FM, Oakley is now selling at ~20X trailing earnings, with earnings growth ???
Until this year Oakley price movement could be fit reasonably well to a seasonal pattern: low January, high July. They've tried to increase sales in the southern hemisphere, especially in Brazil, which would be countercyclical to the primary market, but Q2 and Q3 are still the big quarters for sunglasses. I would expect sales of the Shoe and the Time Bomb watch to be spread out more evenly, but those still account for a relatively small percentage of total sales. This year the chart has broken from the previously established pattern.
In the '98 Q4 report, marketing expenses were up significantly versus '97, possibly indicating that the newer product lines are in more competitive markets. Back in '95 and '96, when things were rolling for OO, their flagship product was the M Frame line. That style still has a distinctive look, and since it is geared for sports, it also gets the most free advertising from pro athletes. The other styles have more of a fashion component. The fashion market has become overcrowded with designer sunglasses and other look-alike competitors, so that is a tougher sell.
Newer 'families' such as X metal® are positioned at the high end of the market, so they wouldn't be expected to ramp up to the same level as some earlier models. Manufacturing costs are certainly higher, too. Possibly they have moved the price point too high, above a level of diminishing returns. Also, polarized sunglasses such as Maui Jim were a hot item the last two summers, and Oakley was a little slow in offering a polarized lens. They now have that for at least the Jackets and Frogskins lines. The product descriptions on their website now also list prescription lenses as being available for all styles except Zeros. Furthermore, there will be "genetically altered rebirths" of M Frame®, Eye Jacket® and Zero® this summer. All that adds up to a more diversified product line that should increase the potential customer base this year.
Certainly, the footwear is up against some tough competition, and they admit that sales haven't met their expectations. But, I look at that as a gamble - the Shoe is actually quite innovative compared to the run-of-the-mill stuff, e.g. Nikes. I don't think the risk-reward is so bad for the shoe at this point, now that most of the start-up costs are behind them. Who knows, it could become a fad, like Doc Martens. Some people seem to have questions about the wisdom of entering the footwear market and about the motivation for that move. Is there something personal involved? If there is, that's not so unusual and it doesn't bother me. This Face/Off from Forbes 3-9-98 is what they are talking about:
forbes.com
Updates since that article:
re: the case - 12/98 there was a ruling in favor of Oakley on eight
separate summary judgment motions that strengthened Oakley's legal position in the case.
re: Jannards stake - he bought an additional 2.9% June, August '98.
My impression is that the Oakley management team is highly respected by their employees. In contrast, Nike managemment has exploited the 'employees' working in their sweatshops. Oakley is trying to show, by example, that there is a better way. That may be a naive, idealistic take on it...
I haven't been following OO from an investment perspective, but at this price, I'm starting to think about it. Some analysts attempt to predict Oakley results by monitoring developments at Sunglass Hut. Perhaps they can do that, but I don't believe the summer selling season can be so easily gauged by what is happening now.
WT
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