Oakley, Inc. saw second quarter net sales increase 19.4%, to a quarterly record $203.6 million, compared with $170.5 million in the same period of 2005. Net income for the quarter totaled $17.9 million, or 26 cents per diluted share, including an after-tax restructuring charge of $2.1 million, or 3 cents per diluted share, related to the company’s footwear business and unrealized fair value losses of approximately $1.5 million on an after-tax basis, or 2 cents per diluted share, related to the change in fair value of foreign currency derivatives recorded in accordance with SFAS 133. Analysts consensus estimate for the second quarter, which does not include the 3 cents per diluted share footwear restructuring charge, is 27 cents per share. Net income earned in the second quarter of 2005 totaled $24.0 million, or 35 cents per diluted share, including unrealized fair value gains on foreign currency derivatives of approximately $3.7 million, or 5 cents per diluted share.
“Our strong second quarter performance reflects early success against the strategic initiatives we articulated at the beginning of the year,” said Scott Olivet, chief executive officer, Oakley, Inc. “The growth of Oakley’s optics business was driven by strong demand for the company’s sunglass products including the successful launch of our first women’s eyewear collection, the acquisitions of Oliver Peoples and The Optical Shop of Aspen (OSA), and significant double-digit increases within each of our retail platforms.”
“While we benefited from these early successes, we made investments in several initiatives including repositioning our apparel platform, research and development, beginning the integration of our recent acquisitions, consolidating our European warehouse operations, and demand creation,” Olivet continued. “As previously stated, we intend to continue making investments during the second half of 2006 concentrating on the continued acceleration of our product development, retail expansion, re-branding Sunglass Icon and brand marketing including the re-launch of the oakley.com Web site. All of these investments are expected to position us for sustained, profitable growth.”
Additionally, the company announced that it signed a new, three-year contract with Luxottica Group S.p.A. establishing commercial terms retroactive to January 1, 2006 through December 31, 2008. “While this new agreement solidifies a long-standing relationship, I am even more pleased with both management teams renewed commitment to showcasing each company’s multi-branded offerings in our respective retail channels,” concluded Olivet.
Product Category Net Sales
Net sales of Oakley optics totaled $158.5 million in the second quarter of 2006, an increase of 20.9% compared with $131.1 million in the same period of 2005. This growth was driven by strong demand for the company’s sunglass products including the successful launch of its first women’s eyewear collection; incremental sales from the acquisition of Oliver Peoples and OSA; and strong contribution from the prescription eyewear business. These increases were partially offset by a decline in electronics sales.
Second quarter net sales of Oakley apparel, footwear and accessories (AFA) totaled $30.5 million, including the impact of a $1.8 million returns and discounts accrual related to the company’s footwear restructuring announced on February 9. Second quarter AFA net sales of $30.5 million represented an increase of 2.5% compared with net sales of $29.8 million in the second quarter of 2005.
Second quarter net sales of other brands, which consists of non-Oakley products sold through the company’s Sunglass Icon and OSA retail stores, increased 52.6% to $14.6 million from $9.5 million in the second quarter of 2005.
Channel Net Sales
Total U.S. second quarter net sales increased 24.3% to $119.9 million, compared with $96.4 million during the second quarter of 2005. Net sales to U.S. wholesale customers totaled $74.4 million in the second quarter, a 12.9% increase compared with $65.9 million in the comparable 2005 period, driven by a significant increase in optics sales, partially offset by a significant double-digit decline in AFA net sales. Oakley’s U.S. retail net sales, which for reporting purposes include the company’s e-commerce and telesales business, increased 48.7% to $45.4 million, compared with $30.6 million in the second quarter of 2005. The retail sales growth included a high single-digit increase in comparable store sales, the contribution of new stores opened during the last twelve months and incremental sales from the acquisitions of Oliver Peoples and OSA.
In the company’s international markets, net sales were $83.7 million, a 13.0% increase from net sales of $74.1 in the second quarter of 2005. A weaker U.S. dollar relative to foreign currencies increased reported international net sales growth by 1.0 percentage points. The company’s EMEA (Europe, Middle East and Africa) region experienced significant double-digit optics growth, partially offset by a slight decline in AFA net sales. The Americas (non-U.S.) region reported significant double-digit growth in optics and AFA. Asia Pacific saw a slight decline in its optics sales and a significant double-digit decline in its AFA business due primarily to a disproportionate impact of the footwear restructuring charges.
Gross Margins, Operating Expenses, Tax Rate
Second quarter gross profit as a percentage of net sales was 56.4% compared with 62.7% in the comparable period of 2005. Non-GAAP gross margins in the second quarter of 2006 and 2005, which exclude footwear restructuring charges and changes in fair value of foreign currency derivatives, were 58.5% and 59.5%, respectively. This decline reflects additional disposal of end-of-line products, higher sales returns and discounts, and inventory reserves, partially offset by a favorable mix shift toward optics products and retail channels.
Second quarter 2006 operating expenses totaled $86.7 million, representing 42.6% of net sales, compared to $71.7 million, or 42.0% of net sales, in the second quarter of 2005. The year over year increase in operating expenses included incremental expenses associated with the addition of Oliver Peoples and OSA, new Oakley and Sunglass Icon retail locations, increased compensation expenses including approximately $0.5 million of employee stock option expense reflecting the company’s implementation of SFAS 123(R), higher demand creation expenses, and costs associated with the consolidation of certain European warehouses.
The company’s tax rate in the second quarter was 35.0% compared to 31.5% in the second quarter of 2005 which benefited from a large state tax refund related to a prior period.
Balance Sheet
The company’s consolidated inventory totaled $145.7 million at June 30, 2006 compared to $134.3 million at June 30, 2005. This increase reflects the company’s acquisitions of Oliver Peoples and OSA, expanded retail operations, and increased electronics and spring apparel inventories, partially offset by a significant decline in footwear inventory. Accounts receivable, less allowances, totaled $103.4 million at June 30, 2006, compared with $98.7 million at March 31, 2006 and $94.7 million at June 30, 2005.
Stock Repurchase Program
During the second quarter, the company repurchased 425,518 shares of its common stock at an average price of $16.11 per share. Under the $20.0 million repurchase plan approved by the company’s board of directors on March 15, 2005, the company has repurchased 1,141,103 shares at an average price of $14.98 per share. At June 30, 2006, $2.9 million remained available for future repurchases subject to favorable market conditions.
2006 Guidance
As a result of strong sales growth in the second quarter, the company increased its 2006 net sales growth guidance to approximately 13 percent from its previously stated expectation of at least 10 percent. Due to anticipated investments concentrated in the second half of the year, the company reaffirmed its 2006 earnings per share guidance of approximately $0.68 per diluted share. This earnings guidance does not include any footwear restructuring charges which are estimated to total approximately $4.1 million on an after-tax basis, or $0.06 per diluted share, for the full year.
OAKLEY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data, unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
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2006 2005 2006 2005
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Net sales $203,583 $170,475 $355,282 $312,270
Cost of goods sold 88,824 63,644 159,840 123,849
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Gross profit 114,759 106,831 195,442 188,421
Operating expenses:
Research and development 5,856 4,655 10,886 8,587
Selling 53,276 43,944 99,556 85,072
Shipping and warehousing 5,359 4,380 9,906 8,669
General and administrative 22,217 18,683 44,205 35,876
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Total operating expenses 86,708 71,662 164,553 138,204
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Operating income 28,051 35,169 30,889 50,217
Interest expense, net 559 83 461 24
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Income before provision
for income taxes 27,492 35,086 30,428 50,193
Provision for income taxes 9,622 11,045 10,650 16,181
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Net income $ 17,870 $ 24,041 $ 19,778 $ 34,012
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Basic net income
per share $ 0.26 $ 0.36 $ 0.29 $ 0.50
Basic weighted average
shares 68,954 67,592 68,986 67,671
Diluted net income
per share $ 0.26 $ 0.35 $ 0.28 $ 0.50
Diluted weighted average
shares 69,643 68,361 69,574 68,359
