K-Swiss total Q1 revenues decreased 18.3% to $122.6 million $150.0 million last year. Net earnings and net earnings per diluted share for the first quarter of 2007 decreased 27.8% and 27.1%, respectively, to $18.0 million or 51 cents per diluted share, compared with $24.9 million or 70 cents per diluted share, in the prior-year period.
At March 31, 2007, total futures orders with start ship dates from April through September 2007 were $172.2 million a decrease of 19.8% from March 31, 2006. Of this amount, domestic futures orders were $88,719,000, a decrease of 37.9%, and international futures orders were $83.5 million an increase of 16.0%.
KSwiss brand revenues decreased to $118.6 million for the three months ended March 31, 2007 from $147.1 million for the three months ended March 31, 2006, a decrease of $28,516,000 or 19.4%. The decrease for the three months ended March 31, 2007 was the result of a decrease in the volume of footwear sold offset by higher average wholesale prices per pair. The volume of footwear sold decreased to 4,178,000 pair for the three months ended March 31, 2007, from 5,443,000 pair for the three months ended March 31, 2006. The decrease in the volume of footwear sold for the three months ended March 31, 2007 was primarily the result of decreased sales of the training, Classic and children's categories of 33.1%, 26.3% and 18.3%, respectively, offset by increased sales of the tennis category of 4.5%. This decrease in volume for the three months ended March 31, 2007 was offset by a higher average wholesale price per pair of $27.63 for the three months ended March 31, 2007 from $26.47 for the three months ended March 31, 2006, an increase of 4.4%, which resulted from a mix of sales.
The breakdown of revenues (dollar amounts in thousands) is as follows:
Three Months Ended March 31,
2007 2006 % Change
Domestic
KSwiss brand $ 61,435 $ 102,642 (40.1%)
Royal Elastics brand 948 742 27.8%
Total domestic $ 62,383 $ 103,384 (39.7%)
International
KSwiss brand $ 57,160 $ 44,469 28.5%
Royal Elastics brand 3,025 2,131 42.0%
Total international $ 60,185 $ 46,600 29.2%
Total Revenues $ 122,568 $ 149,984 (18.3%)
Customer acceptance of our domestic product has been weak and is likely to continue for the near term. We have recently hired several individuals in product design and management; however, it will take additional time for the full impact of the contribution of these individuals to affect our business.
Overall gross profit margins, as a percentage of revenues, increased to 47.0% for the three months ended March 31, 2007, from 46.4% for the three months ended March 31, 2006. Gross profit margin for the three months ended March 31, 2007 was affected by product mix changes and international sales becoming a larger portion of revenues. Gross margins may not be comparable to K-Swiss competitors as management recognize warehousing costs within selling, general and administrative expenses.
Overall selling, general and administrative expenses increased to $36.9 million (30.1% of revenues) for the three months ended March 31, 2007, from $34.4 million (23.0% of revenues) for the three months ended March 31, 2006, an increase of $2.5 million or 7.1%. The increase in selling, general and administrative expenses during the three months ended March 31, 2007 was the result of increases in compensation and compensation related expenses and advertising for the three months ended March 31, 2007. Compensation expenses, which includes commissions, bonus/incentive related expenses and employee recruiting and relocation expenses, increased 9.0% primarily due to an increase in headcount, offset by a decrease in bonus/incentive related expenses that were calculated in accordance with our bonus formula under our Economic Value Added incentive program. Advertising expenses increased 3.5% mainly due to an increase in international advertising as part of a strategic effort to drive higher revenues, offset by a decrease in domestic advertising expenses from an effort to reduce costs as a result of declining domestic revenues. Corporate expenses during the three months ended March 31, 2007 were comparable to those recognized during the three months ended March 31, 2006.
Overall net interest income was $2,211,000 (1.8% of revenues) for the three months ended March 31, 2007, compared to $1,301,000 (0.9% of revenues) for the three months ended March 31, 2006, representing an increase of $910,000 for the three months ended March 31, 2007 compared to the same prior year period. This increase in net interest income was the result of higher average interest rates and higher average balances during the three months ended March 31, 2007.
K-Swiss effective tax rate was 21.3% and 31.7% for the three months ended March 31, 2007 and 2006, respectively. Starting January 1, 2005, provision has not been made for United States income taxes on earnings of selected international subsidiary companies as these are intended to be permanently invested. The decrease in the effective tax rate was mainly due to K-Swiss geographic mix of sales, as international sales have become a larger portion of revenues, with these subsidiaries being profitable and to an increase in our tax-exempt interest income.
K-Swiss also issued guidance for the second quarter of 2007 and full-year 2007. The Company expects revenues for the second quarter of 2007 to be approximately $87 to $97 million and earnings per diluted share to be in the range of 12 cents to 22 cents. The Company expects full-year revenues to be approximately $415 to $440 million and expects to report full-year earnings per diluted share of approximately $1.20 to $1.35.
The Company's estimates for the second quarter of 2007 and full-year 2007 reflect a significant decline in domestic revenues; substantial investments in product development and marketing for the K-Swiss brand, including a retail strategy; continued expansion of international operations; and continued investment in the Royal Elastics brand. The estimates are based upon the following assumptions: gross margins will be approximately 46% to 47%; SG&A will not rise above $37 million for the second quarter of 2007 or $150 million for the full-year 2007; our tax rate will approximate 21%; customer order cancellations will be moderate; and the Company's growth initiatives with respect to Royal Elastics will not exceed a net loss of $0.11 per share for the full year.
Steven Nichols, Chairman of the Board and President, stated, “Consistent with the 2007 outlook we provided in February, we posted another quarter of strong international revenues and backlog offset by continued declines in domestic revenues and backlog. As we have noted before, we will remain patient in letting our new team have an impact in apparel, product development, international operations and marketing. We will also continue to rely on our strong cash position to make the necessary yet financially responsible investments to bring the K-Swiss brand back and build on our successes internationally. The benefits of this long-term approach were evident on both fronts during the quarter with the excitement generated by the signing of tennis star Anna Kournikova as the new K-Swiss spokesperson.”
