K-Swiss, Inc. looked to the International business in the first quarter for any goods news as both sales and order backlog surged for the period. But the increase in revenues wasn’t enough to move the total revenue line back into positive territory as ongoing weakness in the U.S. classics business dampened any hopes of a return to positive trends any time soon.

Foot Locker and the athletic specialty business continues to be at the center of the issue for K-Swiss as sales at the retail giant slipped two more points to make up 19% of total company sales in the period compared to 21% in the year-ago period. Sales to Foot Locker were down 8% for the quarter, while sales to all other customers as a whole were flat.

K-Swiss is seeing the same impact on their order backlog, with Foot Locker representing 17% of the total book, compared to 18% at quarter-end last year, reflecting a 10% decrease in order backlog. All other customers, taken in the aggregate, were up one percent at the end of the period. The total backlog is comprised of a 9.5% increase in second quarter 2006 futures orders to $118.4 million and an 11.8% decrease in third quarter 2006 futures orders to $96.4 million, due primarily to movement of more back-to-school orders to the end of June that may have been in July last year. Domestic backlog is up 1% for the second quarter and down 32% in Q3. KSWS said the current trend for Q4 domestic backlog is slightly worse than Q3.

The International business, which has been primarily driven out of Europe, is now starting to get some traction in Asia as well. Company Chairman and CEO Steven Nichols said that Japan is starting to grow “very, very nicely” with a new distributor in place. He sees the market there influencing South Korea, Taiwan, and Hong Kong. As for Europe, KSWS expects to break $100 million this year and be “very profitable.” The company is still only doing business in Germany, the U.K. and the Benelux region, but they just opened an office in France where they will be shipping product starting in 2007. They see expanding to Spain and Italy next.

Revenues in the Classic category were down 9% from first quarter last year. Classic Originals, which represented 44% of Q1 sales, was down 23% from Q1 2005. The Limited Edition category, which accounted for 19% of revenues in the period, was up 57% for the quarter. But Mr. Nichols said that some success stories in the category were not universal. He cited the Land Cruiser product that did well with independents, but failed to sell-through at the desired rate at Foot Locker.

The Children's category was down 5% for the quarter, but the Tennis business was up 11%. Sales in our Training category, which includes the basketball line, were up 48% in the first quarter. Royal Elastics sales were up 40% in the quarter, but that was off of a small base.

The issues here should not be a surprise as the retail market as a whole reports a rapid decline in the classics business as low-profile and performance product take center stage in the market.

Based on POS data from SportScanINFO, sales in the classics category are down in the mid-teens for the year-to-date period, reflecting trouble across the board for that business. Sales in the Sports Retailer strata, which includes the sporting goods and athletic/urban specialty businesses, were down less than the market as a whole. Making matters worse, the data also suggests that K-Swiss has seen its share of the classics business decline as Nike and adidas grab more share with their retro classic product.

K-Swiss, Inc. 
First Quarter Results
(in $ millions) 2006 2005 Change
Total Sales $150.0 $153.2 -2.1%
Domestic $103.4 $117.6 -12.1%
International $46.6 $35.6 31.0%
Gross Margin 46.4% 47.0% -60 bps
SG&A 23.0% 21.1% +180 bps
Net Income $24.9  $25.9  -3.7%
Diluted EPS  70¢ 72¢ -2.8%
Backlog* $214.7  $217.4  -1.2%
Domestic $142.8  $169.7  -15.9%
International $72.0  $47.6  +51.0%
Inventories* $53.4  $55.5  -3.8%
* at quarter end