreme

Updated July 17 at 4 p.m. ET

There’s something about Supreme that makes companies see themselves differently and inspires them to try new things.

That’s what happened with VF Corp. when it bought the exclusive and often elusive luxury brand for $2.1 billion in 2020 — and so is EssilorLuxottica, which agreed Wednesday to take over the brand for $1.5 billion in cash.

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

The sale of Supreme was no surprise. The embattled VF has openly admitted it is looking 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, with Goldman Sachs helping VF vet its assets.

The fact that the buyer is eyewear giant EssilorLuxottica raised some eyebrows, but Milleri and du Saillant said the deal fits perfectly with their strategy.

“This brand fits perfectly into our innovation and development journey, providing us with a direct connection to new audiences, new languages ​​and new creativity,” they said. “With its unique brand identity, its completely direct commercial approach and its customer experience – a model we will strive to preserve – Supreme will have its own space within our private label portfolio and will also complement our licensed portfolio. They will be well placed to leverage our group’s expertise, capabilities and operational platform.”

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

Multitasking has given EssilorLuxottica investors plenty to consider. Shares in the company fell 4.5% to 189.85 euros, leaving it with a still-massive market capitalization of 86.5 billion euros.

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

“It is not clear to investors what would make this acquisition a synergy for EssilorLuxottica, judging by the price reaction today. We assume that EL’s thinking is along the same lines as the historic Oakley acquisition.”

On the other hand, VF investors cheered the deal, sending the company’s shares up 13.6% to $16.16 for a market cap of $6.3 billion.

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

Supreme has certainly grown its presence at VF, but not dramatically. And despite some pandemic-related supply chain issues, the company remains highly profitable.

A source told WWD that the Supreme deal was surprising but “consistent with what Milleri told investors in May, that the future of EssilorLuxottica is through iconic brands, medical technology and smart glasses. The brands are the platforms and vehicles to talk to consumers, who may not buy the medical or technology element, but they will get it through the brand,” citing Ray-Ban Meta smart glasses as an example. The Supreme deal “is consistent with that. EssilorLuxottica is buying a brand, a business model that is a jewel that you don’t want to touch. It’s a good deal because the brand is profitable, with good margins, so it’s financially interesting, but it didn’t fit with the VF group and it was probably the easiest to sell.”

Entry and exit at VF

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

“Under VF’s leadership, Supreme has expanded its presence in key markets in China and South Korea and returned to strong growth,” said Bracken Darrell, VF’s Chairman and CEO.

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

“While we always look to adjust the VF portfolio from time to time, this transaction provides us with 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.”

“The silver lining is that it will give them much-needed balance sheet flexibility (with) $1.75 billion of debt maturing in the next nine months,” Nikic said.

He also noted that Supreme had “limited synergies” with VF’s other brands and that there was “something poetic about getting rid of the brand that many market observers consider the deal that broke the camel’s back.”

It’s a reference to the dramatic turnaround VF’s fortunes have taken in recent years, as its biggest brand, Vans, struggled and the issue of paying off the debt it accumulated to buy Supreme loomed. But at the same time, the sale of Supreme ends what had been a solid and profitable business for VF.

BMO analyst Simeon Siegel said: “We believe this is a significant win for VFC as it significantly exceeds investor expectations and provides a moment of respite, allowing management to 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 believe stabilization will be a matter of time rather than possibility. We believe skepticism about the ability to repay this debt has created a key negative bias for the stock. If the liquidity issue is behind us, VF now has time to address it.”

If VF shareholders are considering a change in direction, Supreme founder James Jebbia is also keen. He describes EssilorLuxottica as “a unique partner that 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 last 30 years. This move allows us to focus on the brand, our products and our customers, while setting us up for long-term success.”

A new look for EssilorLuxottica

Supreme also brings something new to EssilorLuxottica.

According to one source, the eyewear giant could help Supreme improve its still-small eyewear business. “Maybe a Supreme Meta could be the next step? EssilorLuxottica is also a retailer and can help Supreme grow its presence, while maintaining the rarity it is known for. Both can do new things, but I don’t think expanding into apparel is EssilorLuxottica’s goal. Supreme is about lifestyle and that’s what EssilorLuxottica is interested in; the brand will give the eyewear group a new window on the world. I see it as a win-win.”

Claudia D’Arpizio, a senior partner at Bain & Company, also welcomed the Supreme deal. “Moving from a category specialist to a brand manager is very exciting,” said D’Arpizio, who has long championed such changes. “It’s a logical leap that opens EssilorLuxottica to a broader market. EssilorLuxottica is a leader in the eyewear sector and will now be able to offer consumers an expanded portfolio, while also gaining insight into a cross-section of customers. It’s a strategic move with great growth potential.”

But not all deals come to fruition. Ask VF.

Luca Solca, senior analyst at Bernstein, found the Supreme deal surprising because “it seems to be outside the comfort zone of the eyewear industry,” as Luxottica “has a track record of successfully acquiring eyewear brands such as Ray-Ban and Oakley in the eyewear space,” and because “it appears to be oriented toward streetwear, at a time when streetwear brands appear to be experiencing a significant decline in consumer engagement worldwide – Off-White is a prime example. We wonder if EssilorLuxottica sees an “opportunity for Oakley” with Supreme, as Oakley has significant exposure to non-eyewear products such as apparel, backpacks, etc.”