Some on Wall Street are seeing a bright future for sunglasses maker

Oakley

( OO).

The company's

shares plummeted this year after Milan-based Luxottica bought Sunglass Hut, Oakley's largest distributor, and cut back orders of the company's shades for its thousands of stores. But now analysts say Oakley is on the mend.

This week, the company has announced two major deals to make up for the loss of shelf space in Sunglass Hut. Shares are still about 50% off their 52-week high of $26.56 reached in mid-May, but analysts expect further deals to be announced in the remaining weeks of 2001; the company has said it is negotiating with the likes of upscale department store chain

Nordstrom

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, for example. The upshot: The shares could go much higher.

"We believe Oakley is one of the few investments in our universe that is not dependent on holiday sales for the vast majority of their annual earnings," says Eric Beder, an analyst with Ladenburg Thalman who upgraded Oakley to a strong buy rating on Tuesday and has a 12-month price target of $20 on the stock. His firm doesn't have a banking relationship with the company.

Foothill Ranch, Calif.-based Oakley, once a favorite among momentum investors but now seen more as a value play, is not widely covered on Wall Street. But another analyst, Jennifer Black, of Wells Fargo Van Kasper, also has a strong buy rating on the stock, and a higher price target -- $29 a share. (Her firm has had a banking relationship with the company.)

Beder says investors considering Oakley shouldn't be deterred by the slowing economy because the company's business is strongest in the spring and summer months. When those seasons swing around again next year, the economy could be on the mend. In the meantime, he says that the announcement of further distribution deals will likely drive the stock higher.

"Right now you are kind of buying it for a few quarters ahead," he says.

If the company is able to completely replace the lost sales from Sunglass Hut -- as Beder is confident it will, perhaps sometime next year -- and return to annual earnings growth of 20% or more, then the stock is very cheap at current levels. The stock trades at around 15 times current 2001 earnings estimates, and about 14 times next year's estimate, according to First Call/Thomson Financial. This compares with a five-year annual estimated growth rate of 22%.

Future's So Bright
Declining sales to Sunglass Hut

Source: The Company

The percentage of company sales that came from Sunglass Hut had been declining even before Luxottica bought the retailer. During the 12 months that ended June 30, 2001, 19% of sales come from Sunglass Hut, compared with 21% in fiscal 2000. This is down significantly from a peak of 31% in fiscal 1996. Ron Parham, a spokesman for the company, says that figure is currently "significantly less than 19%," but that the relationship has not been severed completely. He says the company will likely update the figure when it reports its third-quarter earnings in October.

Expanding

On Monday the company said it acquired Iacon, a Scottsdale, Ariz.-based sunglasses retailer that operates 40 stores. It followed this Tuesday with the announcement it was expanding its retail partnership with Foot Locker, a division of

Venator

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. The company said the expansion will begin in October, and by November Oakley eyewear will begin appearing in 350 U.S.-based Foot Locker shops.

"Our new partnership with Foot Locker is another step in our strategic plan designed to overcome Sunglass Hut's decision not to carry ... Oakley products," said Jim Jannard, the company's chief executive, in a statement.

These two deals follow an announcement earlier in September that the number of Champs sporting goods stores carrying Oakley shades would rise to 500, from 370.

In addition, the company has also been trying to compensate for the lost sunglasses sales with a bigger push in other gear, such as watches and apparel, Beder says. These items, however, carry much lower gross margins then the 70% to 90% typical of eyewear. Thus, it is crucial the company continue to ink distribution deals for sunglasses.

"Those

margins are hard to replicate," he says.

But that is just what management needs to do -- and is doing.