Oakley Has Gray Day as Sunglass Hut Orders Fade

Oakley Inc.’s shares tumbled Thursday after the maker of trendy sunglasses said that second-half earnings will fall because its single largest customer has unexpectedly reduced orders for its 2001 line.

Oakley said that Sunglass Hut, which accounts for 19% of the Foothill Ranch company’s sunglasses sales, reduced its orders although Sunglass Hut’s parent said as recently as three weeks ago that it intended to continue ordering Oakley products at the same level.

Oakley’s relationship with Sunglass Hut, the world’s No. 1 sunglasses retailer, has been the subject of speculation since the Florida chain was acquired in April by Luxottica SpA, which owns such popular sunglass brands as Ray-Ban and Arnette, making the Italian company an Oakley competitor.

The stock slumped to a 52-week low of $11 a share before closing at $11.03, off $6.46, or 37% on the New York Stock Exchange. More than 7 million shares changed hands, 13 times more than the average daily volume over the last three months.

Oakley Chief Operating Officer Link Newcomb said Luxottica decided to stock its Sunglass Hut stores with many of its own brands, refusing to sell Oakley’s 2001 sunglasses in “any meaningful quantities.” The order was more than 80% below what the company was expecting.

Luxottica Chairman Leonardo del Vecchio said the company has cut its Oakley orders by 30%, attributing the decision to Oakley’s refusal to renegotiate a supply contract. Sunglass Hut may stop offering Oakley products altogether if the companies can’t settle the dispute by the end of the year, Del Vecchio said.

The lower projections followed several quarters of strong gains in earnings and sales, reflecting high demand for Oakley’s sunglasses and growing sales in other product lines.

“It is a big blow,” said Francois Parenteau, an analyst with Parenteau Corp., who rates Oakley a “buy.” “No one understands really what is going on in the relationship between Oakley and Luxottica.”

The companies have had a “love-hate relationship over the years,” said Eric Beder, an analyst with Ladenburg Thalmann & Co., who rates Oakley shares a “strong buy.”

Beder said the rift may hurt Sunglass Hut more than Oakley, however. Oakley “will get out of this without a doubt,” he said. “This brand is bigger than Sunglass Hut.”

Oakley sunglasses, which sell for $60 to $325, are popular among skiers and cyclists, the company said in its latest annual report filed with the Securities and Exchange Commission. Three-time Tour de France winner Lance Armstrong wears them, Parenteau said.

Sunglasses are expected to account for about 70% of Oakley’s sales this year. The company also makes jackets, shoes and watches.

Luxottica decided not to order new styles such as the X-Metal Penny, Scar and Why3 glasses, Oakley said. Oakley plans to open more company-owned stores to reduce dependence on one retailer. Newcomb wouldn’t provide details.

Oakley has one retail store at its headquarters and one at a mall in California, Newcomb said.

The company also plans to offer more products to Sunglass Hut’s competitors, including retailers such as Nordstrom Inc. and Venator Group Inc.’s Footlocker.

Oakley expects profit of 21 cents to 23 cents a share in the third quarter, and 13 cents to 16 cents in the fourth quarter. The company had forecast earnings of 31 cents and 21 cents. Analysts were expecting the company to report 32 cents for the third quarter.

The sunglasses maker reduced third-quarter sales estimates to $114 million to $118 million from $130 million. The company revised its fourth-quarter sales forecast to $95 million to $100 million from $113 million.

In the third quarter, Oakley had net income of $17.4 million, or 25 cents, on sales of $107 million. It earned $9.7 million, or 14 cents, in the year-earlier fourth quarter on sales of $93.9 million.

Sunglass Hut’s other brands include Diesel, Christian Dior, Kenneth Cole, Nike, Tommy Hilfiger and Polo Sport. There are more than 1,900 Sunglass Hut stores worldwide.

Oakley has suffered financial setbacks previously when Sunglass Hut cut back orders. In 1996, the Coral Gables, Fla.-based chain, citing sluggish demand, canceled orders before the holiday shipping season.