The acquisition of Royal Elastics and the launch of the National Geographic footwear line were disappointments in 2002, but K-Swiss expects moves made with both brands to bear fruit in the coming year. The K-Swiss Classics business will continue to fuel staggering growth in 2003 even as average price points moved lower.

KSKS reported net earnings for Q4 increased 5.4% to $4.8 million, or $0.25 per diluted share, compared with $4.5 million, or $0.23 per diluted share in Q4 2001. Lower sales with NG and RE impacted EPS for Q4.

Total worldwide revenues for the fourth quarter grew 18.8% to $53.3 million. Domestic revenues increased 16.6% to $44.7 million and international revenues increased 31.9% to $8.6 million. Q4 sales would have been even higher, but KSWS ran out of Black Classics due to heavy demand. Seemed the company ran a very effective print ad campaign around the product and didn’t support it with enough inventory.

The average selling price dropped 7% in the quarter from $26.17 to 24.41, but the dip was explained away as a shift in styles rather than price deflation.

The company sees growth continuing through 2003, reporting that total futures orders through June increased 42.9% to $168.9 million. Domestic futures orders increased 42.9% to $147.7 million and International futures orders increased 43.1%.

Q1 backlog is up 32% and Q2 backlog is up 63%.

KSWS estimated that the at once business will only be 3% to 5% of shipments in 2003 as more retailers book heavier in futures due to increased confidence in the brand. Some key product, like the hot new Tongue Twister shoes, will be 100% pre-booked.

Foot Locker is 20% of total order backlog and was 26% of Q4 deliveries. Z provides the company with more at-once business due to their very effective QR system. KSWS is shipping to 1,600 rooftops now compared to only 500 doors in Jan/Feb 2002.

Company officials told analysts that the Nike/Foot Locker spat was really a “wash” as other retailers like Finish Line, Hibbett, Footaction and JFF were investing more heavily in Nike moving forward. KSWS still sees continued growth in these retailers, but other brands may be getting “squeezed”. One analyst commented that FINL told him that the K-Swiss business was up 30% for them.

KSWS expects Q1 2003 revenues to be in the $103 to $106 million range and earnings per diluted share to be in the range of $0.55 to $0.60. The company expects full year revenues to increase to $350 to $360 million and expects to report full year earnings per diluted share of approximately $1.75 to $1.85, an increase of 20% to 27% over 2002.

Commenting on the Royal Elastics deal, CEO Steve Nichols said that RE had had inferior product with poor fit, poor materials and bad quality. KSWS has worked with RE to upgrade the product, including the addition of women’s and kid’s lasts, and enabled them to reduce pricing while improving margins. KSWS took back RE product from Journeys and is now flowing new product.

Royal Elastics will concentrate its marketing efforts in Metro New York, with a mobile “showroom” working events at the Garden and high schools.

The company does not see abandoning the National Geographic experiment any time soon. Nichols felt the issue was the $160 product introduced developed pre- 9/11. The re-introduction this year will feature product under $100, with much product “approaching K-Swiss pricing”. KSWS said its key retail partners have committed to the line.

KEY METRICS:

  • Worldwide 2002 sales up 22.4% to $290.4 million
  • Domestic 2002 sales up 20.4% to $248.6 million
  • Int’l revenues grew 35.6% to $41.8 million in ‘02
  • Net earnings increased 23.1% for the year to $28.7 million, or $1.46 per diluted share
  • Black Classics sales surged 700% in Q4
  • Sees 105 pages of print ads in ’03 versus 70 in ‘02
  • Classics was 67% of Q4 sales (41% Originals & 26% LE), Kids 17%, Training 17% and Tennis 5%
  • Sold 440K pair of Classic, 195 K pair of Heltof and 195K pair of Nido in the quarter.