Unpacking EssilorLuxottica’s Surprise $1.5 billion Deal for Supreme

Updated 4:00 P.M. E.T. July 17

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

So it was with VF Corp. when it bought the exclusive and often elusive luxe street brand for $2.1 billion in 2020 — and so it is with EssilorLuxottica, which agreed on Wednesday to takeover 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 chief executive officer of EssilorLuxottica , in a statement with Paul du Saillant, deputy CEO.

That Supreme was being sold came as little surprise. The struggling VF admitted openly that it was 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 shopped to potential buyers as Goldman Sachs helped VF review its assets.

The fact that the buyer was eyewear giant EssilorLuxottica did raise a few eyebrows, but Milleri and du Saillant said the deal fit right into their strategy.

“It perfectly aligns with our innovation and development journey, offering us a direct connection to new audiences, languages and creativity,” they said. “With its unique brand identity, fully-direct commercial approach and customer experience – a model we will work to preserve – Supreme will have its own space within our house brand portfolio and complement our licensed portfolio as well. They will be well-positioned to leverage our group’s expertise, capabilities, and operating platform.”

EssilorLuxottica also advanced its med-tech strategy on Wednesday with a deal to acquire an 80 percent stake in Heidelberg Engineering, a German company specializing in diagnostic solutions, digital surgical technologies and healthcare IT for clinical ophthalmology.

The multitasking gave EssilorLuxottica investors a lot to take in. Shares of the company fell 4.5 percent to 189.85 euros, leaving it with a still-massive market capitalization of 86.5 billion euros.

Jefferies’ James Grzinic said in a report, entitled “More than Meets the Eye?” that “investors’ underwhelming reaction” to the two acquisitions “likely reflects the market’s lukewarm assessment of Supreme’s prospects. And of how this fits within a group which had proactively sought to shift away from its historic consumer focus.

“What will make this a synergistic acquisition for ExilorLuxottica does not seem obvious to investors, judging by today’s price reaction. We presume that EL’s thinking is very much along the same lines of the historic purchase of Oakley.”

On the other side, VF investors applauded the deal, sending the company’s shares up 13.6 percent to $16.16 for a market cap of $6.3 billion in midday trading.

The fact that VF is selling Supreme for $600 million less than it paid for the brand most likely says more about the state of VF’s finances generally than the state of the brand, even if it is no longer at the white-hot center of fashion.

Supreme did grow its footprint while at VF, but not dramatically so. And despite some supply chain troubles over the pandemic, the business remains very profitable.

A source told WWD that the Supreme deal is surprising but “in line with what Milleri told investors in May, that EssilorLuxottica’s future passes through iconic brands, med-tech, and smart eyewear. The brands are the platforms and vehicles to talk to consumers, who may not buy the medical or the technological element, but will get it through the brand,” citing, for example, the Ray-Ban Meta smartglasses. The Supreme deal “goes in that direction, EssilorLuxottica is buying a brand, a business model that is a jewel that should not be touched. It’s a good deal, as the brand is profitable, with good margins, so it’s financially interesting, but it didn’t fit with the VF group and it was most likely the easiest to sell.”

In and Out at VF

VF said in a regulatory filing that Supreme logged revenues 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.

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“Under VF, Supreme expanded its presence in the key markets of China and South Korea and has returned to delivering strong growth,” said Bracken Darrell, president and CEO at VF.

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

“While we will always look to adjust the VF portfolio from time to time, this transaction gives us increased 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 pointed out that Supreme had “limited synergies” with VF’s other brands and that “there’s something poetic about ridding themselves of the brand that many market-watchers view as the deal that broke the proverbial camel’s back.”

That’s a reference to the dramatic turn of fortune VF has had in recent years, when its biggest brand, Vans , struggled and repayment of debt accumulated to buy Supreme loomed. But at the same time, selling Supreme jettisons what has been a generally strong and profitable business for VF.

Simeon Siegel, an analyst at BMO, said, “We believe this a material win for VFC, believing it comes meaningfully above investor expectations and provides a breathe-out relief moment, thereby allowing management to move past liquidity concerns and focus on improving the business.

“Next up Is Stabilizing Vans and The North Face,” Siegel said. “Although this will not be easy, we expect stabilization to be a question of when, rather than if. We believe skepticism surrounding the ability to pay down this debt drove a key negative bias for shares. If the liquidity issue is in the rear-view, VF now has time for that when.”

If VF shareholders see themselves moving on, so does Supreme founder James Jebbia, who described 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 past 30 years. This move lets us 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.

One source said the eyewear giant could help upgrade Supreme’s eyewear business, which is still small. “Perhaps a Supreme Meta could be next? EssilorLuxottica is also a retailer and they can help Supreme grow its footprint, while maintaining the scarcity it is known for. Both can do new things, but I don’t think an expansion in apparel is what EssilorLuxottica is aiming at. Supreme is about lifestyle and that is what interests EssilorLuxottica, the brand will give the eyewear group a new window on the world. I see this as a win-win.”

Claudia D’Arpizio, senior partner at Bain & Company, also gave a thumbs up to the deal with Supreme. “Moving from being a category specialist to brand management is very interesting,” said D’Arpizio, long an advocate of this kind of shift. “It’s a logical leap and opens EssilorLuxottica to a wider market. They are the leader in eyewear and now will be able to offer consumers an expanded portfolio, while getting to know better a transversal customer target. This is a strategic move with great growth potential.”

Even so, not all deals pan out. Ask VF.

Bernstein’s senior analyst Luca Solca found the Supreme deal surprising because “it seems outside of the eyewear ‘comfort zone’,” since Luxottica “has a successful track record of acquiring eyewear brands such as Rayban and Oakley in eyewear,” and because “it appears to be geared towards streetwear, at a time when streetwear brands seem to be seeing significant lower engagement from consumers worldwide – OffWhite is a case in point. We wonder if EssilorLuxottica sees an ‘ Oakley opportunity ’ with Supreme, as Oakley has significant exposure to non eyewear products such as apparel, backpacks, etc.”

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