K-Swiss Inc. Posts First Quarterly Top-Line Gain Since 2006

 

Even more encouragingly, futures orders increased 14.8% on the strength of the Tubes collection. Domestic futures with start ship dates from January through June 2011 increased 52.8% while International futures were down 7.1%.

In the quarter, domestic revenues increased 2.8% to $18.6 million while international revenues increased 0.6% to $24.1 million. Price gains helped offset an overall 15.9% decline in unit volume. For the K-Swiss brand, the average wholesale price per pair increased to $28.65 for the latest quarter, compared with $24.14 in the prior-year quarter. At-once business in the quarter was 74.3% of revenues versus 64.2% of sales in the 2009 fourth quarter.

Among product categories, Lifestyle revenues (representing 52% of sales) were down 22% for the fourth quarter. The biggest seller for the quarter in Lifestyle was the Classic, which sold 144,000 pairs; the Arvee 1.5 with 61,000 pair; the Trifuno with 38,000 pair; the Albury II with 28,000 pairs; and the Classic Hiker with 26,000 pairs. Performance revenues (representing 26% of sales and including tennis, running and training) were up 36% for the period. The top Performance category sellers were the Tubes Run 100, with 85,000 pair; and ST329, with 49,000 pair. Other revenues (representing 22% of sales and including apparel, Form Athletics, and Palladium) were up 62% for the fourth quarter.

European sales were down 14% in the quarter with an 11% decrease in future orders. Sales in the Asian region were up 8% with a 12% increase in future orders. Europe accounted for 26% of revenues in the quarter, and Asia, 22%.

Fourth quarter gross margins eroded to 32.4% of sales from 36.5% in the prior-year quarter, primarily due to higher reserves established in the fourth quarter of 2010. SG&A was 81.9% of revenues compared with 65.9% in Q4 209 and was ahead $7.2 million in dollars above the prior year, partly due to increased marketing costs.

Inventories were up 39% to $67.0 million at year-end. Futures orders of $92.9 million at Dec. 31, 2010 were comprised of an 8.6% increase in first quarter orders to $56.8 million and a 26.2% increase in second quarter orders to $36.1 million. Domestic futures orders were up 56.8% for Q1 and 48.2% for Q2. International futures orders are down 12.5% for Q1 but up 6% for Q2.

Looking ahead, K-Swiss expects consolidated revenues for 2011 to be 25% to 35% above 2010. Consolidated gross margin is expected to be approximately 39%, which is comparable to 2010. SG&A expenses are expected to be $145 million to $155 million, due to continued investments in marketing.

On a conference call with analysts, Steven Nichols, chairman, president and CEO, said he doesn’t expect K-Swiss will be profitable in 2011 despite the sales gain.  He said the company is “still very aggressively spending” on its newer Tubes and Blades lines. He said sell-throughs on Tubes, in their fifth or sixth variation, are “excellent.” Blades, currently only being sold at run specialty shops, “has even more legs than Tubes,” according to Nichols.

Overall, he said K-Swiss has been working over the last three years to reinvent the brand with a focus on running as well as making a stronger commitment to performance tennis.

In the turnaround, the company chose not to turn to volume accounts to boost growth, but stayed with its traditional distribution channels “and we're starting to get very nice increases from the same account base.” The brand is also aggressively pursuing smaller independents “and that seems to be working although that will not be perceivable to our top line.”

Once the brand is reestablished, Nichols said K-Swiss will have “an option of expanding” to non-core accounts.

“We stuck to our guns and we spent a lot of money and we moved the needle, I think,” said Nichols. He said the “big, big, big number” will be the 2012 futures which will get booked this summer.

On the downside, Nichols admitted that that the Classic business has seen “nothing positive happening” lately, even labeling it a “stinko.” He said that the market has seen a lessening of demand for white leather over the last three or four years. But he expects marketing efforts around Tubes – including hiring actor Kenny Powers and celebrity trainer Jillian Michaels as spokespersons – will have a halo effect on Classics.  He also expects the fashion cycle will again return to white shoes.
“They just go with everything,” he said.