FOOTHILL RANCH, Calif.–(BUSINESS WIRE)–Oct. 17, 2001–Oakley, Inc. (NYSE:OO)

Selected Third Quarter Highlights

International net sales grew 19.8 percent to a record $62.4 million
New category sales from footwear, apparel, prescription eyewear and watch products grew 79.9 percent to $33.2 million
Net income of $0.21 per share in line with company’s revised expectations New distribution initiatives successfully launched
Introduced Switch(TM), an innovative ceramic-encased magnesium eyewear frame
Oakley, Inc. (NYSE:OO) today announced financial results for its third quarter ended September 30, 2001.

Net sales increased 6.5 percent to a third-quarter record $114.0 million, compared to $107.0 million in the third quarter of 2000. International net sales increased 19.8 percent to a record $62.4 million while U.S. net sales decreased 6.2 percent to $51.6 million, compared with $52.1 million and $55.0 million, respectively, in last year’s third quarter.

Net income for the quarter totaled $14.4 million, or $0.21 per diluted share, compared to net income of $17.4 million, or $0.25 per diluted share, in last year’s third quarter. Revenue and net income were in line with the company’s expectations, which were lowered in early August to reflect a significant reduction in orders from the company’s previous largest customer, Sunglass Hut, after Luxottica Group, SpA acquired the retail chain in April 2001.

“This quarter marked another key turning point for Oakley,” said Chairman and Chief Executive Officer Jim Jannard. “In response to a significant shift in our relationship with Sunglass Hut, we successfully launched several strategic distribution initiatives designed to strengthen our presence at retail and make a broader assortment of our six product categories more accessible to consumers. Strong international growth and an 80 percent increase in new category revenue reflect the enduring strength of the Oakley brand.”

Operating Officer Link Newcomb commented, “No other quarter in recent memory has contained so many critical developments with the potential to support the long-term success of the Oakley brand. In the past two months, since we first learned of Luxottica’s intention to virtually discontinue their support of Oakley products, we’ve announced significantly expanded relationships with Venator Group’s Foot Locker and Champs Sports divisions and enhanced our existing partnership with Finish Line, Sport Chalet and other key regional and national accounts. We also designated over 2,100 U.S. stores as Oakley Premium Dealers, identifying them as retailers that are the best at showcasing and educating consumers about the superior performance characteristics of Oakley products. With our pending acquisition of Iacon, Inc., one of the truly great specialty sunglass retail chains in the United States, we’ll add approximately 40 mall-based retail locations to our direct retail presence and an excellent and experienced management team in this channel. In addition, we are formulating plans to open more “O” stores and other Oakley-only retail concepts in the months ahead.

“The full effect of these additional points of distribution may not be felt for some time,” continued Newcomb. “However, we believe we are well on our way to eventually replacing the lost Sunglass Hut business, which in the third quarter alone declined over $18 million, or 91 percent, from last year’s third quarter, and led to a 14 percent decline in worldwide gross sunglass sales.”

Reflecting the continued importance of the company’s product diversification strategy, new categories represented 28.3 percent of total third quarter gross sales, growing 79.9 percent to $33.2 million from $18.5 million in last year’s third quarter and up 51.6 percent from $21.9 million in the second quarter this year. Each of the new categories grew at least 31 percent over last year with footwear posting triple digit growthh.

Oakley’s continued momentum is reflected in the September 30, 2001 backlog of approximately $40.1 million, a 12.3 percent increase over $35.7 million one year ago. Included in this growth is a 129 percent increase in pre-booked spring footwear and apparel products, partially offset by a lower sunglass backlog primarily due to reduced X-Metal eyewear backorders as the company’s X-Metal production capacity has been expanded in 2001 to better meet demand.

“Without question, an already softening global economy was aggravated by the September terrorist attacks resulting in a heightened level of economic uncertainty and a further softening of the near-term retail environment,” Newcomb continued. “In spite of the momentum from our new distribution strategies, these factors have combined to dampen our growth expectations for the remainder of the year and as a result we now expect fourth quarter 2001 net sales of approximately $90 million and earnings per share of $0.09 compared to $0.14 a year ago.”

Newcomb concluded, “Our preliminary guidance for 2002 calls for revenue growth of between 10 and 30 percent and pre-tax earnings growth of between zero and 20 percent compared to 2001. These ranges are wider than we would normally offer, reflecting these uncertain times. However, we believe our existing strategies of relentless product innovation, expansion of retail partnerships and continued product diversification, coupled with a strong brand and an outstanding balance sheet, provide us with a solid foundation for the long term.”

Third Quarter Financial Analysis

Reflecting continued strong demand overseas and marking a fourteenth consecutive quarterly record, Oakley’s international net sales increased 19.8 percent (25.2 percent on a constant dollar basis) to a third-quarter record $62.4 million, representing 54.7 percent of total sales in the quarter. Sales growth was strong in all major markets, with the highest increases in Latin America, Japan and Europe.

quarter U.S. net sales decreased 6.2 percent to $51.6 million. U.S. net sales to Sunglass Hut, which until June 2001 was the company’s largest customer, declined 97.5 percent to $0.4 million compared with $15.8 million in the same period last year. This decline was partially offset by a 30.6 percent increase in sales to the company’s diverse base of specialty retail accounts, which totaled a record $51.2 million.

Gross margins in the third quarter were 58.6 percent, compared with 60.8 percent in last year’s third quarter, due to the negative leverage caused by the decline in sales to Sunglass Hut, and a greater contribution from the company’s new footwear, apparel and goggle products which carry lower gross margins than sunglass products.

Operating expenses totaled $45.6 million, or 40.0 percent of sales, compared with $37.5 million, or 35.1 percent of sales in the prior year, as the 91 percent decline in worldwide sales to Sunglass Hut resulted in negative operating leverage. Selling expenses reflected increased advertising as part of the company’s strategic effort to increase brand awareness and drive demand. General and administrative expenses increased primarily due to the increased personnel and infrastructure necessary to support the anticipated future growth in business. Operating income decreased 23.2 percent to $21.2 million compared with $27.6 million in last year’s third quarter. Operating margins for the quarter were 18.6 percent of sales compared with 25.8 percent in the prior year period.