Oakley, Inc. Business Information, Profile, and History

Company Perspectives:

Origin of the Species. It started with a single idea. A mad scientist looked at a product and saw an opportunity. Jim Jannard created a world's first--a motocross handgrip with a unique orbicular design, engineered to fit a competitor's closed hand. The year was 1975. It was the beginning of Oakley Inc. (NYSE: OO), a technology company that would soon be fueled by a raging distaste for mediocrity and a fierce devotion to innovation.

Today, Oakley is driven to seek out problems, create solutions, and wrap those solutions in art. The company's obsession with innovation has built a legacy of science, sculpture, and defiance of conventional thinking. Reinventing the concept of eyewear was only the first step. The passion that ignited the optical industry is now unleashed on high-performance footwear, wristwatches, apparel and accessories.

History of Oakley, Inc.

Oakley, Inc. is an innovation-driven designer, manufacturer, and distributor of high-performance eyewear, including sunglasses and goggles. Oakley sunglasses sell for anywhere from $65 to $335 a pair. Although known best for its sunglasses, Oakley has also expanded into footwear, watches, apparel, and accessories. Key aspects of the company's success include celebrity endorsements, especially by athletes, together with high-tech designs that include interchangeable lenses, high optical clarity, and damage resistance, and selective distribution through high-end retailers and specialty stores, including the Oakley-owned O Stores, Oakley Vaults, Sunglass Designs, Sporting Eyes, and Occhiali da Sole. These elements of Oakley's brand-building strategy work together to increase the perceived value of the company's products. Its products are not available from mass-market retailers, and Oakley vigorously litigates any unauthorized distribution of its products as well as patent infringements to keep competitors out of its lucrative business.

Beginnings: Moving from Handgrips to Goggles to Sunglasses

Oakley was founded by Jim Jannard in 1975 when he began selling handgrips for motocross motorcycles from the back of his car. Something of a motorcycle enthusiast, Jannard attended the University of Southern California in 1970. The long-haired student dropped out, reportedly because the Irish setter he brought to class irritated his professors. He spent about a year driving around the Southwest on his motorcycle. When he returned to Los Angeles, he traded in his motorcycle for a small Honda and began selling motorcycle parts out of his trunk to shops that serviced motorcycles. In 1975 he designed a rubber grip for off-road motorcycles and began selling it along with the motorcycle parts. That was the beginning of Oakley, a company he named after one of his dogs.

Jannard was in his mid-30s when he began Oakley. Toward the end of the decade he began selling motocross goggles. Featuring his own designs, the goggles were made of high-impact plastic that was lighter and stronger than the glass goggles then in use. With the help of some young salespeople, Jannard began handing them out at motocross competitions and selling them through Oakley's motorcycle parts accounts.

When the motorcycle goggles became a hot item, Jannard began developing eyewear that was part goggles and part sunglasses for skiers and bicyclists. In 1983 Oakley began selling ski goggles. Next year the company moved into the sunglasses market. Cyclist Greg Le Mond wore Oakley sunglasses in 1986 on his way to winning the Tour de France, becoming the first of many star athletes to be associated with marketing Oakley sunglasses. Jannard was encouraged to develop new sunglass models. One was the company's trademark Blades model, which featured interchangeable wraparound lenses that slipped into a simple carbon-fibre frame.

To market his new sunglasses, Jannard and his salespeople handed out many pairs to top athletes in the late 1980s and early 1990s. At one golf tournament, they gave a pair to basketball star (and golfer) Michael Jordan, who became a regular wearer of Oakley sunglasses. Other celebrities who have been associated with Oakley sunglasses include Nike chief Philip Knight, tennis star Andre Agassi, skater Bonnie Blair, and baseball great Cal Ripken, Jr.

A key element of Oakley's distinctive marketing approach has been the use of influential athletes. Relying primarily on the "editorial" endorsement of influential athletes, Oakley was able to increase consumer awareness of the company's product performance and overall brand image. Oakley believed serious athletes were quick to recognize the superior technology and performance of its products.

Many of Oakley's endorsements were obtained at little or no cost. In 1994 Oakley paid about $4 million to its endorsers, or about three cents per sales dollar. Andre Agassi, for example, did not charge his friend Jannard for his endorsement, even though he used to have an endorsement contract with Bausch & Lomb's Ray-Ban brand of sunglasses. By comparison, it cost Phil Knight of Nike $10 million per year to sign Agassi to an endorsement contract for ten years. Michael Jordan, who first wore Oakley sunglasses while playing golf, then while playing baseball for the Birmingham Barons, negotiated a stock package with Jannard when Oakley went public in 1995 that included a position on the company's board of directors.

The use of influential athletes to endorse its products helped make Oakley the acknowledged leader in the sports sunglasses market. Its high-performance sunglasses and goggles were worn by professional baseball and basketball players, skaters, skiers, cyclists, golfers, tennis players, and others. In 1990 the company had net income of $7.7 million on sales of $68.6 million. Sales were off slightly in 1991, then rebounded in 1992 to $76.4 million, with net income increasing to $9.1 million.

In the early 1990s Oakley's products were becoming popular in the nonsports fashion segment of the market. Sales and net income rose significantly in 1993 and 1994, to $92.7 million and then $124 million. By the end of 1994, the company made eight lines of sunglasses and three lines of goggles, accounting for a 13 percent market share of the U.S. premium (over $30 retail) sunglasses business. Its products were distributed in more than 60 countries.

Throughout its history Oakley has been selective about introducing new products. Starting with the basic Blades brand, which retailed for around $110 plus $60 for each additional coated lens in 1995, the company developed other product lines. The least expensive was the Frogskins line, which sold for $40 a pair. Agassi wore Oakley's Eye Jackets brand, which were introduced in December 1994. The M-Frame, a high-impact line that featured superhard polycarbonate lenses, could withstand a blast from a 12-gauge shotgun at 15 yards, or the force of a one-pound pointed weight dropped from a height of four feet. They sold for about $130 a pair in 1995. Trenchcoats, a line of camouflage eyewear, were introduced in October 1995, followed by Straight Jackets in May 1996. The much anticipated X-Frames were introduced in February 1997. Oakley also made three lines of goggles: H2O, Motocross, and Ski.

Going Public in 1995

As Oakley prepared to go public in 1995, Jannard gave himself a $21 million bonus at the end of 1994. He owned 64.8 percent of the company, and his net worth was estimated to be $750 million. His chief executive officer, Mike Parnell, who was 42 in 1995, received about $4.8 million in 1994. They each owned jet planes that they leased back to the company after it went public. Parnell owned about 7 percent of Oakley. Overall, the company was valued at about $820 million.

The year 1995 began well. Sales for the first half were 37 percent above sales for the first half of 1994. In August, 10 million shares were offered to the public at $23 per share, some $4 to $6 higher than the range of $17 to $19 per share originally envisioned by the underwriters. The initial public offering (IPO) raised $230 million, with $154 million going to insiders. Jannard made nearly $139 million. His holdings in the company were valued at $627 million after the stock rose to $27.125 a share on the day after the IPO, making him the second richest Orange County resident behind billionaire Donald Bren. The remaining $76 million for Oakley was earmarked to build a new corporate headquarters and pay off debt.

Litigating Infringements and Unauthorized Distribution in the 1990s

In December 1995, Oakley won two patent infringement suits against Bausch & Lomb Inc. and Lombardie Booster. The Court of Commerce in Paris ruled that some models of Bausch & Lomb's Killer Loop sunglasses infringed on two of Oakley's design patents. In a separate judgment, the same court ruled that Lombardie Booster's Infrared and Morpho sunglasses infringed on three of Oakley's design patents. Although Oakley was awarded less than $50,000 in damages in each case, the rulings served to help Oakley keep its competitors from copying its trendy glasses. Earlier in the year, the company was able to halt the sale of fake Oakleys delivered to Big 5 Sporting Goods, which the retailer had heavily advertised. The retailer agreed to cooperate with Oakley in tracking down the distributor of the fake sunglasses, all of which were ordered destroyed by the court. In April 1996 Oakley filed suit against The Clubhouse, a sporting goods store located in Thousand Oaks, California, charging that it resold Oakley sunglasses to an unfashionable discount warehouse. The discounter, Price/Costco, apparently offered Oakley's e Wire brand sunglasses in its mail-order catalog.

Historically, Oakley vigorously litigated any unauthorized distribution of its products as well as patent infringements. This helped keep competitors out of such a lucrative business. One attorney told Forbes that Oakley "uses litigation as a marketing tool." He estimated he had spent 2,000 hours helping ten sunglass makers fight Oakley in court in the early 1990s.

Oakley had some 320 patents issued or pending worldwide, plus 249 registered trademarks, as of 1995. Jannard's chief legal advisor, boyhood friend Gregory Weeks, spent much of his career enforcing Oakley's patents and trademarks, starting with Jannard's first motorcycle handlebar grip. Oakley exhibited zero tolerance for counterfeiters and used its sales force, concerned consumers, and private investigators to seek out counterfeiters and sue them.

New Headquarters, New Competition, and a Sales Setback: 1996-97

In January 1996 Oakley unveiled plans for its new "interplanetary corporate headquarters," to be located on 40 acres in Foothill Ranch in Orange County. The $35 million facility had "the look and feel of a post-industrial age gone awry," according to the Orange County Register. "Steel beams, oversized rivets, and galvanized metallic surfaces give the structure--dubbed 'Technical Center'--a dark, intimidating presence." Jannard reportedly wanted the facility to "look as if it were the sole survivor in a 'post-nuclear kill zone.'"

A sense of privacy was achieved by setting the facility back from the main entrance, where a winding road took visitors past rock formations. The dark-shaded, two-story building came into view only after the final turn of the road.

Over the main doorway, plans called for a 40-foot high metal ring with a convex stainless steel center, similar to Oakley's trademark ellipsis. Inside were the corporate offices, an auditorium, a boutique, and a museum. The adjacent warehouse was the size of four football fields and contained a basketball court. Other features of the Oakley campus included a helicopter landing pad, a small park for employees, a jogging track that circled the area, and an amphitheater. Much of the corporate campus appeared to reflect Jannard's personal style and took into account the youth of the company's workforce, whose average age was under 30.

As for landscaping, an architect who had done work for Great Britain's royal family designed prehistoric-looking rockwork to surround the campus. Native plants and trees were to be used around the grounds instead of manicured lawns, and the parking lot would be lighted by heavy-duty airport landing discs instead of traditional parking-lot lights.

Oakley held its first-ever annual meeting for shareholders at El Toro, California, in June 1996. Jannard presided over the meeting, which was attended by basketball star Dennis Rodman and was held at the Command Museum at El Toro Marine Corps Air Station. Soldiers wearing Oakley camouflage Trenchcoat sunglasses directed shareholders at the base. Jannard, refusing as usual to allow his photograph to be taken, was wearing black M-Frames sunglasses during the meeting.

The company reported to shareholders on 1995 earnings, which grew 49 percent to $39.6 million. Sales rose nearly 40 percent to $173 million. The company's stock had nearly doubled to $45.25 per share since its IPO in August of the previous year. Jannard gave a speech to the shareholders in which he emphasized Oakley's high-tech abilities and competitive strength. "We solve problems with inventions and then we wrap those inventions in art," he said about the company's products. The next line of sunglasses that Oakley planned to introduce were X Metals. The company also planned to introduce sunglasses especially for cricket players in the international market.

A secondary offering of stock, underwritten by Merrill Lynch & Co. and Alex Brown & Sons Inc., also took place in June. Jannard and Parnell were planning to sell about five million shares, worth about $220 million at current market prices. After the sale, Jannard would still own at least 45 percent of the company. Jannard's compensation for 1995 consisted of a $380,697 salary and a $9.3 million bonus, earned in part for exceeding financial performance targets.

In August Oakley entered into an agreement with Essilor International and its U.S. subsidiary Gentex Optics, makers of prescription lenses. The deal gave Oakley access to prescription lens laboratories and lens-making capabilities. Oakley planned to make its e Wire frames ($130) available in prescription sunglasses within a month. Previously, prescription lenses had accounted for less than 1 percent of the company's sales and were limited to only two of its sports sunglasses. Oakley's agreement with Essilor International and Gentex Optics was expected to cut the time for obtaining prescription lenses for Oakley sunglasses from three weeks to just one week.

In addition, Oakley was granted an option to purchase Essilor and Gentex's nonprescription-lens unit within four years. At the time Gentex was the world's leading producer of advanced-technology polycarbonate lenses and was Oakley's sole supplier of polycarbonate lenses. As part of the deal, Oakley also obtained an exclusive right to purchase a new scratch-resistant coating and decentered sunglass lens blanks, which would enable it to create optically superior dual lens sunglasses.

In October, Nike announced it would enter the $1.5 billion premium sunglasses market. It planned to focus on sports performance sunglasses, the same niche occupied by Oakley. Nike began with two styles of sunglasses designed specifically for track and field, the V12 ($160) and the V8 ($145). Nike also announced it would introduce the Magneto brand of glasses in the winter of 1996-97. The unusually designed Magnetos had no temples; they adhered to the face of the wearer with two small, semi-sticky round discs called AMPs that were placed on the wearer's temples. The AMPs held the sunglasses to the face with tiny magnets. The advantage, according to Nike: the glasses were lighter and would not bounce when you ran.

After effecting a two-for-one stock split in early October, Oakley experienced problems with one of its principal distributors. Sunglass Hut International, Inc. reported lower than expected sales for September, causing Oakley's stock price to drop by 16.9 percent. Sales to Sunglass Hut accounted for approximately one-third of Oakley's total volume in the first half of 1996. On December 5, Oakley announced that Sunglass Hut had cancelled all purchase orders through January 1997. Oakley delayed the launch of its new X Metal brand of sunglasses, and its stock lost 33 percent of its value, falling to $10.625 a share.

In November Oakley announced it had reached an agreement to acquire Serval Marketing, its exclusive distributor in the United Kingdom and Ireland. The distributor would be renamed Oakley U.K. Based outside London, England, Serval Marketing had been Oakley's exclusive U.K. and Irish distributor for 15 years, since 1981. It employed about 35 individuals, and its chairman, Carl Ward, and managing director, Ray Tilbrook, were signed to five-year employment contracts to ensure they would continue in the same roles for Oakley U.K.

Closing out a very eventful year, three shareholders filed a class-action suit in December against Jannard and Michael Parnell, Oakley's two top executives, charging they misrepresented the state of the company's operations to take advantage of Oakley's secondary stock offering in June 1996. The two underwriting firms and Oakley were also named in the suit. According to the suit, Jannard sold nine million shares at $23.81 per share (adjusted for October's stock split) for $205.2 million, and Parnell sold 1 million shares for $22.8 million. Six weeks later, Oakley's stock dropped to $15.375 on news that Sunglass Hut was experiencing weak sales. The lawsuit charged that company executives artificially inflated Oakley's stock by claiming that business with Sunglass Hut was strong and that the X Metal line would be introduced by the end of 1996. Several other similar class-action lawsuits were soon filed.

Sales in the fourth quarter of 1996 declined sharply, because of the loss of orders from Sunglass Hut and sluggish European sales. For the year, sales were up 27 percent to $218.6 million from $172.5 million in 1995. Net income for the fourth quarter was only $3.6 million versus $9.2 million the previous year. For the year, net income increased 16 percent to $46 million from $39.6 million a year ago.

Oakley moved into its new Foothill Ranch headquarters in early 1997 while still struggling from the aftermath of the Sunglass Hut debacle. Revenues for the first quarter of 1997 fell 29 percent, and earnings plunged from $11 million the previous year to $550,000. The full-year results for 1997 were no better: net income fell to $19.6 million while revenues declined to $194 million. During the year Oakley took a number of steps to lay the ground for a turnaround, including a renewed focus on product innovation and a ramping up of new product introduction. After belatedly introducing the X Metal line in February, Oakley in April launched Fives, a frame designed specifically for the heads of women, which are typically smaller than those of men. In August the Eye Jackets line was extended with the introduction of a frame called Topcoat. Pursuing an aggressive strategy to achieve direct distribution in its international markets, Oakley began such an operation in Japan in May 1997. One month later, the company acquired One Xcel, Inc., maker of distortion-free face shields used with the sports helmets of athletes in the National Football League and the National Hockey League. Also accomplished was the addition of about 400 new retail accounts in order to lessen the company's reliance on the still struggling Sunglass Hut. By 1999 sales to Sunglass Hut would account for only about 23 percent of Oakley's sales. Continuing its litigious ways, Oakley filed the first of several suits against Nike in July 1997, alleging that the shoe company had infringed a patent covering several Oakley sunglass designs. Nike later countersued, and Knight and Jannard's relationship turned acrimonious. In September 1997 Link Newcomb, who had been the company's COO, was promoted to CEO, replacing Parnell, who was named vice-chairman. Because of the company's poor performance, Jannard took the unusual step of foregoing any compensation for the year, receiving neither a salary nor any stock options.

Rebounding and Diversifying in the Late 1990s and Early 2000s

Soon after suing Nike, Oakley took on the company in the heart of its market--that of footwear. Oakley announced in August 1997 that it planned to enter the athletic shoe market, and in June 1998 the O Shoe made its debut, priced at $125. Despite sporting a funky design and the company's usual high-tech materials, the shoe was perhaps most noteworthy for being manufactured entirely in the United States, at the Orange County plant. This was a direct challenge to the contention of Nike and other shoemakers that they had to manufacture overseas in order to make a profit. A further diversification of the product line came in December 1998 when Oakley introduced its first wristwatch, the Time Bomb, which retailed for between $1,300 and $1,500. The company was also by this time offering a line of apparel and accessories. Other 1998 moves included the purchase of the Oakley division of its Canadian distributor. This drive to directly market and sell its products in foreign markets continued in succeeding years. In November 1999 Oakley's Australian distributor was acquired; in June 2000 the company took over the distribution of Oakley products in Austria and also opened a new office in Munich, Germany.

The year 1999 turned out to be a turbulent one for Oakley as the shoe line, which was not yet profitable, proved to be a drag on earnings. Although revenues increased 11 percent for the year, profits fell 18 percent, to $19.8 million. There was also turmoil in the management ranks, as Oakley hired William D. Schmidt, a former Olympic javelin thrower and former Gatorade executive, as CEO in April, with Newcomb returning to the COO position. In October, with the stock price down to around $6 per share and Wall Street pressing the company to drop the troubled shoe line, Schmidt left the company, having apparently sided with the Wall Street analysts. Jannard refused to back down from his challenge to Nike, and even assumed the CEO position for the first time, vowing to take a greater hands-on role at the firm.

To turn the shoe line around, Jannard reversed course and outsourced manufacturing to a South Korean contractor. Plans were also formulated to significantly expand the shoe line to offer a broader line that would be more appealing to major retailers such as Foot Locker and REI. Oakley had introduced two lower-priced models in 1999, ShoeTwo at $90 and ShoeThree at $99, but then eight more styles debuted during 2000, ranging in price from $75 to $120. By late 2000 the shoe line was in the black, aided by much wider distribution into about 2,700 stores worldwide. Also helping Oakley's shoe sales--as well as the sales of its other products--was the decision in mid-1999 to hire the company's first outside ad agency, which led to a new print campaign that debuted in early 2000. In July 1999 Oakley established its first retail outlet, opening the first O Store in Irvine, California. In October, Oakley made its entire product line available through the company web site, and direct Internet sales totaled $1 million for the final quarter of 1999. Also aiding sales of sunglasses in 2000 were the exploding pair of X Metals that Tom Cruise wore in the opening scenes of the motion picture blockbuster Mission: Impossible 2. Revenues for 2000 increased 41 percent, hitting $363.5 million, and profits skyrocketed 83 percent, to a record $51.1 million. By late 2000, meanwhile, the good news coming out of the Foothill Ranch headquarters sent the company stock soaring; it tripled in value from its level of a year earlier.

Another important development in 2000 was the settlement of the various class-action lawsuits that had been filed in 1996 and 1997 accusing the company's executives of misleading investors. To the chagrin of Jannard, who continued to insist he had done nothing wrong, the company's insurance carrier elected to settle the lawsuits rather than keep fighting them, agreeing to pay the plaintiffs $17.5 million.

In March 2001 Oakley expanded its retail operations by opening its first outlet store, which it located in Milpitas, California. Dubbed Oakley Vault, the store featured mostly products from the previous season and discontinued styles, along with selected first-run merchandise. By the end of 2001 there were two Oakley Vaults along with four O Store locations, with plans in place to expand these concepts primarily in the California, Texas, and Florida markets. Oakley's retail operations gained added importance in April 2001 when Luxottica Group S.p.A. acquired Sunglass Hut. Luxottica had purchased the Ray-Ban brand from Bausch & Lomb in 1999 and was therefore Oakley's main sunglasses competitor. Fears that the new ownership of Sunglass Hut would lead to reduced stocking of Oakley products soon proved justified as Luxottica told Oakley in early August 2001 that Sunglass Hut would order only about one-sixth of what Oakley had been expecting. Responding quickly and aggressively, Oakley expanded its distribution network by partnering with several sporting goods retailers, including Champs, the Finish Line, and Foot Locker. In October 2001 Oakley acquired Iacon, Inc., which was based in Scottsdale, Arizona, and which operated 40 sunglass specialty stores in malls under the names Sunglass Designs, Sporting Eyes, and Occhiali da Sole. During its most recent fiscal year, Iacon had reported revenues of $15 million. In December 2001 Oakley signed a three-year agreement with Luxottica that would return Oakley products to the shelves of Sunglass Hut, although not to the level seen prior to the acquisition.

Oakley had had a strong first half of the year during 2001, but the Sunglass Hut feud combined with the downturn in the U.S. economy and the effects of the events of September 11 sent both sales and profits plunging. For the year, revenues increased 18 percent, aided in large measure by a significant jump in international sales--an increase large enough that non-U.S. sales accounted for more than one-half of overall revenues for the first time. Another key trend was the increasing importance of sales of non-sunglasses products, which accounted for 33 percent of overall sales in 2001 (compared to just 18 percent in 1997). The net income figure of $50.4 million was a slight decrease over the preceding year.

In February 2002 Oakley established an office in Brazil to facilitate the shipping of products to that nation. Oakley further broadened its distribution channels in early 2002 when it began opening "concept shops" in Macy's West and Parisian department stores featuring Oakley products from all of the company's product categories. In May of that year, Oakley and Nike ended their nearly five-year-long court battle, reaching an undisclosed settlement with neither of the two sides admitting wrongdoing and with the companies agreeing to "compete in the marketplace." A new battle between the two rivals was soon underway, however, as a result of Oakley's foray into the basketball shoe market that was dominated by Nike. Oakley was clearly a fierce competitor, with an ever-widening product line and an expanding distribution network, and there seemed to be no reason to doubt that Oakley would remain one of the hottest consumer brands.

Principal Subsidiaries: Bazooka, Inc.; Oakley SARL.

Principal Competitors: Luxottica Group S.p.A.; Marchon Eyewear, Inc.; Safilo SpA; Signature Eyewear, Inc.; NIKE, Inc.; Reebok International Ltd.; adidas-Salomon AG.

Chronology

• Key Dates:
• 1975: Jim Jannard founds Oakley when he begins selling handgrips for motocross motorcycles.
• 1984: Company enters the sunglass market.
• 1986: Cyclist Greg Le Mond sports Oakley sunglasses while winning the Tour de France.
• 1995: Oakley goes public through an IPO that raises $230 million.
• 1998: Company introduces its first athletic shoe.
• 2001: Company acquires Iacon, Inc., operator of mall-based sunglass specialty stores Sunglass Designs, Sporting Eyes, and Occhiali da Sole.