Oakley, Inc. increased its net sales during the first quarter by refocusing its energies on the optics category. However, returns and clearance in the electronics and footwear categories, along with the strengthening of the Dollar, caused the companys margins to erode and a decrease in net income to result. Net income for the quarter included unrealized fair value losses of approximately a penny per diluted share, while last years first quarter included unrealized fair value gains of approximately 4 cents per diluted share related to the company's hedging activities.
The sales increase in the optics segment was driven by “strong” sales of the company's recently launched sunglasses, including 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. Dragon saw sales increase “in excess of 40%” in both goggles and sunglasses. These increases were partially offset by significantly lower sales of the company's electronics products, which faced tough comparison against the companys initial launch in the category 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. The decline in sales of Oakley apparel, footwear, and accessories reflected issues with product assortment, channel alignment, and delivery execution.
Total U.S. sales jumped 20.9% to $81.1 million from $67.0 million last year. Owned-retail sales, which includes e-commerce and telesales, reflected a “significant” increase in comp store sales as well as new stores opened over the last twelve months. Internationally, a stronger U.S. Dollar reduced reported international net sales growth by 3.6 percentage points. The balance of the 5.5% decline came from modest declines in the EMEA and Asia Pacific regions where weak sales in apparel and electronics had a more pronounced effect.
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. SG&A expenses increased 390 basis points to 45.0% of sales during the quarter, which combined with the decrease in GM to produce the sharp decline on the bottom line.
The company reaffirmed its 2006 guidance, expecting net sales growth of at least 10% and earnings of approximately 68 cents per share, not including any restructuring charges resulting from the exit of a large portion of the footwear business.
| Oakley, Inc. | |||
| First Quarter Results | |||
| (in $ millions) | 2006 | 2005 | Change |
| Total Sales | $151.7 | $141.8 | 7.0% |
| U.S. Wholesale | $51.7 | $45.5 | 13.7% |
| Intl Sales | $70.6 | $74.8 | -5.5% |
| Owned Retail | $29.3 | $21.5 | 36.3% |
| Optics | $106.9 | $95.2 | 12.3% |
| App., FW, Acc. | $36.8 | $40.3 | -8.8% |
| Other | $8.0 | $6.3 | 27.9% |
| Gross Margin | 53.2% | 57.5% | -440 bps |
| Net Income | $1.9 | $10.0 | -80.9% |
| Diluted EPS | 3¢ | 15¢ | -80.0% |
| Inventories* | $134.6 | $121.0 | +11.2% |
| *at quarter-end | |||
