Orange 21

Orange Crushed
By Lawrence Carrel Published: February 18, 2005

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Orange 21, Inc. (ORNG)

Share price as of Thursday's close: $9.50
Share price now: $6.60
Change: -30.5%
Volume: 2.3 million shares, daily average 68,300 shares
Last time this low: All-time low
52-week high: $11.50
52-week low: $9.05
Forward P/E before announcement: 38.0 (based on 25 cents a share)
Forward P/E after announcement: 30.0 (based on 22 cents a share)

INVESTORS LOOKING AT ORANGE 21 (ORNG) through rose-colored glasses were certainly seeing red on Friday.

Shares of the Carlsbad, Calif., company sank 31% to $6.60 after the maker of premium sunglasses and goggles issued 2005 profit guidance that disappointed Wall Street. Increased spending to boost Orange's profile in Europe will hurt the bottom line this year. The effects of the higher costs prompted one of the two analysts covering Orange to slash his rating and price target on the stock.

"Today [Orange's stock] took a beating after an analyst released a report cutting his earnings estimate," says David Aferiat, managing partner of Trade Ideas, an Encinitas, Calif., market-analysis firm that provides real-time stock-trading tools.

Before the market opened Friday, Rommel Dionisio of Roth Capital Partners, a Newport Beach, Calif., investment bank, lowered his rating on the stock to Neutral from Buy and cut his price target to $9 from $13. Dionisio reduced his 2005 earnings estimate to 18 cents a share from 27 cents, and 2006 estimate to 30 cents from 38 cents.

"The difference in net income between management's new guidance and our prior forecast is primarily due to management's intention to now increase investment in its European sales infrastructure to achieve greater penetration of that market," wrote Dionisio in a Friday research note. "Management intends to spend an incremental $600,000 to $700,000 annually in Europe above prior expectations. While such greater investment in the European sales and distribution platform should drive future top-line growth, we note that such expenses certainly have upfront cost ramifications, which should negatively impact operating margins in the near term before such investments generate meaningful top-line results." (Dionisio doesn't own shares of Orange 21; Roth Capital Partners managed the company's initial public offering.)

Dionisio's costly downgrade was in reaction to Orange's announcement late Thursday that 2005 earnings per share would rise between 70% and 90% on a 25% to 30% gain in sales. In a conference call following release of the forecast, Orange Chief Financial Officer Michael Broward put 2005 earnings at $1.3 million to $1.5 million. The company projected 2004 earnings of $800,000, a 60% rise over 2003. Sales for 2004 were projected to climb 22% to $33.5 million. Audited results for 2004 are due out on March 21.

"I'd like to make one clarifying point in our press release issued [Thursday]," said Broward during the conference call. "The earnings-per-share base on which we are forecasting our growth and 2005 guidance assumes eight million shares outstanding; it is not based on a weighted average share calculation for 2004."

Orange didn't offer per-share profit estimates for 2004 or 2005, but based on eight million shares outstanding, 2005 earnings should come in between 16 cents and 19 cents a share, bracketing Dionisio's lowered forecast of 18 cents.

Orange 21, which went public on Dec. 14 at $8.75 a share, makes sunglasses and goggles for the action-sports market. Think hip, high-end eyewear for surfers, skaters and snowboarders. Formerly known as Spy Optic, its brands include Spy, Scoop, Dri-Force and Spy Optic. Orange's products are carried at 4,100 outlets, including those of retailers No Fear and Pacific Sunwear of California (PSUN). Prices range from $70 to $225. No Fear, based in Carlsbad, Calif., owns about 40% of the company.

On Jan. 28, Orange unveiled plans to reorganize its European operations, in particular to capture more of the fashion-attuned consumers in France and Italy. It also hopes to better position its brands ahead of the 2006 Winter Olympics in Italy. While admitting that upfront costs would hurt the near term, Orange said the investment would create "significant long-term strategic benefits [and] is necessary to achieve our growth plans for the European market."

"We grew quite well in 2004 in the European market, about 42%," said Barry Buchholtz, Orange's chief executive, during the Thursday conference call. "But, it's a market with a lot of expansion opportunity for us. And the right move is to grow the business and invest in infrastructure."

Buchholtz expects European business to pick up in 2005, but he said substantial improvements won't be seen until 2006.

Quote:
"The company is making an investment for growth," says Aferiat of Trade Ideas. "Strategically, it makes sense. That is where they want to expand. They want to participate in the X Games and the Winter Olympics, and they need to get in a year ahead of those games to make more of a footprint. Right now, I think the stock is a buying opportunity. It made a 52-week low, and there is no reason for it to go lower. And it began consolidating late in the day on heavy volume. The analyst only lowered his stock price to $9, so I could see it getting back to $9 within the next year." (Aferiat doesn't own shares of Orange 21; Trade Ideas doesn't do investment banking.)

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