Oakley Reports Third Quarter Sales And Earnings

Oakley, Inc. (NYSE:OO) today announced financial results for its third quarter ended September 30, 2002.

Net sales for the quarter increased 15.7 percent to a third quarter record $131.9 million, compared with last year’s net sales of $114.0 million. Pretax income for the third quarter totaled $18.9 million compared with $20.5 million in last year’s third quarter. Net income for the third quarter totaled $12.3 million, or $0.18 per diluted share, compared with net income of $14.4 million, or $0.21 per diluted share, in last year’s comparable period, which included a benefit of $0.02 per share from a reduced tax rate.

Oakley Chief Operating Officer Link Newcomb commented, “In the third quarter, Oakley’s sunglass sales grew 26.6 percent, driven by a 21.7 percent increase in unit volume and a 4.0 percent increase in average selling prices, despite a challenging worldwide retail environment. Our renewed relationship with Luxottica’s Sunglass Hut retail chain, the company’s largest customer, contributed $13.2 million, or 10.0 percent, to total net sales in the third quarter, an increase of $11.3 million over last year’s third quarter during which shipments to their stores were temporarily suspended.

“In total, new category gross sales grew 15.5 percent in the quarter to $38.4 million from $33.2 million and accounted for 26.9 percent of third quarter gross sales compared with 28.3 percent in last year’s third quarter. Consistent with expectations previously disclosed, sales of our fall footwear line declined during the quarter from the prior year, a decline which was exacerbated by delays in the receipt of product due to the West Coast port shutdown. Excluding footwear, new category sales grew 38.3 percent in the third quarter. In our retail store operations, we opened seven new Iacon stores and two new Oakley stores during the third quarter and by the end of the year expect to have opened 22 new Iacon stores and nine new Oakley stores in 2002, bringing us to a total of 64 stores and 14 stores, respectively.

“Our backlog at September 30, 2002 was a very strong $58.2 million, 45.1 percent above the $40.1 million level of one year ago,” Newcomb continued. “The increased backlog reflects orders from the renewed relationship with Sunglass Hut, strong bookings for our Spring 2003 lines of footwear and apparel, and orders for our new Wisdom(TM) goggle being launched in the fourth quarter. In addition, strong orders from new department store partners reflect the continued success of our channel diversification efforts.

“We are reaffirming our previous fourth quarter guidance for sales growth of approximately 20 to 22 percent, to between $108 and $110 million, and earnings of approximately $0.10 per diluted share. Meeting those expectations would bring full year 2002 net sales growth to approximately 15.7 percent and earnings per diluted share to $0.68, compared with $0.72 per diluted share in 2001 which included a tax-rate benefit of $0.06 per diluted share.”

Newcomb concluded, “Despite a challenging retail environment, the strength of the Oakley brand and our strategies to continue diversifying our product line and distribution channels provide a solid foundation as we look ahead to 2003. Our preliminary guidance for 2003 calls for full-year sales growth of approximately 15 percent and earnings per share growth of approximately 13 percent. Beyond the first quarter of 2003, in which we expect sales growth of 10 percent and earnings equal to the first quarter of 2002, we expect sales and earnings to both grow at a 16.5 percent rate for the balance of the year. Although this growth rate is below our longer-term annual growth objective of 20%, uncertainty about the duration of the challenging retail environment for premium consumer products leads us to take what we believe is a conservative posture in setting our initial 2003 guidance.”

Third Quarter Financial Analysis

U.S. net sales excluding Oakley’s retail store erations increased 11.8 percent to $55.9 million from $50.0 million. U.S. sales to Sunglass Hut, the company’s largest customer, increased by $10.0 million over last year’s third quarter during which shipments to Sunglass Hut were temporarily suspended. U.S. net sales through other domestic channels decreased 8.5 percent to $45.4 million from $49.5 million in last year’s third quarter, primarily reflecting the decline in footwear sales discussed above. In addition, last year’s results in these channels benefited from the commencement of the Oakley Premium Dealer program and other new distribution strategies designed to offset the temporary suspension of shipments to Sunglass Hut. Direct Internet sales and related telesales increased 32 percent to $2.5 million. U.S. net sales through Oakley’s retail stores, including sales through the Iacon chain acquired October 31, 2001, were $8.5 million in the quarter, up from $1.6 million last year. Total U.S. net sales increased 24.8 percent in the third quarter to $64.4 million from $51.6 million.

International net sales increased 8.2 percent to $67.5 million compared with $62.4 million in last year’s third quarter, primarily reflecting strong increases in Australia, Canada and Asia, partially offset by modest declines in Japan and South America. The company’s Brazilian start-up operation reported $0.7 million in net sales during the quarter, below expectations, but is expected to show steady improvement beginning in the fourth quarter.

Third quarter gross margins were 56.3 percent compared with 58.6 percent in last year’s third quarter. Gross margins reflected higher sales discounts, lower footwear margins and foreign currency contract losses, partially offset by the positive effect of a higher proportion of sunglass sales versus other lower-margin product categories. Operating expenses were 41.7 percent of net sales in the quarter, compared with 40.0 percent in last year’s third quarter.

The company’s consolidated inventory totaled $85.9 million at September 30, 2002, up 4.1 percent compared with $82.5 million at June 30, 2002 and up 0.9 percent compared with $85.1 million at September 30, 2001. Excluding inventory growth attributable to the company’s acquired and expanded retail store operations, inventory declined $4.1 million, or 4.8 percent, from one year ago. Accounts receivable days sales outstanding (DSO) improved to 58 at September 30, 2002, compared with 59 at June 30, 2002 and 66 at September 30, 2001. During the quarter, the company repurchased a total of 497,900 shares for a total of $6.3 million, utilizing the $3.8 million that remained under a previous $20 million share repurchase program and $2.5 million of a new $20 million authorization approved by the board of directors in September 2002.

Tax Rate Returns to 35 Percent

The company’s tax rate was 35 percent in the third quarter, where it is expected to remain throughout 2002. In 2001 a one-time tax benefit associated with the company’s foreign operations reduced the effective tax rate to 30 percent in the third quarter and to 29 percent for the full year, resulting in a benefit of $0.02 per share and $0.06 per share, respectively.

About Oakley, Inc.

Oakley: a world brand, driven to ignite the imagination through the fusion of art and science. Building on its legacy of innovative, market-leading, premium sunglasses, the company also offers an expanding line of premium performance footwear, apparel, accessories, watches and prescription eyewear to consumers in more than 70 countries. Trailing-12-month revenues through September 30, 2002 totaled $476.9 million and generated net income of $43.4 million — a 9.1 percent net margin. Oakley, Inc. press releases, SEC filings and the company’s Annual Report are available at no charge through the company’s Web site at www.oakley.com.

Conference Call at 8:00 a.m. PDT, Wednesday, October 23, 2002

A simultaneous webcast for interested investors can be accessed at Oakley’s corporate web site: http://investor.oakley.com and will remain available for replay through midnight, November 6, 2002 on the Internet or by phone at 877/519-4471 or 973/341-3080, passcode 3524089.

Safe Harbor Disclaimer

This press release contains certain statements of a forward-looking nature. Such statements are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The accuracy of such statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including: risks related to the company’s ability to manage rapid growth; the ability to identify qualified manufacturing partners; the ability to coordinate product development and production processes with those partners; the ability of those manufacturing partners and the company’s internal production operations to increase production volumes on raw materials and finished goods in a timely fashion in response to increasing demand and enable the company to achieve timely delivery of finished goods to its retail customers; the ability to provide adequate fixturing to existing and future retail customers to meet anticipated needs and schedules; the dependence on eyewear sales to Sunglass Hut which is owned by a major competitor and, accordingly, could materially alter or terminate its relationship with the company; the company’s ability to expand distribution channels and its own retail operations in a timely manner; unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders placed by retailers; continued weakness of economic conditions could continue to reduce or further reduce demand for products sold by the company and could adversely affect profitability, especially of the company’s retail operations; further terrorist acts, or the threat thereof, could continue to adversely affect consumer confidence and spending, could interrupt production and distribution of product and raw materials and could, as a result, adversely affect the company’s operations and financial performance; the ability of the company to integrate acquisitions without adversely affecting operations; the ability to continue to develop and produce innovative new products and introduce them in a timely manner; the acceptance in the marketplace of the company’s new products and changes in consumer preferences; reductions in sales of products, either as the result of economic or other conditions or reduced consumer acceptance of a product, could result in a buildup of inventory; the ability to source raw materials and finished products at favorable prices to the company; the potential effect of periodic power crises on the company’s operations including temporary blackouts at the company’s facilities; foreign currency exchange rate fluctuations; earthquakes or other natural disasters concentrated in Southern California where substantially all of the companies operations are based; and other risks outlined in the company’s SEC filings, including but not limited to the Annual Report on Form 10-K for the year ended December 31, 2001 and other filings made periodically by the company. The company undertakes no obligation to update this forward-looking information.an be accessed at Oakley’s corporate web site: http://investor.oakley.com and will remain available for replay through midnight, November 6, 2002 on the Internet or by phone at 877/519-4471 or 973/341-3080, passcode 3524089.

Safe Harbor Disclaimer

This press release contains certain statements of a forward-looking nature. Such statements are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The accuracy of such statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including: risks related to the company’s ability to manage rapid growth; the ability to identify qualified manufacturing partners; the ability to coordinate product development and production processes with those partners; the ability of those manufacturing partners and the company’s internal production operations to increase production volumes on raw materials and finished goods in a timely fashion in response to increasing demand and enable the company to achieve timely delivery of finished goods to its retail customers; the ability to provide adequate fixturing to existing and future retail customers to meet anticipated needs and schedules; the dependence on eyewear sales to Sunglass Hut which is owned by a major competitor and, accordingly, could materially alter or terminate its relationship with the company; the company’s ability to expand distribution channels and its own retail operations in a timely manner; unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders placed by retailers; continued weakness of economic conditions could continue to reduce or further reduce demand for products sold by the company and could adversely affect profitability, especially of the company’s retail operations; further terrorist acts, or the threat thereof, could continue to adversely affect consumer confidence and spending, could interrupt production and distribution of product and raw materials and could, as a result, adversely affect the company’s operations and financial performance; the ability of the company to integrate acquisitions without adversely affecting operations; the ability to continue to develop and produce innovative new products and introduce them in a timely manner; the acceptance in the marketplace of the company’s new products and changes in consumer preferences; reductions in sales of products, either as the result of economic or other conditions or reduced consumer acceptance of a product, could result in a buildup of inventory; the ability to source raw materials and finished products at favorable prices to the company; the potential effect of periodic power crises on the company’s operations including temporary blackouts at the company’s facilities; foreign currency exchange rate fluctuations; earthquakes or other natural disasters concentrated in Southern California where substantially all of the companies operations are based; and other risks outlined in the company’s SEC filings, including but not limited to the Annual Report on Form 10-K for the year ended December 31, 2001 and other filings made periodically by the company. The company undertakes no obligation to update this forward-looking information.