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Oakley's core strategy remains the same&mdashø develop eyewear that demonstrates superior optical performance and comfort by combining patented technology and unique styling. For over twenty years we have been driven to create better product solutions for the demands of athletes. The same commitment we have toward product performance now is applied to enhancing shareholder value through our performance as a newly public company.
Oakley, Inc. is an innovation-driven designer, manufacturer, and distributor of high-performance eyewear, including sunglasses and goggles. Oakley sunglasses sell for anywhere from $40 to $225 a pair. Key aspects of Oakley'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. 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. With net margins for the company hovering around 25 percent, Forbes estimated that it cost Oakley about $15 to manufacture a $100 pair of sunglasses out of plastic, carbon fibre, and other new materials.
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 about 35 when he began Oakley in 1975. 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, and Jordan has been wearing Oakley sunglasses ever since. Other celebrities who have been associated with Oakley sunglasses include Philip Knight, head of Nike, 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 have been 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, didn't charge his friend Jim 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 $124.0 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 cheapest pair were a $40 pair of Frogskins. Agassi has worn Oakley's eye jackets brand, which were introduced in December 1994. The M-Frame, a high-impact line that features superhard polycarbonate lenses, can 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, originally announced for 1996, were put on hold until 1997. Oakley also made three lines of goggles: H2O, Motocross, and Ski.
Oakley Went 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-$6 higher than the range of $17-$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 has vigorously litigated any unauthorized distribution of its products as well as patent infringements. This helps 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, has spent much of his career enforcing Oakley's patents and trademarks, starting with Jannard's first motorcycle handlebar grip. Oakley has zero tolerance for counterfeiters and uses its sales force, concerned consumers, and hired investigators to seek out counterfeiters and sue them.
Plans for New Corporate Headquarters in 1996
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." The company's founder and chairman, Jim 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 takes visitors past rock formations. The dark-shaded, two-story building comes 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 are the corporate offices, an auditorium, a boutique, and a museum. The adjacent warehouse is the size of four football fields and contains a basketball court. Other features of the Oakley campus included a helicopter landing pad, a small park for employees, a jogging track that circles the area, and an amphitheater. Much of the corporate campus appeared to reflect Jannard's personal style and take into account the youth of the company's workforce, whose average age is 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.
First-Ever Annual Meeting Held in 1996
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 5 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 July the company reported that first half 1996 financial results were good. Profits climbed 32.5 percent to $26.7 million, compared to $20.2 million a year ago. Sales were up 35.4 percent to $111.5 million from $82.3 million the previous year.
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 one 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.
Nike to Compete in Premium Sunglasses Market
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. Interestingly, basketball superstar Michael Jordan was under a ten-year contract with Oakley and was also a member of its board of directors. He was also signed with Nike to endorse its products. With Nike entering the sports performance sunglasses market, it was unclear how he would handle his dual obligations.
Nike began with two styles of sunglasses designed specifically for track and field, the V12 ($160) and the V8 ($145). Nike spent a year developing them with the help of a visual sports expert and tested them on top-flight track athletes. Among the eyewear's special features were small vents on the sides to eliminate fogging and nose bridges that adapted to facial contours.
Nike also announced it would introduce the Magneto brand of glasses in the winter of 1996-97. The unusually designed Magnetos have no temples; they adhere to the face of the wearer with two small, semi-sticky round discs called AMPs that are placed on the wearer's temples. The AMPs hold the sunglasses to the face with tiny magnets. The advantage, according to Nike: the glasses are lighter and won't bounce when you run.
After effecting a two-for-one stock split in early October, problems with one of its principal distributors, Sunglass Hut International Inc., began to show with lower-than-expected sales in 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. Oakley reported a strong third quarter, with profits up 53 percent to $15.7 million versus $10.2 million a year ago. U.S. sales increased 44 percent to $47.4 million and international sales gained 39 percent to $20.3 million. 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.
Acquired U.K. Distributor in 1996
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. Financial terms of the agreement were not disclosed. Based outside London, England, Serval Marketing was Oakley's exclusive UK 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.
Michael Parnell noted that "the U.K. and Irish markets continue to be one of our strongest and most important regions overseas. This acquisition will enable us to integrate one of our most profitable distributors, improve productivity, and better respond to the increasing demand in this growing market."
Closing out a very eventful year, three shareholders filed a class action suit in December against Jim 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 9 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.
Sales in the fourth quarter of 1996 declined sharply, due to 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 $46.0 million from $39.6 million a year ago. The X-Metal line was expected to be introduced later in 1997 along with other new products currently under development.
Pursuing an aggressive strategy to achieve direct distribution in its international markets, Oakley announced it would begin a direct distribution operation in Japan starting in May. Oakley canceled its contract with one of two authorized distributors in Japan that had sold to the snow ski, motorcycle, sunglass specialty, and sporting goods markets. Oakley hoped that establishing direct distribution in Japan would better position the company for long-term growth and increased market share in the country. Its other distributor, which focused on the surf and snowboard markets in Japan, was retained for the time being.
Perhaps indicating the company's strong commitment to superior design, Oakley established a new position, vice president of design, to which Colin Baden was promoted in February. Baden joined Oakley in February 1996 as director of design and advised Oakley on company image issues since 1993. He was formerly a partner at Lewis Architects of Seattle, Washington.
Oakley Geared for New Challenges
At its annual meeting in 1996, Oakley proclaimed its goal was "world domination." To achieve that goal and keep its sales and earnings growth on track, Oakley must deal with several problems that cropped up during 1996 and 1997. Its earnings were severely affected by the performance of its key distributor, Sunglass Hut, toward the end of 1996. That situation may force Oakley to reevaluate its selective distribution strategy. Another challenge may come from a new competitor, Nike, who entered the premium sportswear sunglasses market in 1996. As the future plays out for Oakley, Jannard and his associates will be formulating strategies from their newly built corporate headquarters.
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