SPY'S PARENT COMPANY CUTS Q1 LOSSES DESPITE FALLING MARGINS

19 May 2008     Orange 21  Spy  Zumiez

Orange 21 said consolidated net sales increased 23% to $11.6 million for the three months ended March 31, 2008 from $9.4 million for the three months ended March 31, 2007.

The maker of action sports and youth lifestyle products attributed the increase to increased sales and marketing efforts, an improvement in product mix and availability and increased prices. Net losses declined sharply to $900,000 compared to a net loss of $1.7 million for the year earlier quarter.

Orange 21 sells its primary brand, Spy Optic, through a variety of action sports/youth fashion retailers, including Cycle Gear, Inc., No Fear, Inc., Pacific Sunwear of California, Inc., Tilly's Clothing, Shoes & Accessories and Zumiez, Inc.

Consolidated gross profit increased 10% to $5.4 million from $4.9 million for the three months ended March 31, 2007. Gross profit as a percentage of sales fell 500 basis points 47% largely due to increased materials costs due to increased gas and oil prices and an increase in Euro foreign exchange rates, partly offset by decrease in outsourcing costs at LEM, our subsidiary and primary manufacturer. The increase in gross profit is also due to net decreases in inventory reserves for slow moving and obsolete inventory that is no longer being marketed for resale of approximately of $300,000. During the three months, inventory with an adjusted basis of $100,000 was sold for approximately $200,000 in revenue, affecting margins by $100,000, or 0.7% of net sales. The remaining decrease in the inventory reserve was mainly due to the disposal of product which has no effect on the results of operations.

Sales and marketing expense decreased 25% to $3.0 million from $3.9 million for the three months ended March 31, 2007. The decrease was primarily due to a $600,000 decrease in depreciation expense for point-of-purchase displays in the U.S. partly offset by a $200,000 increase in expense related to purchases of new point-of-purchase displays.

General and administrative expense remained consistent at $2.5 million.

Shipping and warehousing expense increased 29% to $500,000 from $400,000 for the three months ended March 31, 2007. The increase is primarily due to increased employee-related expense at LEM.

“We made progress in executing against our business plan this quarter, moving into a phase of growth while also continuing to work on improving operating efficiencies," said Mark Simo, Orange 21’s Chairman and CEO.