STOCK WATCH
Oakley Shares Brighten on New Products, Clearer Outlook
By JENNIFER BELLANTONIO
Foothill Ranch-based Oakley Inc. has regained momentum on Wall Street.
The apparel maker’s stock has nearly doubled since early March, up from 7.4 to 13 at recent check. Shares are up 26% this year, beating the S & P; 500 Index’s 21% gain. Last week, Oakley counted a market value of nearly $900 million.
But it hasn’t been a smooth trip higher.
The company took a hit in the first quarter as sales of Oakley’s bread-and-butter sunglasses slumped.
Oakley blamed bad spring weather and a tough economy for the dip. Sunglasses accounted for 62% of Oakley’s sales last year. The sales woes sent shares down 28% from January to mid-March.
But there’s reason for optimism among some watchers.
New York-based Merrill Lynch & Co. recently raised Oakley’s rating to “buy” from “neutral” and increased earnings estimates for next year.
“While sunglass sales have been sluggish in 2003, we believe the business may have bottomed in Q3 and look for earnings to rebound next year,” wrote Merrill Lynch senior analyst Mark A. Friedman in a November report.
Oakley’s stock surged about 15% on the upgrade and has gained more since, though it still is far off its all-time high of 25 in 2001.
Also optimistic is Paul Kaump, analyst at Minneapolis, Minn.-based Dougherty & Co., who initiated coverage of Oakley in October with a “buy” rating.
“We don’t believe that lightening will strike twice,” said Kaump, referring to bad weather that led to weaker-than-expected sales. “We see the strength next year in sunglasses. Sunglass sales, for better or worse, are what drives the stock right now.”
Others are more cautious.
Robert S. Drbul, analyst at New York-based Lehman Brothers, rates Oakley shares “underweight.”
In an Oct. 30 report, Drbul said he’s “cautious” since Oakley’s sunglass sales volume has “declined eight of the last nine quarters and sunglasses are still the critical component.” Sunglasses are the most profitable of Oakley’s businesses.
Oakley sold 16.8% fewer sunglasses in the third quarter, versus a year earlier. The drop partially was offset by a 9% increase in the average sale price of the gear. Overall, revenue from sunglasses was $77 million, down 9.6% versus a year earlier.
Oakley’s rocky relationship with Sunglass Hut International Inc., its biggest seller of sunglasses, has been a major factor for the decline. Sales to Sunglass Hut, which was bought by Oakley rival Luxottica Group SPA a few years ago, fell 31% in the third quarter.
A three-year pact between Oakley and Sunglass Hut expires next December. Lehman’s Drbul called their relationship “fundamentally flawed” in his report, noting that Luxottica owns several brands that compete with Oakley and it’s not in either companies “best interest” for their relationship to “realize its full potential.”
So Oakley has been tweaking its own retail strategy to make up for the Sunglass Hut decline.
The company saw a 76% spike in sales to $15 million in the third quarter at its own stores, which include O Stores and Iacon, a mall-based retail chain the company bought in 2001.
The sunglasses maker opened 14 O stores and 12 Iacon stores this year for a total of 103 stores, 76 of which are Iacon.
In the past 12 months sales through Oakley’s retail stores, which include sunglasses and other products, exceeded sales to Sunglass Hut for the first time, said Link Newcomb, Oakley’s chief financial officer, in its third-quarter earnings report.
The company also is testing its sunglasses and footwear in 50 Journeys shoe stores, a unit of Nashville-based shoe retailer Genesco Inc., according to Gar Jackson, Oakley’s director of investor relations.
“Unlike a few years ago, Sunglass Hut is not the make or break customer for Oakley,” said Merrill’s Friedman in a report.
And he noted that Sunglass Hut, about 6% of Oakley’s sales in the third quarter, is featuring Oakley signs in the front of its stores for two weeks during the holidays for the first time since 2000.
Meanwhile, Oakley hopes to build on growing sales of its non-sunglasses products.
Sales from newer categories,watches, apparel, footwear and prescription eyewear,jumped 32% to more than $50 million in the third quarter. Apparel and footwear are the biggest pieces of that pie.
“It’s good from a diversification standpoint,” Dougherty’s Kaump said of the categories. “You don’t want to be completely reliant on the sun.”
New product sales more than quadrupled in the past four years to $133 million in 2002,about a quarter of the company’s business, Kaump said.
The rise in new-product sales helped take the sting out of its slumping sunglasses business and buoy the company’s overall sales in the third quarter. Oakley’s total sales jumped 9.9% to $145 million in the period, versus a year ago. Revenue is expected to grow 10% next year to $570 million, according to Lehman.
Michael Pachter, an analyst at Wedbush Morgan Securities, is another that believes Oakley turned the corner in the third quarter.
One reason: “The new product categories have obtained sufficient size to permit the company to leverage its investment,” Pachter said in an October report.
But there’s a catch.
“It’s hard to find product categories that are higher margins than sunglasses,” said Mitch Kummetz, an analyst at D.A. Davidson & Co. For its part, Oakley has seen some profit increases in other products.
