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Oakley's Shoe Quest Has Some Investors Running

The company's plan to do with shoes what it did with sunglasses may have more to do with settling a score with Nike than with anything else.

When it comes to sunglasses, there may be no better brand on the market today than



. Coming out of nowhere in the early 1990s, Oakley, led by Chairman Jim Jannard, revolutionized the industry by making its sporty wraparound shades a favorite of athletes and consumers alike.

But over the last year and a half, Jannard has embarked on a new goal -- to do with shoes what he did with sunglasses. Unfortunately for Oakley shareholders, Jannard's zeal may have more to do with settling a score with


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CEO Phil Knight than with anything else.

As the industry primes for its busiest time of year, Oakley is ambitiously launching a new line of footwear, called


, in 600 stores nationwide.

While the company is excited about ShoeTwo's prospects, there are growing concerns that Jannard is so driven to succeed in footwear that he has lost sight of what made Oakley a Wall Street darling in 1995. Investors apparently share these concerns, as the company's stock has suffered lately, falling to about 9 from 15 a year ago.

"Personally, I think Oakley has the best sunglasses on the market, but the Nike thing is just killing them," says Dick Gould, a money manager with

Greenville Capital Management

who sold his Oakley stock in December.

With shareholders abandoning him, Jannard may be set to make a go of it on his own. He already owns 59.6% of the stock, up from 50% three years ago, according to filings from the

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Securities and Exchange Commission

. And two people inside Oakley say there's talk of taking the company private, apparently so Jannard, who hasn't taken a salary or bonus over the last two years, can wage his battle without shareholder oversight.

"My guess is Jannard takes Oakley private," says Gould.

Oakley doesn't believe taking the company private is the best way to achieve its goals, says company spokesman Ron Parham. In the company's April 21 first-quarter earnings release, Jannard stressed that Oakley is determined to improve shareholder value for the long term. "Our preferred path for achieving this objective is through accelerated growth and improved profitability across all product categories in which we choose to compete," he said. Jannard also noted that the company continues to succeed with its core line of sunglasses. Sunglass styles introduced in the past 12 months accounted for 31% of first-quarter sunglass sales.

But according to a Wall Street broker who has done consulting for Oakley, there has been a certain amount of frustration from management that Wall Street hasn't been tolerant enough of the company's long-term spending plans for its footwear division.

"Oakley has lost 5 cents a share and $7 on its stock because of the shoe talk," says the broker, who has a long position in Oakley. The broker, who requested anonymity, estimates that Jannard would have to offer at least 15 a share to buy the rest of the outstanding shares, which would value Oakley at $1.1 billion. Jannard didn't return repeated calls for comment.

When the Sunglasses Are Half-Empty
Oakley's fading stock performance

Source: BigCharts

Marcia Aaron, a

BT Alex. Brown

analyst, says going private could hurt Oakley. "Oakley would lose relevance in the customers' mind," says Aaron, who rates Oakley a market perform. But she does add that with such a big stake, "the thought of bringing Oakley private must have at least crossed

Jannard's mind." (BT Alex. Brown has been an Oakley underwriter.)

Whether his company remains public or goes private, Jannard seems intent on continuing the fight.

Jannard's relations with Nike's Knight, though once friendly, have since soured. Jannard and Knight were thinking of going into business together shortly after Jannard signed

Michael Jordan

to a 10-year eyewear contract in 1995. But Knight then entered the sunglass market himself. The two companies quickly began fighting in the courts as well as the marketplace. And then about two years ago, Oakley decided to barge into Nike's main business.

Oakley's first shoe was released with much fanfare last May, but its sales didn't quite live up to expectations. Footwear sales made up only 1%, or $2.3 million, of Oakley's $232 million in annual revenue last year.

Gross margins are falling thanks to the shoe-business assault. Gross margins were 58.8% in Oakley's first quarter, compared with 60.5% a year earlier. Oakley attributed the decline to its continued investment in footwear.

But Oakley has refused to give up. It has high hopes for the launch of its second shoe this spring, a $90 casual shoe that the company says will appear in over 600 U.S. stores in the second quarter. "We think it appeals to a much broader demographic than our first shoe," says Parham, Oakley's spokesman. The company's first shoe sold for $125 a pair.

"The smart money has looked at this thing and said this wasn't a smart move, and I think they may be right," says Jim Andrews, editor of the

IEG Endorsement Insider

, a sports sponsorship newsletter. "Footwear is highly competitive and highly different than the sunglasses market."

Sunglasses, it seems, are still what Oakley does best. Eyewear made up 79% of Oakley's revenue last year, according to Oakley's Parham. Oakley is launching a new line of sunglasses this summer, named OO (or Double O), a line designed with Jordan's help.

But Greenville Capital's Gould says the company has lost sight of why its eyewear unit became one of the world's best brands. "It's really a shame," Gould says. And some remaining shareholders are losing patience. "The clock," according to one shareholder who requested anonymity, "is ticking."