K-Swiss, Inc. had another dismal quarter as both domestic and international sales declined in the double-digits and the only real bright spot was an 8% increase in the Performance business. Overall, the company recorded a net loss of $13.7 million, or 39 cents a share, compared to earnings of $596,000, or 2 cents, a year ago.
Fourth quarter sales decreased 28.0% to $56.3 million. The company also suspended its dividend while forecasting a loss amid a steep drop in revenues for 2009.
On a conference call with analysts, company Chairman, President and CEO Steven Nichols said footwear buyers are holding off on purchases in order to turn inventory into cash and there are few willing to allocate space for new products.
Volume of footwear sold was down 17.3%. At-once business for the quarter was 32.8% compared with the 46% anticipated and 15.5% at-once a year ago. For the K-Swiss brand, the average wholesale price per pair decreased to $24.36 for the quarter versus $28.46 a year ago. The volume of footwear sold was 2 million pairs versus 2.5 million a year ago.
Domestic revenues fell 20.4% to $27.3 million, and Nichols noted that part of the problem in the U.S. is that the brand has never sold highly-promotional, low-quality shoes. “I'm sure right at the moment that's one of the things that's hurting us because that's all that's selling today,” said Nichols. “But when there is an upturn, the fact that we didn't train people to get our shoes at $29.99 and $39.99, I hope that will help us when times return somewhat to normal.”
International revenues declined 34.0% to $29.0 million. European sales were down 59% and accounted for 23% of worldwide revenues compared to 39% a year ago. Sales in the Asian region were just below flat for the quarter.
By category, sports style sales were down 36% and represented 74% of sales. Performance, which includes tennis, running and training, was up 8% and accounted for 14% of sales. Other revenues were up 10%. Excluding Palladium, acquired in June 2008, sales were down 20% on a 28% decline in Royal Elastics and a 7% increase in apparel.
Royal Elastics lost 5 cents a share in the quarter versus a 3 cent loss a year ago. Palladium contributed a net loss of $1.5 million in the fourth quarter with revenues also at $1.5 million. In Q3, Palladium earned $1.6 million on sales of $9.9 million.
Gross margins eroded to 22.3% from 47.6% primarily due to inventory reserves recognized. SG&A increased to 56.4% of revenues from 52.3% a year ago. In dollar terms, SG&A was below the $35 million projected for the quarter.
Inventories were up 17.7% and K-Swiss ended the quarter with approximately $207.4 million in cash, or $5.95 per share. The suspension of the dividend is expected to conserve approximately $7.0 million of capital annually.
Worldwide futures orders were down 36.7% to $93.6 million at year end. Orders were down 28.5% $68.4 million in Q1 2009 and down 51.6% to $25.2 million in Q2 2009. Domestic futures orders decreased 37.2% to $31.9 million. International backlog was down 36.4%. Backlogs were down 52% in Europe and 38% in Asia.
During the fourth quarter, K-Swiss placed “significant focus” on developing growth strategies around classics, tennis and running for 2009.
To revive classics, the 1966 look is being updated “with the comfortable feel inside consumers expect today,” said Nichols. The re-launch is being driven by an online initiative called K-Space as well as PR product placement, online marketing in store, VIP events, sponsorships and targeted print advertising in select lifestyle magazines.
Regarding tennis, K-Swiss plans to add more pro players to its current roster of 10. The early response from pro-shops and specialty tennis stores to its new Defier-miSOUL tennis shoe has also been “very positive.”
In running, K-Swiss continues to sponsor athletes and triathlons. The miSOUL also won best new shoe from The Running Network magazine's spring review.
Asked about exposure to troubled smaller retailers, Nichols said K-Swiss has very-stringent credit policies to help shield it from the retail fallout.
K-Swiss said it would no longer be providing quarterly guidance given “the significant volatility associated with quarterly projections.”
For full year 2009, revenues are expected between $210 million to $250 million versus $340.2 million in FY08. The full year loss is expected between 30 cents to 60 cents a share versus earnings of 59 cents in 2008.
