Oakley, Inc. saw first quarter net sales increase 7.0% to a first quarter record $151.7 million from $141.8 million in the same period of 2005. Net income for the first quarter totaled $1.9 million, or 3 cents per diluted share, compared with net income of $10.0 million, or 15 cents per diluted share, earned in the first quarter of 2005. Net income for the first quarter of 2006 included unrealized fair value losses of approximately a penny per diluted share while the first quarter of 2005 included unrealized fair value gains of approximately 4 centsper diluted share related to the company's hedging activities recorded in accordance with SFAS 133.
“Our first quarter results reflect the initial benefits of Oakley's renewed emphasis on optics,” said Scott Olivet, chief executive officer, Oakley, Inc. “We executed well against an earlier sunglass release schedule and successfully launched our first women's eyewear collection. The women's launch was one of the most coordinated and powerful ever, combining excellent design and manufacturing execution with an early, integrated sales and marketing effort around the world.”
“During the quarter, we also took an important step forward in our multi-branding strategy with the acquisition of Oliver Peoples. Oakley's portfolio of strong brands will enable us to reach new consumers, satisfy performance, sport and active needs while penetrating new distribution channels,” continued Olivet.
“Moving forward, we intend to implement the growth strategies articulated in February which include realigning our apparel platform, restructuring the footwear business, building our retail and international platforms and increasing the investment in overall brand development. We believe that focusing on these strategies will position the company for renewed annual earnings growth in 2007,” Olivet concluded.
Product Category Net Sales
Net sales of Oakley optics totaled $106.9 million in the first quarter of 2006. This 12.3% increase over net sales of $95.2 million in 2005's first quarter was driven by strong sales of the company's 2006 sunglasses, including the launch of the company's first women's collection; incremental sales from the February acquisition of Oliver Peoples; and strong sales of Oakley goggles fueled by excellent brand exposure at the 2006 Winter Olympics. These increases were partially offset by significantly lower sales of the company's electronics products compared to the first quarter of 2005 when the company launched its first electronics product to international markets. In the first quarter of 2006, the company also significantly increased its provisions for sales returns and markdown allowances for its electronics products.
First quarter net sales of Oakley apparel, footwear and accessories totaled $36.8 million, a decline of 8.8% compared with net sales of $40.3 million in the first quarter of 2005. This decline reflects issues with product assortment, channel alignment and delivery execution which are being addressed by the previously announced realignment plan.
First quarter net sales of the company's other products group increased 27.9% to $8.0 million from $6.3 million in the first quarter of 2005.
Geographic Net Sales
Total U.S. first quarter net sales increased 20.9% to $81.1 million, compared with $67.0 million during the first quarter of 2005. U.S. net sales, excluding the company's retail operations, totaled $51.7 million in the first quarter, a 13.7% increase compared with $45.5 million in the comparable 2005 period. Oakley's U.S. retail net sales, which for reporting purposes now include the company's e-commerce and telesales business, increased 36.3% to $29.3 million, compared with $21.5 million in the first quarter of 2005. The retail sales growth reflected a significant increase in comparable store sales and the contribution of new stores opened during the last twelve months.
In the company's international markets, net sales were $70.6 million, a 5.5% decline from net sales of $74.8 in the first quarter of 2005. A stronger U.S. dollar relative to foreign currencies reduced reported international net sales growth by 3.6 percentage points. Net sales declined modestly in the company's EMEA (Europe, Middle East, and Africa) and Asia Pacific regions, partially offset by a slight increase in the Americas region. Weak sales in the company's electronics and apparel categories had a more pronounced impact in international markets and offset strong sales of the company's sunglasses and goggles.
Gross Margins, Operating Margins, Tax Rate
First quarter gross margins were 53.2% compared with 57.5% in 2005's comparable period. Gross margin excluding changes in fair value of foreign currency derivatives in the first quarter of 2006 and 2005 were 54.0% and 54.7%, respectively. The gross margin decline reflected the effect of significantly increased provisions for sales returns and markdowns in the electronics category as well as lower margins in the company's footwear category due to higher closeout sales. These decreases were partially offset by improved margins from Oakley-branded eyewear and a favorable shift in sales mix towards optics products.
First quarter 2006 operating expenses totaled $77.8 million representing 51.3% of net sales in the quarter compared with $66.5 million or 46.9% of net sales in the first quarter of 2005. These increases included incremental expenses associated with the addition of Oliver Peoples and new retail locations. As a percentage of net sales, increased general and administrative expenses reflected the recent filling of several senior executive and staff positions, higher professional fees and approximately $0.5 million of employee stock option expense reflecting the company's implementation of SFAS 123(R). Higher selling expenses, as a percentage of net sales, reflected an increase in marketing activities to support earlier introductions of 2006 sunglass styles and the company's branding efforts during the Winter Olympics.
The company's tax rate in the first quarter was 35.0% compared to 34.0% in the first quarter of 2005.
The company's consolidated inventory totaled $134.6 million at March 31, 2006, compared to $119.0 million at December 31, 2005 and $121.0 million at March 31, 2005. This increased inventory reflects the company's acquisition of Oliver Peoples, expanded retail operations, and higher electronics and apparel inventories. Accounts receivable, less allowances, totaled $98.7 million at March 31, 2006, compared with $99.4 million at December 31, 2005 and $95.1 million at March 31, 2005. Accounts receivable days sales outstanding were 59 at March 31, 2006, compared with 60 at March 31, 2005.
The Optical Shop of Aspen Acquisition
The company noted that on April 18, 2006 it completed the previously announced acquisition of 100 percent of privately held OSA Holding, Inc. and its wholly owned retail subsidiary, The Optical Shop of Aspen (OSA). OSA currently has 14 optical retail stores located in Arizona, California, Colorado, Florida, New Mexico and Missouri, and will operate as a wholly owned subsidiary of Oakley, Inc.
Stock Repurchase Program
During the first quarter, the company repurchased 279,404 shares of its common stock at an average price of $15.13 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 738,089 shares at an average price of $14.33 per share. At March 31, 2006, $9.4 million remained available for future repurchases subject to favorable market conditions.
The company reaffirmed its 2006 guidance given on March 10, 2006, indicating that it continues to expect net sales growth of at least 10% and earnings of approximately $0.68 per share. This earnings guidance does not include any restructuring charges related to its previously announced plans to exit from a significant portion of its footwear business.
OAKLEY, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands except per share amounts, unaudited) Three Months Ended March 31, ---------------------- 2006 2005 --------- --------- Net sales $ 151,698 $ 141,795 Cost of goods sold 71,016 60,205 --------- --------- Gross profit 80,682 81,590 Operating expenses: Research and development 5,030 3,932 Selling 46,280 41,513 Shipping and warehousing 4,547 4,289 General and administrative 21,989 16,808 --------- --------- Total operating expenses 77,846 66,542 --------- --------- Operating income 2,836 15,048 Interest income, net (98) (59) --------- --------- Income before provision for income taxes 2,934 15,107 Provision for income taxes 1,027 5,136 --------- --------- Net income $ 1,907 $ 9,971 ========= ========= Basic net income per share $ 0.03 $ 0.15 Basic weighted average shares 69,040 67,712 Diluted net income per share $ 0.03 $ 0.15 Diluted weighted average shares 69,583 68,318