Oakley, Inc. saw second quarter net sales jump 29.3% to $263.2 million, from $203.6 million in the same quarter last year. Net income for the quarter rose 20.1% to $21.5 million, or 31 cents per diluted share, including an approximate 3 cents per diluted share impact of transaction costs related to the company's previously announced merger agreement with Luxottica Group S.p.A.. Net income for the second quarter of 2006 was $17.9 million, or 26 cents per diluted share.
“Our optics strategies continue to drive results and, in the second quarter, we continued to see strong growth rates across all geographies and channels” said Oakley, Inc. Chief Executive Officer Scott Olivet. “Our premium sports performance styles RADAR(tm) and FLAK JACKET(tm), which are currently showcased in the Tour de France, are clearly being well received by athletes at every level of competition as well as sports-inspired consumers. Consistent with Oakley's history, these new styles are once again redefining performance, fit, convenience, and style on the fields of athletic competition around the world.”
“Our polarized product, including the recently launched NANOWIRE(tm), continues to gain share as more consumers learn about Oakley's unbeatable polarized technology and see first-hand the benefits of our new HYDROPHOBIC(tm) coatings,” continued Olivet. “Additionally, the integrated launches of our women's and Square O collections have driven strong early results and the Oakley custom eyewear program continues to become a more important part of our business in Oakley retail locations.”
Olivet concluded, “We are pleased with the quarterly results, but more importantly, we continue to make great progress against our goals of strengthening our brands, building solid business platforms capable of delivering sustainable and profitable growth, and delivering results consistently.”
Product Category Net Sales
Second quarter optics net sales totaled $207.5 million, up 30.9% from $158.5 million in the same period of 2006. This growth was driven by significant double-digit increases in sunglasses, prescription eyewear, and goggles. The company's second quarter sales had significant double-digit organic optics growth augmented by incremental sales from Eye Safety Systems (ESS) and Bright Eyes. Second quarter AFA net sales totaled $36.5 million, up 19.6% from $30.5 million in the prior year. AFA growth included significant double-digit contributions from footwear and watches, and a double-digit increase in apparel sales.
Second quarter net sales of other products, which consist of non-Oakley owned brands sold through the company's multi-branded Bright Eyes, Sunglass Icon and The Optical Shop of Aspen (OSA) retail stores, increased 31.3% to $19.1 million from $14.6 million during the same period last year.
Segment Net Sales
Global second quarter net sales to wholesale customers were $201.0 million, a 27.1% increase over $158.2 million in the same period of 2006.
Second quarter net sales to U.S. wholesale customers totaled $96.1 million, up 29.2% from $74.4 million in the prior year, driven by significant double-digit optics growth and a moderate increase in AFA sales.
Oakley's second quarter U.S. retail net sales increased 36.8% to $62.2 million, compared with $45.4 million in the same period of 2006. U.S. retail sales were driven by positive comparable store sales growth, contribution of new Oakley and Sunglass Icon stores added during the last twelve months, and increased Internet sales.
Geographic Net Sales
Second quarter U.S. net sales (wholesale and retail) totaled $158.3 million, an increase of 32.1% from $119.9 million in the prior year's same period.
Second quarter net sales in the company's international business were $104.9 million, a 25.2% increase from net sales of $83.7 million in the same period of 2006. A weaker U.S. dollar relative to foreign currencies increased reported international net sales by 5.1%. The company's Americas region saw significant double-digit optics and AFA growth; EMEA (Europe, Middle East and Africa) generated a significant double-digit increase in optics sales and a slight increase in AFA sales; and Asia Pacific had significant double-digit increases in optics and AFA net sales.
Gross Margin, Operating Expenses, Tax Rate
Reported second quarter gross profit as a percentage of net sales was 57.6% compared with 56.3% in the second quarter of 2006. Second quarter non-GAAP gross margin was 57.6% compared to 58.4% in the same period of 2006. The decreased non-GAAP gross margin versus the comparable prior year quarter is primarily due to increased inventory charges in the current quarter and the addition of Bright Eyes and ESS, which generate lower gross margins. These factors were partially offset by increased gross margins on Oakley sunglasses and prescription eyewear. Non-GAAP gross margin excludes footwear restructuring charges and losses from changes in fair value of foreign currency derivatives recorded in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), which together totaled $5.4 million on a pre-tax basis for the second quarter of 2006; no similar charges or losses were recorded in the second quarter of 2007.
Second quarter operating expenses totaled $114.3 million, representing 43.4% of net sales, compared to $86.6 million, or 42.5% of net sales in the same period of 2006. Research and development, and shipping and warehousing expenses decreased as a percentage of net sales. Selling expenses increased $16.2 million or 30.3% from the same period of 2006; over $2.0 million of this increase was due to planned shift of advertising and marketing efforts from the first quarter into the second quarter. General and administrative expenses increased by $10.6 million, or 48.3%, from the same period of 2006 partially due to the impact of transaction costs associated with the company's merger agreement with Luxottica Group S.p.A. General and administrative expenses also increased due to acquisitions completed in the last year as well as increased compensation expense.
The company's tax rate increased to 37.6% in the second quarter compared to 35.0% in the second quarter of 2006. The increased tax rate is due to certain transaction costs related to the company's previously announced merger agreement not being deductible for income tax purposes.
Balance Sheet Highlights
Accounts receivable, less allowances, totaled $129.8 million at June 30, 2007, compared to $103.4 million at June 30, 2006.
The company's consolidated inventory totaled $196.1 million at June 30, 2007 compared to $145.7 million at June 30, 2006. The increase in inventory is due to the impact of acquisitions and new retail stores, increased eyewear inventory to support higher sales volume, and increased apparel inventories.
2007 Guidance
As a result of strong sales growth in the second quarter, the company increased its 2007 net sales guidance to a range of $930 millioin to $960 million, or approximately 22% to 26% over 2006 net sales of $762 million. This is an increase over its previous net sales guidance of 18% to 22% growth. The company did not change its 2007 net income guidance of 95 cents to 98 cents per diluted share, but noted that this EPS range now includes the expected impact of continuing transaction costs related to the company's previously announced merger agreement. This guidance excludes any impact from changes in tax benefits recognized under Financial Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes'' (FIN 48), substantial changes in currency exchange rates, or significant changes in estimated transaction costs related to the company's previously announced merger agreement.
OAKLEY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share data)Three Months Ended Six Months Ended
June 30, June 30,
——————- ——————-
2007 2006 2007 2006
——– ——– ——– ——–
Net sales $263,162 $203,584 $462,326 $355,282
Cost of goods sold 111,503 88,931 202,611 160,044
——– ——– ——– ——–
Gross profit 151,659 114,653 259,715 195,238Operating expenses:
Research and development 6,634 5,928 12,651 11,017
Selling 69,540 53,377 126,461 99,743
Shipping and warehousing 5,584 5,362 10,837 9,911
General and administrative 32,535 21,933 62,667 43,678
——– ——– ——– ——–
Total operating expenses 114,293 86,600 212,616 164,349——– ——– ——– ——–
Operating income 37,366 28,053 47,099 30,889Interest expense, net 3,015 559 5,160 461
——– ——– ——– ——–
Income before provision
for income taxes 34,351 27,494 41,939 30,428
Provision for income taxes 12,899 9,623 14,744 10,650
——– ——– ——– ——–
Net income $ 21,452 $ 17,871 $ 27,195 $ 19,778
======== ======== ======== ========Diluted net income
per share $ 0.31 $ 0.26 $ 0.39 $ 0.29
Diluted weighted
average shares 69,890 69,163 69,708 69,115
