Oakley's third quarter net sales increased 2.2% to
$148.2 million, a third quarter record, compared with $145.0 million in the third quarter of 2003. Net income for the third quarter totaled $11.4 million, or 17 cents per diluted share, compared with $13.5 million, or 20 cents per diluted share, in the third quarter of 2003.
Oakley Chief Operating Officer Link Newcomb commented, “Oakley's
third quarter results reflect continued progress on our
product diversification and retail initiatives. Newer category
sales increased 7.1 percent and grew to represent 35.2 percent
of third quarter gross sales. Sales through Oakley-owned
retail stores contributed 12.7 percent of third quarter
net sales as modest positive comparable store sales and
successful new store openings combined to generate growth
of 25.6 percent. In addition, the company achieved record
quarterly sales to the U.S. military, up 50.5 percent from
the comparable prior year period. Late in the third quarter
the company achieved a new milestone in its military business
as it was named one of two approved vendors for the sale
of combat eyewear to the United States Army.
“In contrast, the third quarter proved challenging for our
core sunglass business which experienced a 10.7 percent
decline in sunglass unit volumes. A weak retail environment
in Europe and the South Pacific region and a wet summer
in Europe, coupled with increased competitive pressure from
competing fashion brands in some markets, contributed to
a substantial decline in sunglass sales. The quarter also
reflected a significant decline in sunglass sales to Luxottica
Group S.p.A. (''Luxottica“), parent company of Sunglass Hut,
as discussed in more detail below. Importantly, on a positive
note, our sunglass sales increased over the prior year in
the U.S. outside of Sunglass Hut and in international markets
outside of Europe and the South Pacific region, as sales
of our new 2004 styles made a much bigger impact than last
year's new styles.
Newcomb concluded, “Even though we expect continued near-term
challenges within our core sunglass business, we believe
we are poised for a strong fourth quarter, thanks to the
upcoming launch of Oakley Thump(tm), the company's innovative
integrated digital audio eyewear, through a select group
of leading retail partners in the U.S. and key international
markets. In addition, we expect our approved vendor status
with the U.S. Army to generate substantial sales of the
company's newly developed combat eyewear in the near future.
As a result, we expect substantial earnings growth in the
fourth quarter and are reiterating our full year 2004 net
sales guidance of $575 to $585 million and earnings guidance
of $0.60 to $0.65 per diluted share, now expecting to achieve
the lower end of both of those ranges.''
Third Quarter Financial Analysis
Total third quarter U.S. net sales increased 6.3 percent
to $74.7 million from $70.3 million during the same period
last year. U.S. net sales, excluding the company's retail
store operations, totaled $55.9 million, an increase of
1.1 percent from the comparable quarter of 2003. U.S. net
sales to Sunglass Hut decreased 44.4 percent to $3.5 million
as compared to the same quarter last year, while net sales
through other U.S. channels increased 6.9 percent, including
sales from the company's Internet and associated telesales
which increased 2.9 percent during the quarter. Sales of
Oakley products at Sunglass Hut stores slowed during the
quarter as the summer Oakley “front-door'' campaign failed
to generate the expected momentum. Oakley-owned retail stores
generated modest positive comparable store sales for the
quarter which, combined with new store openings, resulted
in net sales growth of 25.6 percent to $18.8 million, representing
12.7 percent of total net sales for the quarter. At the
end of the third quarter, the company operated 32 O Store(tm)
locations in the U.S., including two stores opened during
the quarter, and 80 Iacon sunglass specialty stores. At
the end of last year's third quarter, the company operated
24 O Stores(tm) and 69 Iacon locations.
Third quarter international net sales decreased 1.7 percent,
to $73.4 million, compared with $74.7 million in last year's
comparable period, including a benefit of 6.2 percentage
points from a weaker U.S. dollar. The European region experienced
a single digit sales decline and the South Pacific region
posted a significant sales decline. These declines were
partially offset by double-digit sales increases in Japan,
the Middle East and South Africa, combined with single-digit
increases in Canada and Latin America. In Japan, the company's
new eyewear styles, combined with exceptional weather, contributed
to strong sales momentum over the summer.
Worldwide sunglass gross sales decreased 9.0 percent in
the third quarter, to $70.7 million from $77.7 million in
last year's third quarter. Sunglass unit shipments decreased
10.7 percent, offset partially by a 1.9 percent increase
in average selling prices. Increased average selling prices
reflected the favorable effect on international sales of
a weak U.S. dollar, increased contribution from Oakley's
retail store operations and a higher sales contribution
from polarized styles that carry higher price points. These
favorable factors were partially offset by a lower contribution
from international sales that typically carry higher average
selling prices. Poor results across Europe contributed to
the lower-than-expected unit volumes. Global net sales in
the third quarter to the retail division of Luxottica were
$5.3 million.
Third quarter gross sales of the company's newer categories
improved by 7.1 percent to a third quarter record $54.2
million, led by strong fall launches of apparel and accessory
products, increased sales of prescription eyewear lines
and modest growth in watch sales. The company achieved strong
apparel sales growth in the quarter despite production delays
on some outerwear products that is expected to shift deliveries
into the fourth quarter from the third quarter. These increases
were largely offset by reduced sales of the company's footwear
products, which met the company's downward revised expectations
for the quarter. Combined sales from the newer categories
accounted for 35.2 percent of third quarter gross sales
compared with 32.6 percent in the third quarter of last
year.
Third quarter gross margins were 56.8 percent compared with
56.9 percent in last year's comparable period. Third quarter
operating expenses totaled $66.7 million, up 8.7 percent
from last year's third quarter, and represented 45.0 percent
of net sales, compared with 42.3 percent of net sales in
last year's comparable quarter. The increase in spending
was impacted by higher foreign operating expenses, higher
design expenses including additional development costs for
Oakley Thump(tm), and increased retail store operating expenses.
The tax rate for the quarter was 34.0 percent compared with
35.0 percent in last year's third quarter.
The company's order backlog as of September 30, 2004 was
$83.6 million, up a strong 49.0 percent compared with $56.1
million at the same time last year. The backlog reflects
significant initial orders for Oakley Thump(tm), an increase
in eyewear backlog largely due to a one month shift, from
October in 2003 to September in 2004, in the timing of receipt
of large holiday orders from Sunglass Hut, and increased
orders for goggles and apparel. These increases are partially
offset by a significant decline in footwear orders. On a
global basis, preliminary prebook orders show a substantial
increase for the company's spring 2005 apparel and accessory
line and a significant decline for spring 2005 footwear.
The company's consolidated inventory totaled $115.6 million
at September 30, 2004, compared with $109.5 million at June
30, 2004 and $104.5 million at September 30, 2003. Accounts
receivable, less allowances, totaled $93.0 million at September
30, 2004, compared with $90.8 million at June 30, 2004 and
$96.4 million at September 30, 2003. Accounts receivable
days sales outstanding (DSO) improved to 58 at September
30, 2004, compared with 61 at September 30, 2003.
Preliminary Fiscal 2005 Guidance
Uncertainty surrounding the sustainability of the current
economic recovery and its impact on the retail environment
in Oakley's key global markets continues to provide a difficult
backdrop against which to forecast financial results. In
addition, the company cannot predict with accuracy how soon
or to what degree its efforts to restore growth in its core
sunglass business will be successful. Because the company's
sunglass sales rely heavily on “at-once'' orders from retailers
to replenish inventory sold to consumers, an inconsistent
retail environment complicates management's attempts to
predict future sales trends.
With this in mind, the company's preliminary guidance for
2005 anticipates full-year net sales growth in the range
of 10 to 15 percent. This guidance assumes a low-single
digit increase in sunglass sales, combined with an approximately
25 percent increase in the company's newer category gross
sales, including the company's new electronics product category
and incremental sales to the U.S. military under the company's
new approved vendor status. The guidance also reflects management's
current plans to continue the expansion of Oakley-owned
retail locations with 10 to 15 additional O Store(r) locations
planned in 2005 and a similar number of planned additional
Iacon locations. Earnings per share are expected to grow
a comparable 10 to 15 percent in 2005, based on improving
gross margins, offset by increased operating expenses.
Stock Repurchase Program and Declaration of Annual Dividend
On September 10, 2002, the company's Board of Directors
authorized the repurchase of up to $20 million of the company's
stock, to occur from time to time as market conditions warrant.
Since then, the company has repurchased 1,344,900 shares
for $14.5 million at an average share price of $10.79. During
the third quarter of 2004, the company repurchased 368,800
shares for approximately $3.9 million at an average share
price of $10.56. The company intends to continue to make
repurchases under the share repurchase program as market
conditions warrant.
On October 1, 2004, the company announced that its Board
of Directors had declared the company's regular annual cash
dividend of $0.15 per share, an increase of $0.01 per share
over the company's initial dividend of $0.14 per share declared
last year. The dividend will be payable October 29, 2004,
to shareholders of record at the close of business on October
15, 2004.
OAKLEY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data, unaudited)Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net sales $148,170 $144,963 $427,306 $399,994
Cost of goods sold 64,011 62,471 184,684 170,117
-------- -------- -------- --------
Gross profit 84,159 82,492 242,622 229,877Operating expenses:
Research and development 4,247 3,643 11,816 10,733
Selling 41,160 38,039 118,123 106,890
Shipping and warehousing 5,056 4,855 15,855 14,006
General and administrative 16,222 14,827 48,170 43,364
-------- -------- -------- --------
Total operating expenses 66,685 61,364 193,964 174,993-------- -------- -------- --------
Operating income 17,474 21,128 48,658 54,884Interest expense, net 242 334 841 1,106
-------- -------- -------- --------
Income before provision for
income taxes 17,232 20,794 47,817 53,778
Provision for income taxes 5,859 7,278 16,258 18,822
-------- -------- -------- --------
Net income $ 11,373 $ 13,516 $ 31,559 $ 34,956
======== ======== ======== ========Basic net income per share $ 0.17 $ 0.20 $ 0.46 $ 0.51
Basic weighted average
shares 68,184 67,929 68,232 68,030Diluted net income per share$ 0.17 $ 0.20 $ 0.46 $ 0.51
Diluted weighted average
shares 68,558 68,331 68,912 68,252Reconciliation of Non-GAAP financial measures to
equivalent GAAP measures:Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2004 2003 2004 2003
--------- --------- --------- ---------
(dollars in thousands, unaudited)Gross sales $ 153,949 $ 155,306 $ 453,828 $ 431,005
Discounts and returns 5,779 10,343 26,522 31,011
--------- --------- --------- ---------
Net sales $ 148,170 $ 144,963 $ 427,306 $ 399,994
========= ========= ========= =========Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Other Operating Data: (dollars in thousands, unaudited)Sunglasses:
Units 898,148 1,005,499 3,232,638 3,364,541
Gross sales $ 70,739 $ 77,714 $ 244,924 $ 246,955Net sales:
Domestic $ 74,722 $ 70,306 $ 218,187 $ 202,786
International $ 73,448 $ 74,657 $ 209,119 $ 197,208Backlog $ 83,606 $ 56,061
