Oakley fourth quarter net sales increased 24.5% to $153.0 million, compared with $122.9 million in the fourth quarter of 2003. Net income for the fourth quarter totaled $10.0 million, or $0.15 per diluted share, a 213% increase compared with $3.2 million, or $0.05 per diluted share, in last year’s fourth quarter.
Full year 2004 net sales reached a record $585.5 million, up 10.9 percent from $528.0 million in 2003. Net income increased 8.9 percent to $41.6 million, or $0.60 per diluted share, compared to $38.2 million, or $0.56 per diluted share, in the prior year.
Results for 2004 and comparable information for 2003 reflect a reclassification of certain shipping and handling fees charged to customers from operating expenses to net sales. Similarly, certain shipping costs related to those operations were reclassified from operating expenses to cost of goods sold. This reclassification had no effect on reported net income in any prior period. See “Reclassification of Certain Items” below for a more detailed explanation.
“Our successful launch of Oakley Thump(tm) and our new joint product development relationship with Motorola dramatically expand the future potential for Oakley products,” commented Jim Jannard, Chairman and Chief Executive Officer. “In addition, our expanded relationship with the U.S. Army further validates the critical performance capabilities of our product inventions. The Oakley brand may be in its 30th year, but its best years are still ahead,” Mr. Jannard concluded.
Oakley’s Chief Operating Officer Link Newcomb commented, “In the fourth quarter, our newer product categories provided solid sales growth and met our internal forecast. In addition, Oakley’s retail expansion efforts continued during the year, culminating with the fourth quarter being our strongest retail quarter in terms of sales and contribution to earnings. In the fourth quarter, our retail operations achieved strong double-digit comparable store sales increases with Oakley Thump(tm) contributing eight percentage points of that increase.”
Newcomb concluded, “We enter 2005 with great confidence in the long-term opportunities available to Oakley across our broad product assortment and are particularly excited about the potential of our new electronics category.”
Fourth Quarter Financial Analysis
U.S. net sales, excluding the company’s retail store operations, increased 57.6 percent in the fourth quarter, to $62.1 million, compared with $39.4 million last year, a record quarterly increase. Sales of Oakley Thump(tm) and sales of combat eyewear to the U.S. Army were the primary contributors to that growth. Excluding Sunglass Hut, sales to the company’s diverse specialty account base and other domestic sales increased 66.1 percent, to $54.6 million in the quarter. U.S. net sales to Sunglass Hut, the company’s largest customer, increased 14.8 percent, to $7.5 million.
Oakley’s fourth quarter international net sales increased 2.9 percent to $69.8 million compared with $67.8 million in last year’s comparable period, including a benefit of 5.8 percentage points from a weaker U.S. dollar. International net sales benefited from the limited launch of Oakley Thump(tm) in key markets and increased sales of apparel and sunglass styles introduced during the past year. Net sales increases in Japan, Brazil, Asia and Canada were partially offset by declines in the South Pacific, Europe and Mexico. The company’s fourth quarter performance in the South Pacific region was disappointing in what has historically been the region’s strongest quarter. Additionally, the company’s Oakley Mexico subsidiary continues to struggle to generate a profit amid the challenges of the Mexican market. The company believes that it is taking steps to address Mexico’s and South Pacific’s disappointing results and expects better performance in 2005.
Sales through Oakley’s U.S. retail store operations reached $21.1 million during the fourth quarter, compared to $15.7 million in the fourth quarter of 2003, an increase of 34.4 percent. During the fourth quarter, the company opened four new Oakley retail stores and added three new Iacon stores in the U.S. Strong double-digit comp store increases were driven by the fourth quarter launch of Oakley Thump(tm).
Fourth quarter gross sales totaled $162.6 million. Sunglass gross sales increased 9.7 percent in the fourth quarter, to $69.6 million. The growth was driven by strong combat eyewear sales and by a 3.5 percent increase in average sunglass selling price. Global net sales to the retail group of Luxottica, which includes Sunglass Hut and OP(sm) locations worldwide, increased 7.4 percent to $9.8 million during the quarter.
Combined fourth quarter gross sales of the company’s newer categories — apparel, electronics, prescription eyewear, footwear and watches — grew 55.6 percent, to $60.2 million, and accounted for 37.0 percent of total fourth quarter gross sales. Sales of Oakley Thump(tm), combined with increases in sales of apparel, footwear and watches, were partially offset by a decline in sales of prescription eyewear. Prescription eyewear sales declined during the quarter principally due to higher returns of discontinued styles from customers and temporary backorders in sales of the company’s strongest-selling new prescription frame styles.
Fourth quarter gross margins improved to 52.8 percent compared with 51.6 percent in last year’s comparable period. Improved footwear and apparel margins combined with the positive mix impact of higher sunglass sales and sales of Oakley Thump(tm) and related accessories, more than offset the negative impact on gross margins of initial startup costs for Oakley Thump(tm) and normal inventory adjustments. Favorable foreign exchange rates also benefited fourth quarter gross profit.
Fourth quarter operating expense ratios improved to 43.8 percent of net sales in the quarter, down from 47.4 percent in the prior year’s fourth quarter, as the company leveraged its operating infrastructure over higher sales volumes. The weaker U.S. dollar contributed $1.6 million of the $8.6 million year-over-year increase in total operating expenses. Fourth quarter G&A expenses increased $1.8 million year-over-year, including approximately $600,000 in incremental professional fees, primarily related to the company’s Sarbanes-Oxley compliance efforts, and $800,000 from a foreign exchange contract loss related to the repatriation of profits by the company’s UK subsidiary. For the full year, the company incurred approximately $1.2 million related to compliance with Sarbanes-Oxley.
The company’s tax rate in the fourth quarter was 26.5 percent, down from 35 percent in last year’s fourth quarter. The lower fourth quarter tax rate resulted from the adjustment of the full year tax rate to 32.3 percent from the previously estimated 34 percent to reflect the benefits of favorable closure of some prior year U.S. and French tax audit items.
The company’s consolidated inventory totaled $115.1 million at December 31, 2004, compared with $115.6 million at September 30, 2004 and $98.7 million at December 31, 2003. This inventory reflects the expanded company-owned retail operations, increased eyewear inventory and apparel inventory to support new spring releases, as well as inventory related to the new electronics category. Accounts receivable, less allowances, increased to $102.8 million at December 31, 2004, compared with $93.0 million at September 30, 2004 and $78.0 million at December 31, 2003 reflecting the large shipments of Oakley Thump(tm) and combat eyewear in the second half of the quarter. Accounts receivable days sales outstanding (DSO) were 62 at December 31, 2004, compared with 59 at December 31, 2003.
Full Year 2004 Financial Summary
Total 2004 net sales increased 10.9 percent to a record $585.5 million, driven by a 16.7 percent increase in domestic net sales to $305.0 million. U.S. military and other government sales grew 61.2 percent during 2004 to $27.1 million from $16.8 million in 2003. International net sales increased 5.2 percent in 2004 to $280.5 million, reflecting a benefit of 7.6 percentage points from the weaker U.S. dollar. U.S. and international net sales in 2003 were $261.4 million and $266.6 million, respectively.
Sales through Oakley’s U.S. retail store operations reached $72.4 million during 2004, compared to $53.2 million in 2003, an increase of 36.1 percent. Oakley products accounted for approximately 33 percent of Iacon sales in 2004, compared with 32 percent in the prior year. At December 31, 2004, the company operated 119 U.S. retail locations, including 36 Oakley stores and 83 Iacon sunglass specialty stores, which accounted for almost 14 percent of fourth quarter global net sales and 25.3 percent of Oakley’s domestic sales. For the full year, the company’s retail store operations achieved a double-digit comparable store sales increase.
E-commerce and associated telesales totaled $14.1 million for the full year, up 21.6 percent from $11.6 million in 2003, and included approximately $1 million in sales of Oakley Thump(tm) and related accessories.
Gross sales totaled $621.7 million for 2004. Sunglass gross sales increased 1.3 percent to $314.5 million for the year, compared with $310.4 million in 2003. The average sunglass selling price increased 3.4 percent, due in large part to favorable foreign currency exchange rates, higher average price points on new styles and a higher contribution from Oakley retail store operations.
Combined full year gross sales of the company’s newer product categories grew 25.1 percent, to $206.5 million from $165.1 million in 2003, and accounted for 33.2 percent of full year gross sales, compared with 29.1 percent of full year 2003 gross sales.
Gross sales of apparel and apparel accessories increased 24.9 percent for the full year, to $94.9 million in 2004 from $76.0 million in 2003. Accessories accounted for slightly more than 20 percent of this total in 2004.
Prescription eyewear gross sales increased 11.9 percent for the full year to $47.8 million, compared with $42.7 million in 2003 reflecting strong double digit growth in the first and third quarters coinciding with successful new product launches.
Footwear gross sales declined 11.8 percent for the full year, to $32.2 million, compared with $36.5 million in 2003. The company’s lifestyle footwear styles continued to struggle to gain acceptance in the marketplace while its golf shoes, sandals and military footwear continued to be stronger performers.
Watch gross sales increased 20.2 percent for the full year to $11.9 million, compared with $9.9 million in 2003, as the company realigned its product development and sales efforts to focus on premium analog watch designs and distribution.
Goggle gross sales grew 8.3 percent for the full year, to $39.2 million up from $36.2 million in 2003, driven by strong fourth quarter reorder activity for the company’s snow goggles.
2005 Guidance
The economies and retail environments in many of Oakley’s key global markets continue to provide a challenging backdrop against which to forecast. The company’s sunglass sales rely heavily on “at-once” orders from retailers to replenish inventory sold to consumers. As a result, sudden, unexpected changes in the relative strength of the retail environment complicate management’s attempts to accurately assess future order and sales trends. In addition, the company believes that its new electronics category and increased sales to the U.S. military will be significant contributors to its 2005 performance. However, Oakley’s relative inexperience in the electronics market, public acceptance of new products and variables relating to military procurement all contribute to the difficulty in accurately forecasting future performance. Finally, because Oakley is an integrated manufacturer of its sunglass products, a small variance in sunglass sales volume has a relatively large impact on gross margins and net income due to the fixed-cost nature of the company’s manufacturing operations.
The company’s guidance for 2005 calls for full-year net sales growth of 10 to 15 percent. This guidance assumes a mid-single digit increase in sunglass sales, combined with an approximate 15 to 20 percent increase in the company’s newer category sales. It also reflects management’s current plans to continue the expansion of its own retail locations at an accelerated pace compared to that of 2004.
OAKLEY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)Three Months Ended Twelve Months Ended
December 31, December 31,
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2004 2003 2004 2003
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Net sales $152,962 $122,923 $585,468 $528,034
Cost of goods sold 72,229 59,480 265,104 237,788
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Gross profit 80,733 63,443 320,364 290,246Operating expenses:
Research and development 4,146 3,574 15,962 14,308
Selling 41,243 35,475 159,366 142,365
Shipping and warehousing 4,223 3,688 17,087 14,620
General and administrative 17,341 15,555 65,511 58,918
-------- -------- -------- --------
Total operating expenses 66,953 58,292 257,926 230,211-------- -------- -------- --------
Operating income 13,780 5,151 62,438 60,035Interest expense, net 196 166 1,037 1,272
-------- -------- -------- --------
Income before provision
for income taxes 13,584 4,985 61,401 58,763
Provision for income taxes 3,593 1,745 19,851 20,567
-------- -------- -------- --------
Net income $ 9,991 $ 3,240 $ 41,550 $ 38,196
======== ======== ======== ========Basic net income per share $ 0.15 $ 0.05 $ 0.61 $ 0.56
Basic weighted average
shares 67,765 67,935 67,953 68,006Diluted net income
per share $ 0.15 $ 0.05 $ 0.60 $ 0.56
Diluted weighted average
shares 68,593 68,465 68,832 68,282
