Oakley third quarter net sales were $263.8 million, an increase of 25.5% from $210.2 million in the same period of 2006. Net income for the third quarter totaled $23.7 million, or 34 cents per diluted share, which includes an approximate two cents per diluted share impact of transaction costs related to the company's previously announced merger agreement with Luxottica Group. Net income for the third quarter of 2006 was $17.3 million, or 25 cents per diluted share.
“This marks our fifth consecutive quarter of significant double digit optics growth with strength across all product types, sales channels and geographies,'' said Oakley Chief Executive Officer Scott Olivet. “The fact that we saw strength across our 2007 sport performance, Square O lifestyle, and women's collections is a strong indicator that Oakley's philosophy of 'innovations wrapped in art' is resonating with a wide range of consumers.''
“Our efforts to connect more deeply with each of our consumers also saw significant progress,'' continued Olivet. “The expansion of the Oakley Custom eyewear program, launch of an exclusive Icon grab-bag series for core action sport accounts, initiation of our artist collaboration series, and release of the Livestrong RADAR(tm) and FLAK JACKET(tm) styles, are just a few of the successful initiatives allowing individuals to address their performance needs and express their individuality within the Oakley brand.''
Olivet concluded, “We believe that consumers want to become more involved with Oakley as they learn more about the brand, our design and technology leadership, our athletes and collaborators, and our culture. Our 2007 efforts, including highly integrated product launches and marketing campaigns, the introduction of our Rolling O Lab, increased training for our dealers, and an expanding retail base to tell our story, are driving solid results and setting a strong foundation for future growth.''
Product Category Net Sales
Third quarter optics net sales totaled $192.2 million, up 29.1 percent from $148.8 million in the same period of 2006. This growth was driven by significant double-digit increases in sunglasses, prescription eyewear, and goggles. Third quarter AFA net sales totaled $52.2 million, up 12.8 percent from $46.3 million in the prior year. AFA growth included significant contributions from apparel and footwear, and a double-digit increase in watch sales.
Third quarter net sales of other products, which represent 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 28.7 percent to $19.4 million from $15.1 million during the same period last year.
Segment Net Sales
Global third quarter net sales to wholesale customers were $200.5 million, a 22.7 percent increase over $163.4 million in the same period of 2006.
Third quarter net sales to U.S. wholesale customers totaled $85.6 million, up 22.4 percent from $69.9 million in the prior year, and were driven by significant double-digit optics growth offset by a moderate decrease in AFA sales.
Oakley's third quarter U.S. retail net sales increased 35.2 percent to $63.3 million, compared with $46.8 million in the same period of 2006. U.S. retail sales were driven by strong 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
Third quarter U.S. net sales (wholesale and retail) totaled $148.9 million, an increase of 27.5 percent from $116.7 million in the prior year's same period.
Third quarter net sales in the company's international business were $114.9 million, a 22.9 percent increase from net sales of $93.5 million in the same period of 2006. A weaker U.S. dollar relative to foreign currencies increased reported international net sales by 6.1 percent. The company's Americas region saw significant double-digit optics and AFA growth; EMEA (Europe, Middle East and Africa) generated a significant increase in net optics sales and a slight increase in net AFA sales; and Asia-Pacific had significant double-digit increases in optics and a strong increase in net AFA sales.
Gross Margin, Operating Expenses, Tax Rate
Reported third quarter gross profit as a percentage of net sales was 55.5 percent compared with 53.8 percent in the third quarter of 2006. Third quarter non-GAAP gross margin was 55.5 percent compared to 54.0 percent in the same period of 2006. The increased non-GAAP gross margin versus the comparable prior year quarter is primarily due to increased gross margins from 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 $474,000 on a pre-tax basis for the third quarter of 2006; no similar charges or losses were recorded in the third quarter of 2007. A reconciliation of non-GAAP gross margin to GAAP gross profit as a percentage of net sales is included in the accompanying financial tables.
Third quarter operating expenses totaled $105.7 million, representing 40.1 percent of net sales, compared to $87.0 million, or 41.4 percent of net sales in the same period of 2006. Research and development expenses increased $0.9 million and represented 2.7 percent of net sales compared to 3.0 percent of sales in the same period of 2006. Selling expenses increased $10.5 million due primarily to increased advertising and marketing activities, and represented 23.3 percent of net sales compared to 24.2 percent of sales in the same period of 2006. Shipping and warehousing expenses increased $0.6 million and represented 2.3 percent of net sales compared to 2.6 percent of sales in the same period of 2006. General and administrative expenses increased by $6.7 million and represented 11.7 percent of net sales compared to 11.6 percent of sales in the same period of 2006. General and administrative expenses increased due to acquisitions completed in the last year, the impact of transaction costs associated with the company's merger agreement with Luxottica Group S.p.A., and increased compensation expense.
The company's effective tax rate increased to 37.4 percent in the third quarter compared to 32.8 percent in the third 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 $140.8 million at September 30, 2007, compared to $115.8 million at September 30, 2006.
The company's consolidated inventory totaled $208.1 million at September 30, 2007 compared to $154.1 million at September 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.
OAKLEY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
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2007 2006 2007 2006
--------- --------- --------- ---------
Net sales $ 263,789 $ 210,219 $ 726,115 $ 565,501
Cost of goods sold 117,284 97,120 319,895 257,164
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Gross profit 146,505 113,099 406,220 308,337
Operating expenses:
Research and development 7,140 6,281 19,791 17,298
Selling 61,520 50,975 187,981 150,718
Shipping and warehousing 6,044 5,448 16,881 15,359
General and administrative 30,972 24,318 93,639 67,996
--------- --------- --------- ---------
Total operating expenses 105,676 87,022 318,292 251,371
--------- --------- --------- ---------
Operating income 40,829 26,077 87,928 56,966
Interest expense, net 2,990 263 8,150 724
--------- --------- --------- ---------
Income before provision
for income taxes 37,839 25,814 79,778 56,242
Provision for income taxes 14,143 8,472 28,887 19,122
--------- --------- --------- ---------
Net income $ 23,696 $ 17,342 $ 50,891 $ 37,120
========= ========= ========= =========
Diluted net income
per share $ 0.34 $ 0.25 $ 0.73 $ 0.54
Diluted weightedaverage shares 70,304 68,827 69,908 69,017
