K-Swiss, Inc. Backs Off Positive Trend for Q4; Sees 2008 as the Year…

K-Swiss, Inc. will apparently continue to limp through the market this year, looking ahead to 2008 for any real hope of a turnaround. The company had initially expected to see a positive turn in the fourth quarter of this year, building in a 7.5% increase in their internal model, but the realities of the current order backlog situation has caused them to revise their expectations to flat sales for the fourth quarter. While international has been the clear driver for K-Swiss over the last two years, management acknowledged that backlog in the international markets, particularly Europe, is “not looking as strong as it was before.” Still, the company is able to point to a 15% return on sales and Royal Elastics is starting to break out, at least in the international market.

Revenues for the first quarter came in slightly below the mid-point of the company’s guidance, but earnings hit at the high end of estimates, due primarily to a shift in planned marketing expenses to later quarters. At-once orders represented 10% of sales in the quarter, compared to 16% of sales in Q2 last year.

K-Swiss brand revenues decreased 9.4% to $118.6 million for the first quarter from $147.1 million in the year-ago quarter. Brand revenues in the U.S. fell 40.1% to $61.4 million, while international sales increased 28.5% to $57.2 million. Classic category sales were down 25% for the period, with the cornerstone shoe, The Classic, down 52% for the quarter. Original Classics were down 24% and Other Classics, when including LE product, were down 27% for the period. The children’s business was down 14% for the quarter and sales in the training category were down 31%. On the up side, the tennis business grew 28% for the quarter.

Royal Elastic sales were up 39% for the quarter, with domestic revenues increasing 27.8% to $948,000 and international sales growing 42.0% to $3.0 million for the period. Royal operated at a loss of two cents a share for the quarter, a penny better than last year. The full year cost is still pegged at 11 cents per share.

Overall sales in Europe were up 28% for the quarter and backlog was up 15% at quarter-end. The region accounted for 34% of worldwide revenues in the first quarter, up from 22% in the year-ago period. Sales in Asia were up 32% in Q1 and backlog increased 19% versus the prior-year period. Asia now represents 9% of revenues, up from 6% in Q1 last year.

KSWS said their largest customer continues to be Foot Locker, Inc. and declines are more pronounced there than the balance of the market. Worldwide sales to Foot Locker were down 40% for the quarter, while all other customers accounted for a 13% decline. Foot Locker backlog was down 30% at quarter-end, compared to an 18% decrease for the balance of the customer base.

The total worldwide backlog decline at the end of the first quarter was the result of a 28% decrease in second quarter futures to $84.7 million, while Q3 futures were down 9% at quarter-end. Domestic backlogs were down 46% for Q2 and down 26% for Q3. International backlog was up 14% for Q2 and up 17% for the third quarter.

Second quarter revenues are expected to be between $87 million and $97 million, netting diluted EPS of 12 cents to 22 cents per share.

>>> As Foot Locker goes, so goes the business here… Good thing Foot Locker said it sees upside in Classics ahead…