Restructuring Slows Oakley’s Bottom Line Growth…

Oakley, Inc. saw record net sales for the second quarter, but the restructuring of its footwear and apparel businesses, combined with average selling prices that trailed off “slightly,” the shift of its shipping calendar, and cancellations due to late apparel deliveries in Q1, offset the sales gains before they could translate into any sort of positive gains on the bottom line.

Looking ahead, though, the company found a bit of stability as it signed a new, three-year contract with Luxottica Group S.p.A. establishing commercial terms retroactive to January 1, 2006 through December 31, 2008. The company did not give any details on the terms of the relationship, just saying that “there is a lot of opportunity to work together around the world.”

The growth in Optics was driven by “strong demand” for the company’s sunglass products including the launch of its first women’s eyewear collection; sales from the acquisition of Oliver Peoples and OSA; and a “strong contribution” from the prescription eyewear business. These increases were partially offset by a decline in electronics sales.

Second quarter net sales of Oakley Apparel, Footwear, and Accessories (AFA) were held back by a $1.8 million returns and discounts accrual related to the company’s footwear restructuring plan. Going forward, Oakley plans to continue its boot line as well as sandals and men’s golf, but will exit women’s golf and lifestyle product.

Total U.S. second quarter net sales increased 24.3% to $119.9 million, compared with $96.4 million during the second quarter of 2005. Net sales to U.S. wholesale customers were driven by a significant increase in Optics sales, partially offset by a significant double-digit decline in AFA net sales. The Owned-Retail sales growth included a high-single-digit increase in comparable store sales, the contribution of new stores opened during the last twelve months, and incremental sales from the acquisitions of Oliver Peoples and OSA.

In the company’s International business, a weaker U.S. Dollar relative to foreign currencies increased reported net sales growth by one percentage point. The company’s EMEA region experienced significant double-digit Optics growth, partially offset by a slight decline in AFA net sales.

The Americas region, which does not include the United States, reported significant double-digit growth in both Optics and AFA. Asia Pacific saw a slight decline in its optics sales and a significant double-digit decline in its AFA business, due primarily to a disproportionate impact of the footwear restructuring charges.

The decline in gross margins was due to footwear restructuring charges and changes in fair value of foreign currency derivatives, as well as the disposal of end-of-line products, higher sales returns and discounts, and inventory reserves, partially offset by a favorable mix shift toward optics products and retail channels.

As a result of the sales growth in the second quarter, the company increased its 2006 net sales growth guidance to approximately 13% from its previously stated expectation of at least 10%. Due to anticipated investments concentrated in the second half of the year, the company reaffirmed its 2006 earnings per share guidance of approximately 68 cents per diluted share. This earnings guidance does not include any footwear restructuring charges which are estimated to total approximately $4.1 million on an after-tax basis, or 6 cents per diluted share, for the full year.