Industry News

Oakley Inc. Net Profit Dips In Second Quater After Restructuring Charges

Surfersvillage Global Surf News, 22 July, 2006 : -- Oakley Inc. said second-quarter net profit fell after taking a one-time restructuring charge as the company refocuses on its primary optics business. However, excluding those charges, earnings exceeded Wall Street’s consensus estimates. 

Net income for the second quarter totaled $17.9 million, or 26 cents a share, including an after-tax restructuring charge of $2.1 million, or 3 cents share, related to the company's footwear business and unrealized fair value losses of approximately $1.5 million on an after-tax basis, or 2 cents a share, related to the change in fair value of foreign currency derivatives recorded in accordance with SFAS 133. Oakley decided in February to quit making most footwear to focus on more-profitable sunglasses. 

Analysts' consensus estimate for the second quarter, which does not include the 3 cents a share footwear restructuring charge, was 27 cents per share. In the 2005 second quarter, net income totaled $24 million, or 353 cents a share, including unrealized fair value gains on foreign currency derivatives of approximately $3.7 million. 

Second quarter sales increased 19.4 percent, to $203.6 million from $170.5 million a year ago. “Our strong second quarter performance reflects early success against the strategic initiatives we articulated at the beginning of the year,'' said Scott Olivet, CEO.

“The growth of Oakley's optics business was driven by strong demand for the company's sunglass products including the successful launch of our first women's eyewear collection, the acquisitions of Oliver Peoples and The Optical Shop of Aspen (OSA), and significant double-digit increases within each of our retail platforms.” 

“While we benefited from these early successes, we made investments in several initiatives including repositioning our apparel platform, research and development, beginning the integration of our recent acquisitions, consolidating our European warehouse operations, and demand creation,'' Olivet continued.

“As previously stated, we intend to continue making investments during the second half of 2006 concentrating on the continued acceleration of our product development, retail expansion, re-branding Sunglass Icon and brand marketing including the re-launch of the oakley.com Web site. All of these investments are expected to position us for sustained, profitable growth.'' 

Additionally, the company announced that 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. “While this new agreement solidifies a long-standing relationship, I am even more pleased with both management teams' renewed commitment to showcasing each company's multi-branded offerings in our respective retail channels,'' concluded Olivet. 

Product Category Net Sales 

Net sales of Oakley optics totaled $158.5 million in the second quarter of 2006, an increase of 20.9 percent compared with $131.1 million in the same period of 2005.

This growth was driven by strong demand for the company's sunglass products including the successful launch of its first women's eyewear collection; incremental sales from the acquisition of Oliver Peoples and OSA; and 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) totaled $30.5 million, including the impact of a $1.8 million returns and discounts accrual related to the company's footwear restructuring announced on February 9. Second quarter AFA net sales of $30.5 million represented an increase of 2.5 percent compared with net sales of $29.8 million in the second quarter of 2005. 

Second quarter net sales of other brands, which consists of non-Oakley products sold through the company's Sunglass Icon and OSA retail stores, increased 52.6 percent to $14.6 million from $9.5 million in the second quarter of 2005. 

Channel Net Sales  

Total U.S. second quarter net sales increased 24.3 percent to $119.9 million, compared with $96.4 million during the second quarter of 2005. Net sales to U.S. wholesale customers totaled $74.4 million in the second quarter, a 12.9 percent increase compared with $65.9 million in the comparable 2005 period, driven by a significant increase in optics sales, partially offset by a significant double-digit decline in AFA net sales.

Oakley's U.S. retail net sales, which for reporting purposes include the company's e-commerce and telesales business, increased 48.7 percent to $45.4 million, compared with $30.6 million in the second quarter of 2005. The 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 markets, net sales were $83.7 million, a 13.0 percent increase from net sales of $74.1 in the second quarter of 2005. A weaker U.S. dollar relative to foreign currencies increased reported international net sales growth by 1.0 percentage points. The company's EMEA (Europe, Middle East and Africa) region experienced significant double-digit optics growth, partially offset by a slight decline in AFA net sales.

The Americas (non-U.S.) region reported significant double-digit growth in 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.

Gross Margins, Operating Expenses, Tax Rate  

Second quarter gross profit as a percentage of net sales was 56.4 percent compared with 62.7 percent in the comparable period of 2005. Non-GAAP gross margins in the second quarter of 2006 and 2005, which exclude footwear restructuring charges and changes in fair value of foreign currency derivatives, were 58.5 percent and 59.5 percent, respectively.

This decline reflects additional 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. 

Second quarter 2006 operating expenses totaled $86.7 million, representing 42.6 percent of net sales, compared to $71.7 million, or 42.0 percent of net sales, in the second quarter of 2005.

The year over year increase in operating expenses included incremental expenses associated with the addition of Oliver Peoples and OSA, new Oakley and Sunglass Icon retail locations, increased compensation expenses including approximately $0.5 million of employee stock option expense reflecting the company's implementation of SFAS 123(R), higher demand creation expenses, and costs associated with the consolidation of certain European warehouses. 

The company's tax rate in the second quarter was 35.0 percent compared to 31.5 percent in the second quarter of 2005 which benefited from a large state tax refund related to a prior period. 

Balance Sheet  

The company's consolidated inventory totaled $145.7 million at June 30, 2006 compared to $134.3 million at June 30, 2005. This increase reflects the company's acquisitions of Oliver Peoples and OSA, expanded retail operations, and increased electronics and spring apparel inventories, partially offset by a significant decline in footwear inventory.

Accounts receivable, less allowances, totaled $103.4 million at June 30, 2006, compared with $98.7 million at March 31, 2006 and $94.7 million at June 30, 2005. 

During the second quarter, the company repurchased 425,518 shares of its common stock at an average price of $16.11 per share. Under the $20.0 million repurchase plan approved by the company's board of directors on March 15, 2005, the company has repurchased 1,141,103 shares at an average price of $14.98 per share. At June 30, 2006, $2.9 million remained available for future repurchases subject to favorable market conditions.

2006 Guidance  

As a result of strong sales growth in the second quarter, the company increased its 2006 net sales growth guidance to approximately 13 percent from its previously stated expectation of at least 10 percent. Due to anticipated investments concentrated in the second half of the year, the company reaffirmed its 2006 earnings per share guidance of approximately $0.68 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 $0.06 per diluted share, for the full year.

www.oakley.com

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