July 31, 2005

Oakley Sunglasses Go Digital to Lure Gadget Hounds

SAN FRANCISCO -- Oakley Inc. is jumping into the electronic age with sunglasses that play music and work with cell phones as it targets gadget lovers who want more than just protection from the sun.

The sports sunglasses maker plans in August to introduce its phone-ready "Razrwire" line, which works as a hands-free addition for Motorola Inc.'s popular Razr cell phones and marks the company's latest push into electronics as a way to move into new markets.

Razrwire follows the success of the digital music-playing Thump sunglasses, which have pumped up Oakley's profits since they were introduced last year and helped drive the company's current stock price to near a three-year high.

Still, some Wall Street analysts have cautioned that the foray into electronics masks slowed growth in Oakley's core sunglasses business.

But investors have cheered as Oakley raised its profit targets twice this year due to demand for products like Thump.

Oakley executives say they are confident Thump and Razrwire sunglasses, which let people receive calls and dial by voice at up to 30 feet from a compatible host cell phone, are the first of many electronic styles.

"The Thump release was just the beginning, and has opened up doors for us that we've always dreamed about," Jim Jannard, Oakley's founder and chief executive, told a recent investor conference call.

"The projects we are working on will greatly expand Oakley's presence in the wearable electronics market."


Oakley, founded in 1975 and based in Foothill Ranch, California, made its reputation as a sunglasses maker. But it has branched out into clothes, shoes, watches and other eyewear.

Sunglasses sales accounted for 75 percent of Oakley's business in 2000, but were only 50 percent of the total $585 million in sales last year.

"They are trying to transition from sunglasses to a lifestyle brand," said Eric Beder, an analyst with Brean Murray & Co.

The company is also using the electronic products to get into stores that do not typically carry sunglasses, he added.

Cingular Wireless stores will sell the Razrwire line in early August for $294.99 while retailers such as Circuit City and CompUSA carry Thump sunglasses, which run $395 to $545.

"It is a market nobody else is playing in," Beder said. "These electronics products will be profitable."

The company expects Razrwire to build on the success of Thump, which during the last holiday season generated total sales of $20 million -- an amount that exceeded expectations.

Core sunglasses business sales increased a modest 1.3 percent in the recent second quarter.

Some analysts worry that the company's reliance on new electronics-inspired products to boost growth could prove risky.

"Our concern remains that the company is becoming more 'gadget-oriented,' creating an environment in which it must continuously introduce new electronic products to grow sales," Wachovia Securities analyst Joseph Teklits wrote in a recent research note.

Shares of Oakley already trade at a premium to rivals by some measures.

Oakley trades at 21 times Wall Street estimates for 2006 earnings, while rival lifestyle brands Quiksilver Inc. trades at a forward price-to-earnings ratio of 16.7 and Pacific Sunwear of California Inc., trades at 15, according to Reuters Estimates.

On Friday, Oakley shares closed at $18.68 on the New York Stock Exchange, after hitting $19 the previous day. That was the second time in a week for Oakley to reach $19 -- a high not seen since June 2002 -- after the company reported a jump of 27 percent in second-quarter profit and raised its 2005 earnings outlook.

The company went public in August 1995 at a split-adjusted price of $11.50 a share. A 2-for-1 stock split occurred on Oct. 10, 1996, according to Oakley's Web site.