K-Swiss Inc. continued to see weakness in the U.S. market and may be seeing some chinks in the International business as well. The company had been able to rely on a fast-growing International business to offset the weakness in the Domestic market, but International growth for 2007, while still positive, slowed to a rate that was about a third of the growth rate for International in 2006. At the same time, the decline in the Domestic business in 2007 was at more than twice the rate of the 2006 decline. While the top-line suffers, the company is now starting to see a larger impact on the bottom line as the company continues to invest in its premium sports branding initiatives as K-Swiss Inc. posted its first quarterly operating loss in more than ten years and fourth quarter earnings per share came in at the low end of its stated guidance.
Company Chairman and CEO Steven Nichols told analysts last week that, due to what they have seen in the retail environment and early order indications for the back half, original expectations that the Domestic business would start to see positive momentum in late in 2008 must now be pushed out to 2009.
The company reported that total worldwide revenues decreased 16.7% to $78.2 million for the fourth quarter of 2006, compared with $93.8 million in the prior-year period. Domestic revenues fell 34.6% to $34.3 million in the fourth quarter, while International revenues increased 6.1% to $43.9 million. In the prior-year quarter, International revenues grew 47.8%. Sales in Europe were up 22% for the quarter, about half the increase from Q4 2006, and accounted for roughly 39% of total worldwide revenues, compared to just 27% of total revenues in the year-ago quarter. Sales in Asia were down 14% for the quarter after jumping 73% in the prior-year period, accounting for 13% of total revenues for Q4 versus 12% of revenues in Q4 last year. Canada and Mexico were both down. The International business represented 51% of total worldwide revenues.
Worldwide Foot Locker, Inc. revenues made up 8% of total worldwide revenues in the fourth quarter, compared to 12% of sales in the year-ago period and 16% of sales in the 2005 fourth quarter. Sales to Foot Locker were down 41% for the quarter, while sales to all other customers were down 13% in the aggregate.
Gross margins were up 220 basis points to 47.6% of sales, compared to 45.4% of sales in Q4 last year, thanks in large part to Europe making up a larger piece of the pie. Unfortunately, SG&A expenses, as a percent of sales, jumped 1810 basis points to 52.3% from 34.3% in the 2006 fourth quarter. The company slipped to a $3.7 million operating loss for the quarter, compared to a $10.5 million operating profit in the prior-year period. Net earnings for the fourth quarter fell 94.4% to just $596,000, or 2 cents per diluted share, compared with $10.7 million, or 30 cents per diluted share, in the prior-year period.
The Q4 revenue decline was the result of a 26% decrease in units sold, offset a bit by a 10.7% increase in average selling prices. The K-Swiss ASP was $28.46 in Q4, compared to $25.71 in the year-ago period. K-Swiss brand volume was essentially flat for the period. The at-once business accounted for 15% of revenues for the period compared to about 19% of the business in Q4 last year.
K-Swiss reported that worldwide futures orders at year-end decreased 12.5% to $147.8 million, compared with $168.9 million at the prior year-end. First quarter futures were down 14% to $96 million, with Domestic backlog falling 40% and International up 12% at year-end.
Second quarter futures were down 9% to $52 million, led by a 40% decline in U.S. backlog and International backlog increasing 19% at period-end.
Footlocker accounted for about 9% of the open order backlog at year-end versus 11% at the prior year-end, representing a 28% decrease in backlog for the companys largest customer, compared to a 10% decrease for all other customers.
KSWS said that current third quarter bookings in the Domestic business imply continued trouble in the U.S.. The company expects revenues for the 2007 first quarter to be in the range of $95 million to $105 million, with diluted EPS coming in at 18 cents to 28 cents per diluted share.
Full year earnings are seen in the 10 cents to $35 cents per share range on revenues of approximately $310 million to $340 million. Management said that the larger-than-usual annual EPS range reflects the “uncertainty surrounding cost pressures in Southern China where almost all of [the companys] product sourcing is located.” The estimates for the first quarter and full year continue to reflect the significant decline in domestic revenues.
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