Optics Leading the Way for Oakley in Q3…

Oakley, Inc. is beginning to see dividends from its ‘refocusing on eyewear’ campaign. Optics was the key driver of growth for the company with the category showing growth in each of its distribution channels and each of its geographic regions. In addition, a break in the company’s tax rate has allowed it to invest into other resources with hopes for further future gains.

Of the overall sales growth, management said on a conference call with analysts that “approximately half…was organic.” The other half was attributed to the addition of Oliver Peoples and Optical Shop of Aspen, as well as a weaker U.S. Dollar, which contributed a full percentage point to the growth versus a currency neutral position.

In optics, “the majority of the growth was organic,” with the custom program, goggles, and prescription pointed to as strong drivers. Each region posted “solid double-digit optic sales growth” that helped to increase the overall share of sales for the category to 71% from 69% during last year’s third quarter. Oakley branded eyewear was said to be up “well into the double-digits” by company management, noting that each of the six brands the company owns all contributed to the growth. Offsetting the bright spots in optics was “a large decline” in electronics sales. In apparel, footwear, and accessories, the 2% sales growth came from “modest growth” in apparel, with footwear “basically flat.” The sales growth in the other category was driven by the addition of the Optical Shop of Aspen to the company’s portfolio, as well as “solid growth” at Sunglass Icon.

Regionally, U.S. net sales, which includes both the wholesale and owned-retail distribution channels, increased 27.9% to $116.7 million for the third quarter, up from $91.3 million last year. The U.S. wholesale growth was driven by strength in optics, but was partially offset by a “slight decline” in AFA net sales. The retail sales growth included a mid-single-digit increase in comparable store sales; the 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.

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 double-digit decline in AFA net sales. The Americas (non-U.S.) region posted “double-digit growth in optics and AFA.” Asia Pacific saw a “significant increase” in optics sales and a “modest” gain in the AFA business.

The company increased its 2006 net sales guidance to a growth rate of approximately 15% to 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 attributed the wide sales guidance to receiving a military order in Q4 2005 that they had no guarantee of recurring this year. Despite the increased sales guidance, the company reaffirmed its 2006 earnings per share guidance of 68 cents per diluted share, not including any footwear restructuring charges, which are estimated to total approximately $3.6 million on an after-tax basis, or 5 cents per diluted share, for 2006. That Oakley maintained its earnings guidance caused some consternation for analysts on the call, but was dismissed by management who stated simply that changing earnings guidance at this point would constitute giving quarterly guidance, which the company does not do. In addition, the company using a decrease in its tax rate to invest in clearing out “end of line merchandise” as well as closing its European distribution center.