Luxottica Is Getting a Winner in Oakley

A look at trendsetting eyewear manufacturer Oakley's (NYSE: OO  ) latest earnings results shows that it is living up to the 16% premium it commanded when Luxottica (NYSE: LUX  ) snatched it up last month.

For the second period, revenue growth was robust, increasing 29% compared to the same quarter a year ago. All segments of Oakley's business contributed solidly, with optics, apparel, footwear, accessories, and retail posting high-double-digit growth. And whether it's the U.S. market or international, the company is seeing a tremendous customer response to its products.

On the margin side of the equation, aside from one-time charges related to the merger with Luxottica, there were additional expenses attributed to compensation and inventory increases. That said, there is nothing here of real concern. Once the merger is complete, expect Luxottica to find significant cost savings by eliminating redundant overhead expenses as well as manufacturing and distribution procedures. These savings are expected to add up to about $134 million per year within three years.

The only other figure that really jumps out at me is Oakley's inventory, which is up 34.6% compared to the same period a year ago. What we want to be sure of is that Oakley will not be left with excess inventory a quarter or two from now, and forced to get rid of it with markdowns -- that's a good way to put a dent in profits in a hurry. Management attributed the sharp increase to new retail store growth, the impact of acquisitions, and increased inventory to "support higher sales volume" for eyewear -- that all sounds good. Where there may be some concern is in the apparel segment, as management pointed to increased inventory in this category as well, but did not attribute it to higher sales volume. We will want to take note of this in future quarters to see if Oakley took on too much apparel for its own good.

Back in April 2005, when Oakley's stock was sitting in the low teens, I advised investors to take a closer look at the company because of its accelerating sales and expanding margins. Since then, the stock has more than doubled. Aside from the little red flag regarding apparel inventory, the picture looks still looks bright for Oakley ... and for Luxottica, too.

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Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.


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