SHADES of GRAY

To borrow part of Oakley Inc.’s own marketing slang, stocks of the leading players in the sunglass industry suffered a thermonuclear meltdown Thursday.

The stocks of Oakley, newly public Gargoyles Inc. and retailer Sunglass Hut International were all hammered after Sunglass Hut said its profit this summer fell short of expectations.

And as Sunglass Hut goes, so goes the handful of specialty firms in this $2.4-billion market. Irvine-based Oakley and the smaller Gargoyles, for instance, sell about a third of their shades through Sunglass Hut, which has nearly 2,000 outlets--many in shopping malls--around the country and abroad.

Sunglass Hut, based in Coral Gables, Fla., said its third-quarter profit will trail year-earlier results because sales are languishing. For its fiscal year ended Feb. 3, Sunglass Hut’s sales had skyrocketed 44% from the previous year, to $418 million.

Its president, Jack B. Chadsey, blamed “a slowdown in mall traffic, which affects impulse sales,” and cooler weather. In a statement, he also complained that “a general lack of exciting, new product in the market” has added to the retailer’s slowdown.

Investors didn’t like the news one bit and drove the price of Sunglass Hut’s stock down $4.31 a share, to $9.19, and it was the Nasdaq market’s most active issue, with 16.3 million shares changing hands. Shares in Bausch & Lomb Inc., maker of Ray-Ban sunglasses, also fell.

The sell-off might portend problems that go well beyond those one-time seasonal factors, some analysts said. It could be that the likes of Sunglass Hut, Oakley and the others will now have to work much harder to maintain the hefty sales gains that propelled their stocks sharply higher in the past.

To be sure, Oakley and other premium-brand companies help set fashion trends--witness their wildly popular wrap-around glasses that now seem ubiquitous--and the quality of their shades is vastly superior to that of average sunglasses.

Oakley, to name one, can also point to its own stellar performance as evidence of the high consumer demand for its premium shades, which it has marketed as providing “thermonuclear protection” for the eyes.

Nonetheless, the question now before the industry is: No matter how much Oakley touts its “toroidal single-lens geometry” or the “iridium coating” on its lenses, how many more people are willing to fork over $50, $100 or more for a product that’s constantly misplaced, lost or broken--and a version of which can be bought in any drugstore for $5?

“That is the million-dollar question,” said Mary Corrigan, who follows Sunglass Hut for the investment firm William Blair & Co. in Chicago. “What is the true long-term growth potential?”

It’s a situation many other fashion and leisure goods makers have had to address, including those selling sneakers, watches, cars, apparel and golf clubs. Judging by the early success of Sunglass Hut, Oakley and the others, investors once believed that potential in the sunglass industry was nearly unlimited.

Take Oakley. Founded by Jim Jannard--who adds to Oakley’s mystique by rarely allowing himself to be photographed, and only then if he’s wearing sunglasses--the company grew to $173 million in sales last year from $66.3 million in 1991. It also earned a lofty 23 cents on every dollar of sales in 1995.

Oakley’s stock--its ticker symbol is “OO” on the New York Stock Exchange--went public in August 1995 at $23 a share and then surged as high as $54 in May, making Jannard a billionaire. (Oakley, incidentally, has a 2-for-1 stock split scheduled today.)

Following Oakley’s lead, Gargoyles went public Sept. 27 at $16 a share and quickly jumped as high as $21.25.Gargoyles, a Kent, Wash.-based concern that also sells shades under the Hobie brand, had sales of $18 million last year.

Sunglass Hut’s complaint about the lack of exciting new products in the industry was echoed by Link Newcomb, Oakley’s executive vice president. “We have not yet had a major new-line introduction” in 1996, although Oakley is planning one for late this year, he said.

Oakley itself “is very strong,” Newcomb said, but added that “I would rather not speculate on whether the overall industry has experienced any change.”

Still, Newcomb noted that only 9% of all the sunglasses sold each year are premium brands costing $30 or more and that Oakley and others have to convince more people to trade up:”As people become more educated about the quality they should look for that 9% unit number is going to grow.”

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Not so Bright

Stocks of companies in the sunglass industry fell sharply after its largest retailer, Sunglass Hut, predicted disappointing third- quarter sales. Daily closes since Oct. 1 of Sunglass Hut, Oakley Inc. and Gargoyles Inc.:

Sunglass Hut:

Thursday: $9.19, down $4.31

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Oakley:

Thursday: $37.50, down $7.625

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Gargoyles:

Thursday: $15,75, down $4

Source: Bloomberg Business News