K-Swiss Delights Wall Street with Strong Second Quarter Earnings Performance…

K-Swiss Inc. led all sporting goods industry gainers on Wall Street last week after reporting stronger-than-expected second quarter earnings on a still-very-sluggish domestic business. The weakness in the U.S. caused revenues to fall short of the company’s guidance, but management was still bearish on the outlook for the near future. KSWS shares still closed up 20.6% for the week to close at $28.05 on Friday on the strong earnings report and prospects for continued international growth.

The healthy earnings gain comes as a result of the company’s investments in building its International business, which grew more than 37% in the quarter and produced a 59.2% increase in order backlog at quarter-end. While most other athletic brands are finding Europe a drag on their businesses, K-Swiss has apparently found the secret formula that enables them to use the higher margin business there to help grow gross margins and more than offset weakness in the U.S.

KSWS also saw higher margins on new product introductions and the Classic LX that was due to a price increase instituted in Q3 last year. The company also focused a great deal of energy on cutting expenses, including a reduction in advertising expenditures.

Operating margin was up 300 basis points to 21.9% of sales.
Europe, which accounted for 24% of total worldwide revenues in Q2, saw sales up 53.3% in the second quarter and posted a 73.9% improvement in backlog at the end of the period. The region only represented 15.4% of total company revenues in Q2 last year.

Asked how the company could continue to grow their European business while other vendors suffered from sluggish retail and a heavy promotional environment, company Chairman and CEO Steven Nichols pointed to their focus on controlled growth with select retail partners. He called out their relationship with JD Sports in the U.K. as an example where they are now the number two footwear brand, thanks to a KSWS decision to not sell to JD rival, JJB Sports.

Sales in the Asia region were down 6.4% in the quarter, but the region did post a 14.7% increase in backlog at quarter-end. Asia accounted for 5.6% of total revenues in the period, down 30 basis points from 5.9% of revenues in Q2 last year.

Foot Locker Inc. was again called out as the company’s largest customer and most likely saw some benefit from strength in the International business. Overall, Foot Locker declined less than the total business, dipping 1.6% for the quarter while all other accounts were down 1.8%. FL made up 14.5% of total revenues in Q2, compared to 14.4% in the same quarter last year and made up 17% of total backlog at quarter-end versus 20% last year. That figure would indicate a decrease of roughly 14% in the Foot Locker backlog.

Backlog for all other customers excluding Foot Locker was up 1.0% at period-end.

The total backlog decline was comprised of a 1.5% decline in Q3 backlog to $110.1 million and a 3.1% decrease in Q4 backlog to $71.1 million. Domestic backlog was down 23.8% in the third quarter and down 23.0% in Q4, while International backlog was up 61.3% in Q3 and increased 55.7% for the fourth quarter.

The company said that domestic bookings for Q1 2007 are running “significantly behind” the pace last year.

For Q2, the at-once business represented 5.0% of sales for the period, compared to 17% in the year-ago period. It had been forecast at 5% to 14% of sales.

Unit sales were down 5.2% for the second quarter, which was partially offset by a 2.5% increase in average selling prices.

Classic category revenues were down 2.7% for the quarter, with Original Classics up 3.3% and Other Classics, including the LE product, down 17% for the period. The Tennis business was down 24.3% for the quarter, but sales in the Training category, which includes Basketball, were up 28.1%. The Children’s business was down 3.5% from Q2 last year.

Royal Elastics posted a 17.1% increase in revenues off of a relatively small base and did not post a loss for the period.

KSWS said third quarter EPS should be in the range of 40 cents to 50 cents per diluted share on sales in the $119 million to $129 million range. For the full year, EPS is forecast in the range of $1.90 to $2.00 per diluted share on sales between $470 million and $480 million.

In other moves, the company has tapped former Puma apparel president Alden Sheets to develop and manage the brand’s apparel initiative worldwide. He was at Fila prior to Puma. The range is expected to be developed with both performance and fashion direction.