K-Swiss Inc. Sees Some Light in New Products, but Legacy Products a Drag in Q3

In a conference call with analysts, company Chairman and CEO Steven Nichols said the company methodically worked through inventories and closeouts and saw both successes and non-successes in the period.  Mr. Nichols said the company was on target with running, and saw some encouraging sell-through at selected stores where they placed the shoes.  The other key initiative that is seeing success is the Palladium business acquired last year.

The limited initial placement of the Palladium product has apparently sold through well and the company is now broken in sizes for fill-in on the canvas product.  Nichols said they timed it just right because the weather has turned and the leather product is now starting to move.  He indicated they are going to a futures booking product now with the Palladium business as the expand distribution and retailers that tested in limited doors now look to expand their door count for the shoes.
One program that did not apparently work as planned is the Remastered Classic that was brought out at a higher price-point in limited distribution.  Nichols described the program as “okay, not great, not terrible,” but he said they have since started putting the shoe in a regular K-Swiss box, and are beginning to “sell it to everyone.” 

 

He said it will now go into people like Foot Locker, etc… late in Q1 2010 and will be priced at the same price as the Classic LX.  He said the initial orders are relatively small, but they’re getting orders “pretty much everywhere.”

K-Swiss brand revenues fell 28.1% to $59.4 million from $82.7 million in the year-ago period.  The decrease for the quarter was said to be the result of a decline in the volume of footwear sold as well as lower average wholesale prices per pair. The decrease in the volume of footwear sold for the three months ended September 30 was reportedly the result of a 30.6% decrease in sales of the lifestyle category offset in part by a 19.1% increase in sales in the performance category.
The biggest sellers for the quarter in lifestyle were the Classic, which sold 268,000 pair, which is a decrease of 24% from the prior year period; the Lozan II with 122,000 pair; the Moulton with 77,000 pair; and the Albury II with 68,000 pair; and the Mohr with 65,000 pair. The top performance seller was the ST329, with 75,000 pair.

The average wholesale price per pair decreased 7.1% to $24.56 for the third quarter from $26.44 for the three months ended September 30, 2008.  The ASP decline resulted from “the product mix of sales, which included a higher percentage of sales of closeout product, and from the geographic mix of sales, in which domestic sales generally sell at a lower price; and a general decline in worldwide selling prices.”

Other revenues, which include apparel and Palladium, were up 21%.  The company sold approximately $11.2 million in Palladium product in the quarter, with $10.9 million of that sold Internationally.  Mr. Nichols said most of the sales were from France and about 90% of those sales were from the older product which will not go forward.  The balance was attributed to the new Pompa product, which is the product that the company is building the line around.  Domestic sales were just $330,000 for the quarter.

European sales were down 18% in the quarter and accounted for 46% of worldwide revenues in the third quarter, compared with 42% of the total in Q3 last year. Asia region sales were down 3% in the quarter, but backlog was up 1% increase at quarter-end. Asia was 14% of worldwide revenues in a quarter, compared with 11% a year ago.
At-once business for the quarter was 37.6% compared with 24.6% a year ago, which excluded Palladium, primarily due to higher number of closeouts.

Gross margin as a percentage of revenues was 37.2% in Q3, compared with 39.8% in the prior year period. The lower margin was said to be due to a higher percentage of closeout products sold.

Looking ahead, K-Swiss futures orders through March 2010 were down 32.1% to $68.0 million at quarter-end, compared to $100.1 million at the comp time last year.  Domestic backlogs were down 38.8% to $23.1 million and International backlogs were down 29.3% to $44.9 million at period-end. Europe futures orders were down at roughly the same percentage rate as the overall International business.

KSWS expects full-year revenues to be approximately $230 million to $240 million and expects to report a full-year loss per diluted share of approximately 70 cents to 80 cents.