Sunglass Maker Hopes to Get a Lift from Athletic Shoes
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By Stacy Kravetz
Staff Reporter of The Wall Street Journal
Oakley Inc., maker of hip sunglasses, is battling more than ultraviolet rays these days.
With sleek frames and mirrored lenses, Oakley sunglasses can cost up to $250. Endorsements from such celebrated athletes as Dennis Rodman and Michael Jordan (who sits on Oakley's board) have helped propel the company to the No. 2 position in the industry, behind Bausch & Lomb Inc.
But now Oakley is fending off a growing list of competitors, from cheap imitators to other upscale brands including Nike Inc., Swiss Army Brands and Timberland Co. It's also fighting a patent-infringement lawsuit and struggling to resolve production snafus. And all this is happening at a time when sales of premium sunglasses -- a must-have item for young urbanites in the early 1990s -- have plateaued. Analysts estimate that the overall market's growth has slowed to 2% to 4% a year from about 10% a year.
As Oakley seeks to revive its fortunes -- after four consecutive quarters of declining sales, disappointing earnings and management upheaval -- it has come up with an intriguing new business plan: It's going to make a run at athletic shoes.
The company is hinting it has innovative technology that will enable it to compete with the likes of Nike and Reebok International Inc. So far, it isn't giving any details other than a target launch date of sometime next year.
For now, Oakley must concentrate on its troubled core business. Though the sunglasses glut has plagued the entire industry, Oakley's problems have been compounded because it relies on Sunglass Hut International Inc. for about one-third of its retail sales. Having expanded aggressively when sunglasses were hot, Sunglass Hut struggled to refocus when the downturn came, closing some stores and scaling back a planned expansion.
In December 1996, the chain cut its inventory across-the-board and canceled Oakley orders. "We returned product to all our manufacturers," says Sunglass Hut Chairman Jim Hauslein.
Oakley's stock price, which had been as high as $27.1875 in May 1996, plummeted to below $10 a share that quarter and has languished near $11 since then. Oakley also cited reduced sales to Sunglass Hut as the reason for a 44% plunge in its second-quarter earnings compared with a year earlier. The company still has an 18% share of the $2.5 billion premium sunglass market, but it says it expects to report third-quarter earnings later this month that are substantially below analysts' estimates.
In the meantime, Oakley has shuffled management. Last month, it named Link Newcomb, the company's chief operating officer, as chief executive officer, succeeding Mike Parnell, who was appointed vice chairman. Oakley said the change was initiated by Mr. Parnell, who will handle the sales and marketing of the new footwear line, now that Mr. Newcomb has taken over the day-to-day management. "He thrives on that," Mr. Parnell says. "He does a much better job than I do."
Throughout the turmoil, Oakley hasn't changed its selling strategy, even though it expects net sales to Sunglass Hut to "remain the same or decrease" for the full 1997 year compared with 1996. Oakley believes its practice of keeping its glasses out of department stores, discount stores and drugstores has bolstered its exclusive image, though it has signed up 700 new specialty retailers this year. For its part, Sunglass Hut's Mr. Hauslein says his company is now gaining again after the market "softened temporarily."
Oakley continues to have product problems, however. After a two-year boost to sales from its ubiquitous "Eye Jacket" shades, the company was slow to introduce new lines. Production problems in two of the three designs it did bring out this year dented sales during the crucial summer selling season. Oakley acknowledges it didn't allow enough lead time to order tools used to mold sunglasses frames, which reduced its shipments of sculpted, plastic-framed "Fives" glasses in various colors.
Oakley also had problems with the technology needed to achieve the right curvature and optical clarity in its glasses with polarized lenses, a spokeswoman says. The company has begun shipping back orders of the "Fives" but says it hasn't yet fixed the problems with the polarized line.
Some retailers also complain that Oakley glasses are prone to break, notably the arms on models with plastic frames. Noting that the customer base includes many athletes, Mr. Newcomb says "our glasses can be put through some heavy use." He says Oakley glasses don't break any more than others do under normal conditions.
Oakley still has its loyal fans. At Sport Chalet in Los Angeles, Oakley glasses are the "fastest mover," says saleswoman Joy Liang. Some of the more expensive models don't move fast, however. The store stocks just one pair of the $250 "Romeo" line because customers haven't responded. Brett Hershberger, wearing a pair of eye jackets he bought for about $100 a year and a half ago, says he likes them, but adds: "I've never spent this much on a pair of sunglasses before."
To safeguard its 290 patents, Oakley is quick to sue rival makers of sunglasses for alleged infringement. In March, it won a $750,000 settlement from Greg Arnette, a former Oakley employee who left to form competing brand Arnette Optical Illusions, a unit of Bausch & Lomb. The suit alleged that Arnette stole the design for his Steel Raven glasses. Calling it a "nuisance settlement," Bausch & Lomb said the design, for which Arnette holds the patent, "was conceived and drawn by Greg Arnette after his employment with Oakley was terminated."
In July, Oakley filed a patent-infringement suit against Nike alleging that company's new sunglasses infringe on Oakley's design for dual-lens technology. Nike "does not feel that it infringes on the patent," a spokeswoman says, adding that the company contends the patent is invalid.
With its foray into footwear, Oakley has another way to get back at Nike. Oakley will manufacture the shoes domestically in the same cavernous facility in Foothill Ranch, Calif., where it makes its sunglasses. Oakley says it's planning to spend $8 million on expanding the production space but won't say what its total investment is likely to be. "We're not betting the ranch," says Mr. Newcomb.
Oakley has applied for patents and hired a designer. People who follow the shoe business say that Oakley shoes may not look as distinctly different as its sunglasses but that the company's innovation may be in new manufacturing and construction techniques. Most of the shoes Oakley will be competing against are manufactured by subcontractors overseas.
Oakley has successfully moved into new products over its 25-year history. It started off making motorcycle hand grips, then moved to motorcycle goggles and ski goggles before making its foray into sunglasses. <eom> |
