K-Swiss Expects U.S. Woes to Last Through 2007; International Continues Gains…

K-Swiss, Inc. doesn’t see a turnaround in its business until 2008 and spent much of the time on its quarterly call with analysts last week preparing them for a tough 18 months ahead in the U.S. market. So how does the market respond? How about an 11% increase in share price for the week to close at $35.13 on Friday afternoon. K-Swiss has seen this cycle before and Chairman and CEO Steven Nichols will use the history lesson to build on the future of the brand. A number of key personnel moves made in the last six months and a stronger international business this time around may make the turn back to positive growth a bit more sustainable this time around. In the mean time, the company continues to do what it did the last time it went through a downturn — it keeps buying back shares. Perhaps Wall Street learned from the last time as well and plans to invest alongside Mr. Nichols and the company.

What is quite evident is that the company will take a similar road as they did the last time and not chase after volume to please The Street. The strategy runs counter to the approach others may take in tough times and is focused on building on the company’s performance Tennis past and the country club image that create its allure here in the U.S. and was the foundation for the solid growth in Europe of late.

As part of this strategy KSWS will start to reallocate more marketing dollars from the current TV and print campaigns to more online and digital media opportunities and local brand-building efforts in retail markets. The local efforts are expected to focus on in-store events and sponsorships in select cities and the online efforts include upgrades to the kswiss.com site, development of a Club K-Swiss online user group, and advertising on community-based websites frequented by the 18- to 24-year-old consumer. TV and print campaigns will get a complete makeover to reflect the country club image of the brand.

The other part of the strategy is to pull more product out of the retail pipeline in an effort to keep the brand clean. Mr. Nichols said they recently pulled back distribution of the Classic from 40% of their distribution. He said some retailers are now cutting back on other K-Swiss product in response to the Classic cut backs.

“We’ve been through this before,” said Mr. Nichols. “Our inventories are up and we’re not going to run a fire sale. We’re so fortunate we finished [the quarter] with $240 million worth of cash. That’ll allow us to sit on $5 or $6 million worth of inventory for a couple of quarters and not have close-out shoes compete with our full-price shoes.”

While the overall revenue results for Q3 were above previously issued guidance for revenues to reach a range of $119 million to $129 million, the low single-digit decline masks a very troubled U.S. business. Mr. Nichols thinks the impact to the overall business will be less pronounced than in downturns in the past, because the business is more diverse globally, approaching a 50/50 balance for next year between the U.S. and International business, compared to the 95% that the U.S. comprised of the total the last time around.

Part of the International growth will come from a focused owned-retail strategy, one that will trickle over into the U.S. next year. Europe sales, which accounted for 26% of Q3 sales up from 15% last year, were up 70% in Q3 and order backlogs were up 38% at quarter-end. Sales in Asia were up 24% for the period and backlogs were up 66%.

The overall at-once business was stronger-than-expected in Q3 as well, making up 21% of sales versus the 8% to 17% forecast, but still below the 22% of the business last year.

The average selling price for K-Swiss product was $27.90 for Q3, up from $26.00 in Q3 last year.

On a category basis, Classic Originals, which accounted for 53% of Q3 revenues, grew 3% for the period, while the Other Classics business, which includes the LE product, was down 10% for the quarter to 14% of total revenues. The Children’s business was described as “essentially flat” for the quarter, while Tennis category sales increased 9% and the Training category, which includes Basketball, was down 42% for the period.

Royal Elastics sales were up 14% for the third quarter off a relatively low base.

K-Swiss reported that sales to Foot Locker, Inc. were down 32% for the quarter and represented just 14% of total worldwide revenues, compared to 20% in Q3 last year. Sales for all other accounts were up 5% for the period. Foot Locker represented 14% of the order backlog at period-end, compared to 19% at the same time last year. Foot Locker backlog is down 37%, while the balance of the business posted a 5% decline.

>>> Perhaps the fact KSWS shares are now trading at ten times their low point during the last downturn gives The Street reason to be optimistic…