For the third quarter ended September 30, 2005, Oakley reported that net sales increased 15.6% to $173.4 million from $150.0 million for Q3 last year. Net income also increased, up 31.6% to $15.0 million from $11.4 million last year. Completing the top and bottom line gains was a 29.4% increase in earnings per share, up to 22 cents from 17 cents last year.
“Oakley's third quarter performance is a testament to the outstanding strength of the brand and the consumer acceptance of the many great products introduced this year,” said Scott Olivet, chief executive officer, Oakley, Inc. “I'm thrilled to join the company and look forward to helping the team further strengthen the brand, grow the core business and create strategies to drive sustainable performance in our new categories.”
“Our strong third quarter results were fueled by the new CROSSHAIR, GASCAN, and BOTTLECAP sunglass styles which generated significantly greater sales than last year's new introductions. During the quarter we also successfully launched RAZRWIRE, the second product in our innovative electronics family,” said Link Newcomb, Oakley COO. “Operating expenses grew at approximately half the rate of our sales during the quarter, which generated healthy operating leverage.”
Newcomb concluded, “We enter the final quarter of the year poised for the holiday introduction of THUMP 2, an appealing new style complementary to THUMP with greater memory and an attractive price point. Additionally, as a result of the strategic initiative to release our new sunglass products to the market earlier, we expect to introduce select 2006 styles in limited quantities beginning in November this year.”
Worldwide Sales Results
Total third quarter U.S. net sales increased 20.1% to $91.3 million from $76.0 million during the same period last year. U.S. net sales, excluding the company's retail store operations, totaled $63.9 million, compared with $57.2 million in last year's comparable quarter, an increase of 11.7%.
Third quarter net sales at Oakley's U.S. operated retail locations increased 46.3% to $27.5 million compared with $18.8 million in last year's comparable quarter and included a strong double-digit increase in comparable-store sales. At the end of the third quarter, the company operated 44 U.S. O Store locations, including five new stores opened during the quarter, and 98 Iacon sunglass specialty stores, including seven new locations added during the quarter.
Third quarter international net sales increased 11.0% to $82.1 million, compared with $74.0 million in last year's comparable period, with the weaker U.S. dollar contributing 2.4% points of that growth. All Oakley international regions, except for South Africa, experienced positive growth led by strong double digit growth in Asia, Latin America, and the South Pacific regions. Additionally, the company operates six international O Stores and has nine licensed locations.
Global net sales in the third quarter to the retail division of Luxottica Group S.p.A. were $8.8 million, an increase of 66.0% over $5.3 million in the third quarter of 2004, and represented 5.1% of total net sales. Global net sales to Luxottica Group S.p.A for the first nine months of 2005 were $35.5 million, an increase of 1.7% over $34.9 million for the first nine months of 2004, and represented 7.3% of total net sales.
Product Sales Performance
Worldwide sunglass gross sales increased 12.7% in the third quarter to $79.7 million from $70.7 million in last year's third quarter. Sunglass unit shipments increased 15.4% worldwide, reflecting strong sales of new sunglass styles and increased sales to Luxottica Group S.p.A. The average sunglass selling price decreased 2.3% compared with last year's third quarter primarily due to greater sales of new introductions at slightly lower average prices.
Combined third quarter gross sales of the company's newer categories, consisting of apparel and accessories, prescription eyewear, electronics, footwear and watches, grew 30.6% to $70.8 million compared to $54.2 million in the third quarter of 2004. These sales accounted for 38.2% of total third quarter gross sales and were driven by increases in the company's apparel and accessories lines and the release of RAZRWIRE, the world's first eyewear to feature Motorola's Bluetooth technology and Oakley's patented XYZ Optics.
Gross Margin Performance
The company's third quarter gross margin decreased to 53.5% compared to 55.5% in last year's comparable period. This decrease was driven by higher sales of close-out products, higher discounts and markdowns, increased inventory reserves and a higher mix of newer category products which carry lower gross margins, partially offset by slightly higher sunglass and goggle margins and a more favorable foreign currency hedging program.
Operating Expenses, Backlog, and Inventory
Third quarter operating expenses totaled $70.2 million, up 6.7% from last year's third quarter of $65.9 million, and represented approximately 40.5% of net sales compared with 43.9% of net sales in the comparable quarter in 2004, achieving strong leverage on sales growth. The tax rate for the third quarter was 34.0%.
The company's order backlog as of September 30, 2005 was $70.8 million, down 15.4% compared with $83.6 million at the same time last year. The decreased backlog reflects lower electronics orders relative to last year's THUMP launch, a shift in the timing of receipt of Sunglass Hut's holiday orders from September last year to October this year, and lower footwear, apparel and accessories orders for spring 2006, partially offset by higher goggle orders.
Consolidated inventory totaled $128.0 million at September 30, 2005, compared to $134.3 million at June 30, 2005, primarily reflecting decreased apparel and accessories inventories due to the shipment of the fall 2005 line, higher closeout sales across product categories and a seasonal reduction of sunglass inventory, partially offset by higher inventory of the company's new electronics products and in the company's expanded retail store operations.
Accounts receivable totaled $104.5 million at September 30, 2005 compared to $93.0 million at September 30, 2004. Accounts receivable days sales outstanding improved to 55 at September 30, 2005 compared with 57 at September 30, 2004.
2005 Guidance
2005 net sales growth over 2004 is now expected to be at the lower end of a 10% to 15% range, versus previous guidance at the high end of the same 10% to 15% range. This revised net sales growth guidance assumes a mid single-digit increase in sunglass sales combined with sales growth of less than 20% in the company's newer categories versus the previously stated 20% to 25% newer category growth guidance. The company reiterated its expectation for 2005 earnings growth over 2004 at the high end of a range of 25% to 30%.
In putting forth this outlook, management reminds investors that the unpredictable nature of the economies and retail environments in many of Oakley's key global markets, coupled with the company's heavy reliance on “at-once” orders from retailers to replenish sunglass inventory sold to consumers, complicate management's attempts to accurately assess future order and sales trends. In addition, the company believes that its new electronics category will continue to be a significant contributor to its 2005 performance. However, Oakley's relative inexperience in the electronics market, public acceptance of new products and variables related to military procurement all contribute to the difficulty in accurately forecasting future performance. Finally, because Oakley is an integrated manufacturer of its sunglass products, a small variance in sunglass sales volume can have a relatively large impact on gross margins and net income due to the fixed-cost nature of the company's manufacturing operations.
Stock Repurchase Program and Increased Dividend
There is currently $14.4 million available for future repurchases under the company's $20 million repurchase plan approved by the company's board of directors on March 15, 2005. The company purchased no shares during the third quarter. The company intends to continue repurchasing shares under the current repurchase program subject to favorable market conditions.
On September 26, 2005 the company announced that its Board of Directors had declared a cash dividend of 16 cents per share on its outstanding common stock, an increase of 1 penny per share over the company's dividend of 15 cents per share paid in 2004. The dividend will be payable October 28, 2005, to shareholders of record at the close of business on October 14, 2005.
OAKLEY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(thousands except per share data, unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Net sales $173,447 $150,044 $485,716 $432,506
Cost of goods sold 80,668 66,709 213,908 192,875
-------- -------- -------- --------
Gross profit 92,779 83,335 271,808 239,631
Operating expenses:
Research and development 4,229 4,247 12,817 11,816
Selling 43,821 41,160 128,894 118,123
Shipping and warehousing 4,459 4,232 13,128 12,864
General and administrative 17,734 16,222 53,608 48,170
-------- -------- -------- --------
Total operating expenses 70,243 65,861 208,447 190,973
-------- -------- -------- --------
Operating income 22,536 17,474 63,361 48,658
Interest expense, net (144) 242 (120) 841
-------- -------- -------- --------
Income before provision
for income taxes 22,680 17,232 63,481 47,817
Provision for income taxes 7,711 5,859 20,837 16,258
-------- -------- -------- --------
Net income $ 14,969 $ 11,373 $ 42,644 $ 31,559
======== ======== ======== ========
Basic net income per share $ 0.22 $ 0.17 $ 0.63 $ 0.46
Basic weighted average
shares 68,389 68,184 67,915 68,070
Diluted net income
per share $ 0.22 $ 0.17 $ 0.62 $ 0.46
