Oakley Sees Owned-Retail Take Bigger Chunk; Electronics Cause Holiday Excitement…

Oakley continued its string of strong results and saw owned-retail take a bigger portion of the business during the third quarter. Management had further cause for excitement as they welcomed the team’s newest member, Richard Shields, as company CFO just two weeks after Scott Olivet was named CEO. But there were a couple of blips on the danger radar, as weakness in Europe and a backlog decrease caused analysts to wonder about the future.

The sunglass category posted its largest quarterly sales increase since the fourth quarter of 2002, with unit volumes up 15.4% and average selling prices down 2.3%. Aiding the sunglass gains was a two-thirds increase in sales to the Luxottica Group, up to $8.8 million from $5.3 million last year. The sales to Luxottica Group were driven by an 83% increase in sales to Sunglass Hut in the U.S. to $6.4 million dollars, up from $3.5 million last year. Overall YTD sales to the Luxottica Group are “up just under 2%.”

Owned-retail continued its pace in becoming an ever more important portion of Oakley’s success, this quarter creating a record 30% of total domestic business. Both retail divisions, O stores and Iacon stores, posted “strong double-digit comps.” At the end of the third quarter, the company operated 44 O Store locations, including five new stores opened during the quarter, and 98 Iacon sunglass specialty stores, including seven new locations added during the quarter.

At the Iacon chain, Oakley sales, accounting for both Oakley brand and Oakley-licensed Fox Racing, took a 30% share of the chain’s business, down from 33% during last year’s third quarter. Management noted that the Fox license, Oakley’s first experience with eyewear licensing, is providing “good contribution” with Fox as a top 10 brand at Iacon and 4 SKUs ranking in the top 30 units sold at the chain.

On the International front, Oakley saw mixed results as overall sales for the segment grew 11%, but weakness in Europe caused worries. The strongest regions were Latin America, Asia, and South Pacific, while Europe only increased “slightly.” Management pointed to a continuing loss of market share, a weaker retail environment in the U.K., and restrictions imposed on imports from China by the European Union as culprits in the lackluster performance.

A 15% decrease in backlog at quarter-end was a cause of much concern for analysts during a conference call covering the quarter’s results. The decrease reflects lower electronics orders after last year’s Thump launch, a “significant decline” in spring 2006 pre-books in footwear and apparel, especially in Europe, and a shift in holiday ordering at Sunglass Hut to October this year from September last year. Also contributing was a shift in inventory management at Sunglass Hut to more of an at-once business model.

Specifically, the Sunglass Hut order shift caused about “a couple million dollars” worth of the decline in the backlog. Not all bad news on the backlog front, though, as increased goggle orders partially offset the backlog decreases.

Within the newer categories, apparel and accessories sales grew 16% with growth coming from owned-retail and International. The strongest growth in the fall line is in golf and lifestyle accounts.

For the coming holiday season, Oakley sees itself positioned especially strong, with the launch of Thump 2 commencing and the partnership with Motorola on RAZRWire maturing. Management feels that the electronics category sees more of a holiday lift than traditional sunglasses and hopes to use that lift as a means to help move product and increase sales in the line during Q4. Company COO Link Newcomb also alluded to several retailers, whom he would not name, that put the Thump on sale during the third quarter, prior to Oakley’s issuing a price change, and saw “pretty significant improvements in sell-throughs.”

Looking ahead, Oakley expects 2005 net sales growth to be at the lower end of the 10% to 15% range, rather than at the high end, which was previously forecast. This revised net sales growth guidance assumes a mid single-digit increase in sunglass sales combined with sales growth at just less than 20% in the company's newer categories, down from the earlier guidance of 20% to 25%. The company reiterated its expectation for 2005 earnings growth at the high end of a range of 25% to 30%.