Oakley, Inc. reported first quarter net sales increased 1.5 percent, to $111.2 million, a first quarter record, compared with $109.6 million in the first quarter of 2002. Net income for the first quarter totaled $3.2 million, or $0.05 per diluted share, compared with net income of $5.6 million, or $0.08 per diluted share, earned in the first quarter of 2002.
U.S. net sales in the first quarter, excluding the company’s retail store operations, decreased 10.7 percent to $46.8 million from $52.4 million. Net sales from Oakley’s retail store operations increased 53.4 percent to $8.9 million from $5.8 million last year. Total first quarter U.S. net sales decreased 4.5 percent to $55.7 million from $58.2 million last year. International net sales increased 8.0 percent to $55.5 million compared with $51.4 million in last year’s first quarter.
Oakley’s Chief Operating Officer Link Newcomb commented, “Although our first quarter results were clearly affected by the sluggish retail environment made worse by the threat and reality of war in Iraq, late in the quarter we witnessed strong sales of our new 2003 sunglass styles, including Plate(TM), Big Square Wire(TM), Valve(TM), T Spoon(TM) and Monster Dog(TM), enabling us to achieve record first quarter sales. We are pleased that our new product launch execution during the quarter resulted in most new products shipping on time, giving us maximum opportunity to capitalize on the critical spring and summer selling seasons. These successful launches reflect an outstanding effort by numerous teams around the world and puts us in great position to capitalize on any sustained improvement in the general retail environment.
“Gross sales of our newer categories registered a combined increase of 18.6 percent to $39.0 million, led by increases in prescription eyewear, apparel and footwear. Footwear and apparel margins improved as a result of higher volumes, better initial merchandise margins, more effective product development and sourcing through third-party manufacturers and reduced sales of excess inventory to closeout channels. We remain firmly committed to this important diversification strategy.”
Newcomb concluded, “We are pleased with our stronger-than-expected earnings performance in the first quarter and, based upon that performance, are able to reaffirm expectations toward the high end of our previous full year guidance of $0.55 to $0.60 per share.”
U.S. net sales to the company’s diverse specialty account base and other domestic sales excluding Sunglass Hut totaled $39.3 million, a decrease of 6.9 percent; U.S. net sales to Sunglass Hut totaled $7.5 million, a decrease of 26.4 percent compared with the first quarter of 2002. Global net sales to Sunglass Hut decreased 24.1 percent to $9.1 million during the quarter. U.S. net sales reflect the generally depressed retail environment during the first quarter, which had a more pronounced effect on the company’s mature sunglass category and contributed to a decline in sunglass sales. In addition, net sales to Sunglass Hut in the first quarter of 2002 reflected the replenishment of severely depleted inventory levels after the two companies suspended their relationship between August and late December 2001.
Oakley’s international net sales increased 8.0 percent (a decline of 2.2 percent on a constant dollar basis) to $55.5 million in the first quarter, compared with $51.4 million last year. Although sunglass sales during the quarter were below the company’s original expectations, sales increases in goggles, apparel and prescription eyewear contributed to the overall sales increase. Europe, Canada, Japan, South Pacific and South Africa each achieved strong growth, partially offset by declines in the Middle East, Latin America and the rest of Asia.
First quarter gross sales totaled $117.9 million. Sunglass gross sales decreased 11.5 percent in the first quarter, to $63.9 million, as soft consumer spending and weak retail conditions persisted throughout the quarter. Sunglass unit shipments declined 16.3 percent, partially offset by a 5.7 percent increase in average sunglass selling price compared to the first quarter of 2002, primarily as a result of a weaker U.S. dollar. Combined first quarter gross sales of the company’s apparel, prescription eyewear, footwear and watch categories grew 18.6 percent, to $39.0 million, and accounted for 33.1 percent of total first quarter gross sales. Excluding sales to closeout retail channels, newer category gross sales increased 26.8 percent. Newer category sales to closeout retail channels decreased significantly as a result of better inventory management and more successful products. Gross sales of the company’s goggles increased 63.1 percent in the first quarter of 2003, driven by the success of Wisdom(TM), Oakley’s newest, most advanced snow goggle, introduced in the fourth quarter of 2002.
Net sales through Oakley’s retail store operations grew to $8.9 million during the quarter, compared to $5.8 million in the first quarter of 2002. During the first quarter, the company opened one O Store(TM), bringing the total to 15. In addition, two Iacon stores were opened, including the acquisition of Celebrity Eyeworks Studio located at Downtown Disney(TM) in Orlando, Florida, bringing the total to 66.
First quarter gross margins were 53.4 percent compared with 52.6 percent in last year’s comparable period, reflecting improved margins in all categories other than sunglasses and the positive effect of a weaker U.S. dollar, partially offset by slightly lower sunglass margins due to the decline in volumes. Operating expenses were 48.7 percent of net sales in the quarter, compared with 44.2 percent the prior year, primarily due to higher foreign operating expenses resulting from a weaker U.S. dollar and higher selling expenses related to the company’s expanded retail operations.
The company’s order backlog as of March 31, 2003 was a record $71.1 million, up 20.3 percent compared with $59.1 million at the same time last year. Prebook orders from retailers for the company’s fall footwear and apparel lines totaled $31.1 million at March 31, 2003, up 45.4 percent compared with $21.4 million at the same time last year.
The company’s consolidated inventory totaled $91.8 million at March 31, 2003, compared with $87.0 million at December 31, 2002 and $78.5 million at March 31, 2002. This inventory reflects higher sunglass inventories established to capitalize on the key summer selling season and the expanded company-owned retail store operations, partially offset by lower footwear and apparel inventories. Accounts receivable totaled $78.5 million at March 31, 2003, compared with $68.1 million at December 31, 2002 and $83.9 million at March 31, 2002.
On September 10, 2002, the company’s Board of Directors authorized a $20 million stock repurchase program to occur from time to time as market conditions warrant. Since the time of this authorization, the company has repurchased 657,200 shares for $6.8 million at an average share price of $10.30. During the first quarter of 2003, the company repurchased 263,200 shares for $2.6 million at an average share price of $9.95. The company intends to continue to make repurchases under the share repurchase program should the right market conditions exist.
The uncertain economy and generally weak retail environment in most of Oakley’s key global markets continue to provide a very difficult backdrop against which to forecast. This environment makes it extremely difficult to predict near-term retail and consumer spending. Because the company’s sunglass sales rely on “at-once” orders from retailers to replenish inventory sold to consumers, an inconsistent retail environment complicates management’s attempts to accurately assess future order and sales trends.
Management believes it has been successful in the implementation of cost control initiatives to reduce initial 2003 spending plans by at least $5 million throughout the year and to minimize future increases in operating expenses relative to the rate of increase in sales. As partial evidence of those efforts, first quarter operating expenses grew at the slowest year-over-year rate since the third quarter of 1999. Management’s current 2003 outlook reflects the anticipated effect of these initiatives.
For the full year 2003, the company is reaffirming its guidance provided on February 12, 2003 that assumed annual net sales growth of approximately 15 percent to $560 million. This revenue outlook assumes growth from new product categories near the bottom end of the previous range of 30 to 35 percent, due primarily to slower growth in Fall footwear than originally anticipated. Conversely, the company’s goggle sales are trending above expectations based on the success of Wisdom and increased sales to the U.S. military. The company’s retail store operations are still expected to represent approximately 10 percent of 2003 sales.
Earnings per diluted share are now expected to be near the high end of the previous range of $0.55 to $0.60, based on the company’s better-than-expected performance in the first quarter and the anticipated positive effects of the company’s cost reduction initiatives. This outlook assumes favorable consumer response to new product introductions scheduled for the second and third quarters, and slow, sustained improvement in the retail environment in key global markets as the year progresses. Investors and analysts are strongly encouraged to take all of the market and operational factors discussed above into careful consideration in formulating their own full year 2003 Oakley financial models.
OAKLEY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data, unaudited)
Three Months Ended
March 31,
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2003 2002
--------- ---------
Net sales $111,190 $109,572
Cost of goods sold 51,775 51,889
--------- ---------
Gross profit 59,415 57,683
Operating expenses:
Research and development 3,722 3,864
Selling 31,691 27,475
Shipping and warehousing 4,430 4,369
General and administrative 14,267 12,758
--------- ---------
Total operating expenses 54,110 48,466
--------- ---------
Operating income 5,305 9,217
Interest expense, net 370 659
--------- ---------
Income before provision for income taxes 4,935 8,558
Provision for income taxes 1,727 2,996
--------- ---------
Net income $3,208 $5,562
Three Months
Ended
March 31, 2003
Reconciliation of Non-GAAP financial measures -----------
to comparable GAAP measures: (in thousands)
Gross sales $117,878
Discounts and returns 6,688
-----------
Net sales as reported in accordance with GAAP $111,190
===========
Constant dollar international net sales $50,270
Positive effect of weaker U.S. dollar (1) 5,275
-----------
International net sales as reported in accordance with
GAAP $55,545
===========
(1) Positive effect represents the difference between the translation
of foreign-denominated sales for the period using average exchange
rates pursuant to GAAP and the translation of such sales using
average rates for the comparable prior year period.
Three Months Ended
March 31,
-------------------
2003 2002
-------- ----------
(dollars in
Other Operating Data: thousands)
Sunglasses:
Units 895,002 1,069,299
Sales before discounts (2) $63,881 $72,177
Net sales:
Domestic $55,645 $58,192
International $55,545 $51,380
Backlog $71,069 $59,092
(2) Does not reflect returns relating to defective product.
