Oakley, Inc. third quarter net sales increased 21.2%, to a quarterly record $210.2 million, compared with $173.4 million in the same period of 2005. Net income for the third quarter totaled $17.3 million, or 25 cents per diluted share, compared to $16.1 million, or 23 cents per diluted share, in the third quarter of 2005.
“Our optics initiatives are working and we're seeing positive results across all geographies and channels of distribution,” said Oakley, Inc. Chief Executive Officer Scott Olivet. “We continue to build on the early success of our women's eyewear launch, enhance the Oakley Custom Program, and grow our retail store platform. In addition to significant double-digit, organic optics growth, we also benefited from the acquisitions of Oliver Peoples and The Optical Shop of Aspen.”
Olivet concluded, “We are also pleased with the progress against our strategic initiatives including restructuring our footwear business, realigning the apparel platform, and amplifying our communication of Oakley's performance and technology story. We believe our investment in these initiatives will position the company for sustainable, profitable growth.”
Net sales of optics totaled $148.8 million in the third quarter of 2006, an increase of 25.3% compared with $118.8 million in the same period of 2005. This growth was driven by incremental sales from Oliver Peoples and The Optical Shop of Aspen (OSA) as well as increased sales of new and existing sunglasses, goggles, and Oakley prescription eyewear. These increases were partially offset by a large decline in electronics sales.
Third quarter net sales of Oakley apparel, footwear and accessories (AFA) totaled $46.3 million, an increase of 2.4% compared with net sales of $45.3 million in the third quarter of 2005.
Third quarter net sales of other brands, which consists of non-Oakley products sold through the company's multi-branded retail stores, including Sunglass Icon and OSA, increased 60.5% to $15.1 million from $9.4 million in the third quarter of 2005.
Net sales to U.S. wholesale customers totaled $69.9 million in the third quarter, an 18.2% increase compared with $59.2 million in the comparable 2005 period, driven by a significant increase in optics sales, partially offset by a slight decline in AFA net sales.
Oakley's U.S. retail net sales, which for reporting purposes include the company's e-commerce and telesales business, increased 45.7% to $46.8 million, compared with $32.1 million in the third quarter of 2005. The retail sales growth included a mid-single-digit increase in comparable store sales; contribution of 34 new Oakley and Sunglass Icon stores opened during the last twelve months; incremental sales from the company's Oliver Peoples and OSA acquisitions; and increased e-commerce and telesales volume.
Total third quarter U.S. net sales (wholesale and retail) increased 27.9% to $116.7 million, compared with $91.3 million during the third quarter of 2005.
In the company's international markets, net sales were $93.5 million, a 13.8% increase from net sales of $82.1 in the third quarter of 2005. A weaker U.S. dollar relative to foreign currencies increased reported international net sales growth by 2.4 percentage points. The company's EMEA (Europe, Middle East and Africa) region experienced significant double-digit optics growth, partially offset by a significant double-digit decline in AFA net sales. The Americas (non-U.S.) region reported significant double-digit growth in optics and AFA. Asia Pacific saw a significant increase in its optics sales and a modest increase in AFA business.
Third quarter gross profit as a percentage of net sales was 53.8% compared with 54.5% in the third quarter of 2005. Non-GAAP gross margin in the third quarter of 2006 was 54.0% compared with a non-GAAP gross margin of 53.5% in the third quarter of 2005. The increase in non-GAAP gross margin versus the prior year quarter reflects a favorable mix shift toward optics products, the addition of Oliver Peoples, and improved manufacturing efficiencies, partially offset by higher accrued sales markdowns and inventory reserves, and the disposal of end-of-line products.
Non-GAAP gross margin in the third quarter of 2006 excludes footwear restructuring charges and changes in fair value of foreign currency derivatives recorded in accordance with SFAS 133, which totaled $474,000. Non-GAAP gross margin in the third quarter of 2005 excludes a $1.7 million gain due to changes in fair value of foreign currency derivatives recorded in accordance with SFAS 133. A reconciliation of non-GAAP gross margin to GAAP gross profit as a percentage of sales is included in the accompanying financial data.
Third quarter 2006 operating expenses totaled $87.0 million, representing 41.4% of net sales, compared to $70.2 million, or 40.5% of net sales, in the third quarter of 2005. The year over year increase in operating expenses included costs associated with the addition of Oliver Peoples and OSA; increased variable selling costs associated with higher sales volumes; new Oakley and Sunglass Icon retail locations; higher compensation expense, including the filling of senior staff positions and approximately $0.6 million of employee stock options reflecting the company's implementation of SFAS 123(R); and increased professional fees.
The company's tax rate in the third quarter was 32.8 percent compared to 34.0% in the third quarter of 2005. On a year-to-date basis, the company's tax rate is 34.0% which it expects to maintain through the end of 2006.
Accounts receivable, less allowances, totaled $115.8 million at September 30, 2006, compared with $103.4 million at June 30, 2006 and $104.5 million at September 30, 2005.
The company's consolidated inventory totaled $154.1 million at September 30, 2006 compared to $128.0 million at September 30, 2005. This increase was largely driven by the acquisitions of Oliver Peoples and OSA, and the addition of 34 new Oakley and Sunglass Icon stores opened during the last twelve months.
As a result of continued strong sales through the third quarter, the company increased its 2006 net sales guidance to a growth rate of approximately 15-17% over 2005 net sales of $648.1 million. The company's previous 2006 net sales guidance included a growth rate of approximately 13%.
The company reaffirmed its non-GAAP 2006 earnings per share guidance of 68 cents per diluted share. This earnings guidance does not include any footwear restructuring charges, which are estimated to total approximately $3.6 million on an after-tax basis, or $0.05 per diluted share, for 2006. On a GAAP basis, including estimated footwear restructuring charges, the company expects 2006 earnings per share of 63 cents per diluted share. To date, the company has recorded $2.3 million on an after-tax basis, or three cents per diluted share, related to the footwear restructuring charges.
OAKLEY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
Net sales $210,219 $173,447 $565,501 $485,717
Cost of goods sold 97,120 78,997 257,164 202,846
-------- -------- -------- --------
Gross profit 113,099 94,450 308,337 282,871
Operating expenses:
Research and development 6,281 4,229 17,298 12,816
Selling 50,975 44,393 150,718 130,386
Shipping and warehousing 5,448 4,459 15,359 13,128
General and administrative 24,318 17,162 67,996 52,117
-------- -------- -------- --------
Total operating expenses 87,022 70,243 251,371 208,447
-------- -------- -------- --------
Operating income 26,077 24,207 56,966 74,424
Interest expense, net 263 (144) 724 (120)
-------- -------- -------- --------
Income before provision
for income taxes 25,814 24,351 56,242 74,544
Provision for income taxes 8,472 8,279 19,122 24,460
-------- -------- -------- --------
Net income $ 17,342 $ 16,072 $ 37,120 $ 50,084
======== ======== ======== ========
Basic net income per
share $ 0.25 $ 0.24 $ 0.54 $ 0.74
Basic weighted average
shares 68,267 68,389 68,431 67,915
Diluted net income per
share $ 0.25 $ 0.23 $ 0.54 $ 0.73
Diluted weighted average
shares 68,827 69,323 69,017 68,713
