FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Sunglass Hut International
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255 Alhambra Circle
Coral Gables, FL 33134
(305) 461-6100

UNION CITY, Ca., December 5, 1996/FOOLWIRE/ --- Sunglass Hut released third quarter results recently, showing a loss of $(0.05) per share compared to net income of $0.05 per share in 1995. Third quarter results were negatively impacted by sales weakness in both comparable and new stores and by $0.03 per share in charges to reflect higher than anticipated inventory shrinkage in the former Sunsations stores and changes in manufacturer's defective return policies which resulted in defective product write-offs. These charges were recognized as a result of the company's physical inventory as of the end of the third quarter following the completion of the consolidation of the company's North American distribution activities.

WHAT HAPPENED WITH THE CHARGES. The first day of the third quarter they conducted a chain-wide physical inventory -- their first full physical inventory during fiscal 1996 and their first since the consolidation of their North American distribution function in Atlanta. The results of this inventory highlighted an unanticipated increase in inventory shrinkage of about $1 million, primarily the former Sunsations store locations. Sunglass Hut locations' results were in line with expectations. They believe the increase in shrinkage at Sunsations was caused by a combination of high in-store employee turnover as they upgraded the Sunsations field staff, an increase in in-store inventory levels as they increased product levels in those stores in an effort to stimulate sales, and transitional start-up issues with the consolidation of their Atlanta distribution center. At this point, the transitional issues related to the distribution center have been resolved and they are continuing to address in-store issues to bring these stores' shrinkage levels back to the standards they realize in the other Sunglass Hut stores.

MANUFACTURER DEFECT ISSUES. Also during the third quarter they recorded a $1.5 million charge to gross margin to reflect changes in manufacturers' return policies. Essentially this charge has arisen as some of the manufacturers have taken a position that Sunglass Hut stores have taken back from customers non-warranty product. This primarily includes scratched lenses. As a result, they will not grant Sunglass Hut full credit for these returns. Acceptance of these returns from customers was consistent with their past practices and in the past Sunglass Hut has received full credit from these manufacturers. The $1.5 million charge reflects a negotiated settlement whereby Sunglass Hut splits the cost of non-warrantied customer returns with the manufacturer. It is important to note that the manufacturers still cover the cost of any warranty-related defects. In order to address this issue on a go-forward basis, Sunglass Hut has taken several steps to reduce the amount of non-warrantied product returns accepted by their stores including covering this issue during recent store training meetings, changing their receipt sleeves to clearly indicate that scratched lenses are not a warrantied defect, and establishing a lens replacement/repair program in order to give customers an alternative and give Sunglass Hut the opportunity to generate incremental sales. While they anticipate some incremental costs in this year's fourth quarter, they do not expect this issue to negatively impact margins in 1997. These stricter defective initiations have clearly impacted the sales of some of those vendors who did change their policy.

SALES AND COMPS. In terms of sales, third quarter sales were $113 million, a 23.4% increase over 1995 sales of $91.4 million. Monthly comps were as follows: August was 2.5% comp versus 18.8% last year, September was 2.1% against 9.6% last year, October was a negative 1.7% against 12.8% in 1995. The total for the quarter was 1.2% against 1995's 13.8%. As previously indicated, during the quarter both comparable and new store sales trends weakened as the factors that negatively affected overall sales continued. They believe these factors are: cooler weather globally compared to 1995 and a general lack of exciting new product on the market which is impacting their destination shopper. As previously indicated, they expect general business trends to remain unchanged during the fourth quarter and, accordingly, anticipate fourth quarter earnings per share to fall below 1995 levels.

EXPANSION STATUS. In terms of new store expansion, during the third quarter they opened 98 new locations -- 50 sunglass specialty stores, 13 licensed departments, 13 EyeX stores, and 22 WatchStation stores -- and closed 13 stores for a total of 2056 locations at quarter end. On a year to date basis, they have opened 186 Sunglass Hut specialty stores, 121 licensed departments, 23 EyeX, and 32 WatchStation stores for a total of 362 new locations. As indicated in their press release they are evaluating the profitability of their existing 2000 stores in order to eliminate marginal or unprofitable sites through closure. While this process is not yet complete, they expect this evaluation will identify sites for closure, many of which will be the former Sunsations locations and some middle market locations which they opened to compete against them. These stores are much more heavily impacted by the industry slowdown because they are lower volume stores. They anticipate completing their evaluation during the next 90 days and recording the cost associated with anticipated closures during the fourth quarter of fiscal 1996.

INVENTORY LEVELS. Inventory at the end of the second quarter approximated $180 million. They recognize this level is greater than optimal due to the slowdown in overall sales growth coupled with excess in-store and warehouse inventories. They have substantially reduced fourth quarter purchase order quantities and will continue to return excess product to vendors. They are very confident that they are on track to achieve their goal of $150 million in inventory by year end.

SUCCESS FORMULA. This transition has forced them to take a hard look at their success formula. First of all, in terms of real estate, their initiative is to have exciting, attractive stores in prime locations. In merchandising their goal is to have dominant assortments of wanted products at great prices. The last piece of their success formula has been people -- great associates providing a high level of service.

REAL ESTATE. In evaluating real estate they took a hard look at each of their major channels. They recognize there is a finite number of traditional mall locations which exist for them due to their penetration. That said, they believe there are many second-store opportunities that exist in high sales-per-square-foot malls where they have stores which exceed $400,000. They will continue to focus on these better malls. In terms of street locations, they have learned that the great locations in urban centers are those that attract both local and tourist traffic and that is where their focus is as they go forward. Transportation terminals are home-runs and they want to do as many as possible as soon as possible. Outlet centers which exceed 250,000 square feet and are in high-traffic and combination tourist locations are where they are focused today. Entertainment centers have provided a new channel for them too and they are targeting these which exceed 150,000 square feet and also those that thrive on local and tourist traffic. On the international front, they are becoming more selective and are going back to their basics of new market entries which is through transportation terminals, high-traffic street locations, and high-profile department stores, in that order. That was their success formula in the UK.

LICENSED LOCATIONS. Their vision has been to divide the license strategy into three distinct segments -- the high-end speciality stores which could be Neiman's, Saks, Nordstrom, Bloomingdale's, etc.; the traditional department stores like Burdine's, Federated Group; and the mass merchants like Sears and Penney's. Traditional specialty stores will operate under the Sunglass Hut or Strictly Sunglass names and mass merchants will operate under the Sunglass Source name. Their expectations in terms of volume have changed. They initially thought they could do 0.75% to 1% of the store's total sales. The experienced percent is closer to 0.5% to 0.65%. Based on their experience they have come to the realization that the business needs tiered into two separate types of licensed arrangements. The two distinct tiers are as follows: department stores doing between $30-40 million and above there would be no change in their current operating format. The department as they have been constructing it and staffing it could be successful. Stores here can generate anywhere in a range of $175,000 to $600,000 plus, depending on the location and volume levels of specific stores. No changes are needed in their current operating format here. Under $30 million, they are going to install self-service spinner programs which they service similar to rent jobbers. Here they work on the arrangement of selling percentages and would be paid as a commision to the host store and also agree upon a level of shrinkage. They have identified a couple of service-oriented manufacturers who would manage this operation for them.

DIRECT MAIL. Over the past 3 years, their cataloging program has grown from 2.5 million mailings in 1994 to approximately 14 million mailings in 1996. In 1995 they realized approximately a 2% comp store increase that was directly related to consumer response. In 1996 they have seen a decline in the response and the revenues. They believe the contributing factors are that there are a lower number of new, exciting products featured in the catalogs which is impacting catalogs just like it's impacting store business. Next is the decline in their core vendor's market share which is impacting sales. Also contributing is probably an overuse of their own database which totals approximately 6 million names. Using this information, their plans for 1997 will be modified. They will have fewer mailings with a stronger emphasis on analyzing their response and sending catalogs out during peak time periods. The creative will be updated to highlight new products, vendors, and value on a more consistent basis and consistent utilization of catalog images and messages for all of their in-store use to gain some synergies. They are also testing use of postcards for introducing new products and business strategies like WatchStation. As far as the Internet is concerned, they have a home page under construction on the Internet at http://www.sunglasshut.com. When their page comes live it will allow Internet browsers to access company profile and store information, catalog information, new product updates, new business strategies, and the annual report. They believe the Internet will give them the opportunity to keep their current customers informed and motivated as well as bring new customers into their stores.

MERCHANDISING. Clearly they see a resource market shift. The overall market shift from 1994 to today has generated a new resource structure outside of the core resources they used to depend on. In 1994, 65% of their business was generated by four resources -- Ray Ban, Serengeti, Oakley, and Revo. In 1996 these resources will account for 48%. They project this will continue to shrink. This has been driven by two primary factors -- first of all the shift in market trends and an emergence of new key suppliers. The challenge they are currently faced with is the ability of many of their vendors to support their growth needs. With their projected growth rates they are concerned that many small resources don't have the capital structure to support this growth. After examining many of these resources, they have developed two courses of action. For those resources who they believe have either sufficient brand equity or proprietary performance features, they have introduced them to the capital market. For those resources who have neither of the above, these resources are candidates to be absorbed into Sunglass Hut's expanded private label program.

REDUCTION OF CORE RESOURCES. As brand names have become more important, there has been a major shift in the market share their core resources represent. They have also experienced a reduction in those core categories which have been driving the business for years -- products like Wayfarers, Aviators, Serengeti Drivers, etc. With shorter product lifespan and an increase in new niche businesses, they expect to continue to see an erosion in the core categories dominated by large vendors. Part of this is due to changes in product lifespan. One of the major factors affecting change in the sunglass industry is the significant reduction in the lifespan of new products. The industry has clearly seen the last of products like Ray Ban Wayfarers and Aviators which have had lifespans continuing over several decades. Today's product is more fashionable by nature, must be delivered to the market on a more timely basis, and has a substantially shorter lifespan. This change has dramatically impacted major manufacturers like Bausch and Lomb and forced them to move from a manufacturing operation to more of an assembly operation which outsources the bulk of its needs. They recognize this shift in product lifespan and this also presents the potential risk of regular obsolescense in the future and Sunglass Hut is committed to maintain significantly less supply of product-on-hand going forward.

FASHION AND DESIGNER IMPACT. With the trend in apparel continuing to be "understated," accessories like sunglasses, shoes, and watches represent an opportunity for the customer to distinguish themselves. Therefore, sunglasses are becoming even more important as a fashion accessory. One of the factors impacting sunglass sales in 1996 was the shift of the industry into the sports segment. Because of the 1995 success of the Oakley E-wire and the Oakley Eye Jacket, two styles which revolutionized the design of sunglasses, many knockoffs of these successful styles were spawned by several manufacturers. Consequently, in the Summer of 1996 many customers who were seeking traditonal fashion looks found little to choose from in the marketplace. In 1997, the product assortment to be delivered will incorporate a shift back into traditional fashion sunglass stylings from major designers such as Ralph Lauren, Donna Karan, Calvin Klein, Liz Claiborne, Guess, etc. They have seen the resurgeance in the fashion business in the third quarter from the new products which have been delivered to date. Looking at the sport performance market, the sport business continues to grow, especially with the addition of sport specific products from Oakley and the polarized classification which is taking on tremendous market share. New manufacturers are continuing to emerge with labels such as Nike, Fila, and Reebok, as well as the use of key athletes to promote these products.

HOW THEY WILL DEVELOP THE SUNGLASS HUT BRAND. Many of the merchandise resources generate between 1-5% of their sales volume who have no brand equity or proprietary features are candidates to be absorbed by their private label brands. Once you get past their key resources, the power of a few thousand Sunglass Hut doors, they believe, is more important than the value of lesser known brands, especially if they have no proprietary features. This shift to more private label product will require a marketing program with the objective of positioning Sunglass Hut as the headquarter store for dominant assortments of fashionable products being sold at value prices. They see product opportunities in the fashion area between $70 and $130, in the sport area between $50 and $150, opening price points between $30 and $50, the entire kids category, and the entire accessories category. To accomplish this they need to incorporate a design team at Sunglass Hut that takes direction and executes design. They also need to bring on a couple of brand managers who will be responsible for product direction and product mix, developing the pricing strategy, coordinating, sourcing, and shipping.

MARKETING. Recognizing that this industry is under-developed because they don't have, like the athletic footware industry, two giants innovating and spending significant marketing dollars to create demand for product, remember that the premium segment accounts for more than half of the dollar volume, but only 15-17% of the units being sold. Sunglass Hut can't wait any longer for something to happen so they are going to take more of a leadership role in raising awareness in the need for quality sunglasses, attracting new customers to the market and building their own image. Recognizing that, they are really looking at three areas: industry initiatives whereby they are putting together some marketing campaigns that they can work with their current major suppliers to develop a strategy for raising awareness and attracting new shoppers; second is building the Sunglass Hut image and moving to the next plateau they must devote significant marketing dollars to the development and implementation of a total marketing plan which focuses on Sunglass Hut as a headquarters store for wanted, fashionable products at great values -- in other words, you're making a terrible mistake if you're not purchasing your sunglasses from Sunglass Hut. The third piece is brand marketing to support the strategy of developing more private label brands they will be allocating marketing dollars to build and maintain the image of these new brands.

FOURTH QUARTER. They are doing a visual facelift in the stores with a new site package, new banners and balloons. They felt they needed this because not only was new products flat in the stores but they also felt that the presentation was flat. They have a great game plan out for the stores with merchandising guidelines, concepts, and incentives. In terms of the catalogs, they have 3 this year -- a holiday/combo catalog which will have 2 million pieces mailed including special offers and new products, they have an Oakley catalog featuring new products and focusing on optical, and they have a catalog for Australia which will have purchase with purchases and gifts with purchases. They will also run some test ads in key markets where they have clusters of stores highlighting sunglasses as the perfect gift. Obviously they are hopeful that these initiatives will fuel sales for the fourth quarter.

SUNSCRIPTIONS. They continue to do SunScriptions, which are prescription sunglasses in Sunglass Hut stores as a great opportunity to build their comparable store sales volume by attracting new customers to existing stores. They believe the training program developed by the initial rollout locations was way too technical and consequently intimidated many of their sales associates. This program content has been revised focusing on single lens dispensing. Stores which have been emphasizing a SunScriptions program have been generating comparable store sales at a much higher rate than other Sunglass Hut stores in the same area. They will continue to roll this strategy out in the North American market. They are currently at about 230 stores and they still see the potential to exceed 500 stores. They are testing a roving optician concept in New York and Boston. From a marketing standpoint, they are going to continue to enhance the signing they have at store level, utilizing more catalog inserts going forward. They have in-store handouts that are being developed for markets and they are exploring newspaper advertising in key markets to support this program.

PEOPLE. In relation to people they are focused on the following. First of all recruiting. They are focusing their recruiting on finding the best talent based on their known success factors of what makes great sales associates. On the training side, they are enhancing their training process to ensure consistency and a learning and performance through online reference systems, strengthening their pre- and post-hire orientation processes to promote faster assimilation into the organization, and a strong focus on leadership training for their district and area managers. Last but not least they need to constantly keep working on more effective communication tools to keep these people pumped up and motivated.

NEW BUSINESS STRATEGIES. They are clearly focused on WatchStation versus EyeX because WatchStation more closely mirrors the Sunglass Hut model. That said, as of October they have opened 33 WatchStation stores which on average have been open less than 3 months. Initial results for WatchStation are positive and are meeting their expectations. However, any read is premature given that fourth quarter sales play such a large role in determining annual sales volume. Approximately 40% of annual volume is expected during the fourth quarter. Thus far they have learned the following. Similar to Sunglass Hut, WatchStation stores seem to establish their sales levels quickly, not requiring expensive marketing support to build volume. Thus, similar to Sunglass Hut, the quality of WatchStation locations is a key to driver to total volume. Both in-line and kiosk locations are performing well. WatchStation stores at LA airport are performing very well. The average retail price point is approaching $100. Their top resources are Skagen, Guess, Fossil, Freestyle, Swiss Army, and Nautica. They are actively seeking additionl vendors to add to their assortment and during the third quarter they added Hamilton. Their goal is to maintain the most current trends within the market and also an assortment that provides the customer with a unique approach to purchasing watches. The characteristics of the business appear to be very similar to Sunglass Hut and stores seem to ramp up in volume relatively quickly. They continue with their plans to open 50 to 55 WatchStation stores by fiscal year end. They will more fully evaluate this concept once the holiday sales results are complete. Expansion plans for fiscal 1997 have been back-ended to allow for this evaluation to occur prior to committing to any major expansion.

SUMMARY. While they believe that the great weather and strong product introductions in 1995 masked some developing sunglass industry problems, they are focused on the factors they believe they can control -- the fundamentals of their business strategy. In addition they will be working with their key suppliers to get new product to the market on a more timely basis in 1997 as well as other initiatives which will attract new users to an under-penetrated market.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.