The Goliath and the David of sports eyewear have made peace, probably because they are very useful to each other. Luxottica and Oakley struck earlier this month an original 3-year agreement that puts an end to their dispute over the pricing of Oakley eyewear. Effective immediately, the deal puts Oakley's sports glasses back into the stores of Sunglass Hut International in the USA, Canada, the UK and Ireland.
The deal does not cover yet the numerous stores operated by Sunglass Hut in Australia and other countries. Afew days ago, Sunglass Hut raised to about 160 the number of its outlets in Australia and New Zealand by acquiring 10 sunglass specialty stores operated by the OPSM Protector group under the Face-It banner. The large Australian group, which won recently a bid for Laubman & Pank Holdings, raising its own share of the Australian optical retail market to over 40 percent, retains about 500 other stores in the Asia Pacific region under the OPSM, Laubman & Pank and Budget Eyewear banners.
Under its new contract with Oakley, Luxottica, parent company of Sunglass Hut, will obtain preferential pricing terms from Oakley if it purchases certain minimum quantities of Oakley eyewear before the end of this year and in each of the subsequent two years, or if Sunglass Hut can show that Oakley represents 15 percent of its own sales. The products of Luxottica, such as those marketed under the Ray-Ban, Arnette and Killer Loop brands, had risen in the past few months from 15 to 40 percent of the Hut's total sales. Luxottica had intended to raise the share of its own products to 50 percent in 2002, but it's now more likely to stay within the more reasonable 40 percent range.
The discounts offered by Oakley to Sunglass Hut, whose details could not be determined, will help improve the chain's gross and operating margin, but not as much as Luxottica had expected.
Oakley stresses that the deal with Luxottica has no bearing on pending intellectual property litigation between the two firms. Last Dec. 3, a California court granted a primiminary injunction against Luxottica, restraining the Italian company and its US retail chains, Sunglass Hut and LensCrafters, from selling certain products with emerald green and ice blue lenses that appear to infringe certain US patents held by Oakley.
Furthermore, Oakley states that it will continue to diversify its product line and its channels of distribution. In particular, Oakley will continue with its Premium Dealer program with retailers, such as Foot Locker and Champs, that carry also the brand's footwear, apparel, prescription glasses and watches.
Luxottica has notoriously been eyeing an outright purchase of Oakley, and it recently indicated to investors that such a move would not create any anti-trust problems, but its likelihood is described as remote because of price.
Its settlement with Oakley leads the latter's management to revise its forecasts for 2002. The California-based firm expects now total 2002 revenues of $500-550 million instead of the previously budgeted $475-550 million, with an 18-32 percent better than expected profitability.
Sunglass Hut decided to stop buying Oakley's products last August, a few weeks after the company decided to raise its own prices in the USA. Prior to the break-up, Sunglass Hut represented about 19 percent of Oakley's total sales, down from a previous peak of 31 percent.
One reason why Sunglass Hut is again Oakley's largest single customer is certainly the fact that Oakley has not been doing well lately in other sales channels. Due in part to the recent decline in holiday travel, the company now expects sales of only about $85 million in the 4th quarter of this year, down from a previous forecast of $90 million.