K-Swiss lowered its quarter loss on lower costs and a jump in international revenue. But the company also saw weak domestic revenues and eroding future order rates while cutting its guidance for the year.
The loss came to $6.7 million, or 19 cents per share, in the quarter compared with a loss of $9.8 million, or 28 cents per share, in the same quarter last year. The recent quarter's loss included a gain from discontinued operations of $77,000 per share, while the year-ago quarter included $1.2 million in losses.
Revenue fell 4.3 percent to $69.3 million from $72.4 million, as domestic revenue tumbled 34.0 percent to $20.8 million and international revenue rose 17.8 percent to $48.5 million.
Volume was down 6.4 percent. For the K-Swiss brand, the average wholesale price per pair increased to $30.73 for the quarter compared with $29.31 in the year-ago quarter, due to a planned price increase. Its at-once business was 27.1 percent, compared with 27.9 percent a year ago.
“I would like to characterize this quarter as more of the same, continued improvement in Palladium, along with declines in worldwide backlog and domestic business,” said Steven Nichols, chairman and president, on a conference call with analysts.
On the positive side, he noted that initiatives highlighted in the fourth quarter, such as Clean Classic launch in Q312, the reduction of inventory, and marketing reductions “showed some signs of progress as well.” He added, “We will look to build on these initiatives as the year progresses.”
The Lifestyle segment revenues grew 12 percent and represented 38 percent of sales. The biggest sellers for the quarter in Lifestyle were the Classic, 137,000 pair, and the RV 1.5, with 86,000 pair.
Performance (tennis, running and training) revenues were down 24 percent and accounted for 34 percent of sales. The top performing sellers were the Tubes Run 100, which sold 139,000 pair, the ST 329, which sold 69,000 pair, the Grande Court 2, with 55,000 pair, and the Blade-Max Endures, with 47,000 pair. Other revenues, which include Palladium and Apparel, were up 19 percent.
Europe drove the international growth, with sales climbing 32 percent in the region to account for 45 percent of worldwide sales. Asia sales were up 3 percent and accounted for 17 percent of sales.
Overall, gross margins slid to 37.8 percent in the quarter from 39.4 percent a year ago due to an increase in the levels of closeout product as a percent of revenues, and a decrease in royalty income as a result of timing and loss of an international distributor. On the positive side, gross margins improved on a sequential basis more than 1,200 basis points from the fourth quarter of 2011.
SG&A was reduced to 45.3 percent of sales compared with 54.6 percent a year ago, and down $8.1 million in dollars partly due to significantly less marketing expenditures.
Worldwide futures orders set to ship between April and September tumbled 32 percent to $71.5 million. Orders were down 39.5 percent for the second quarter and 26.9 percent for the third. Domestic orders for the six-month period fell 54 percent to $21.7 million.
International orders dropped 14 percent drop to $49.9 million with futures down 12 percent in Europe and 38 percent in Asia. The decrease in international orders is primarily attributed to late transmission of orders from its largest Asian distributor, and also the fact that 2011 futures reflected a bump in orders as a result of factory delays that occurred earlier in 2011.
Total Palladium backlog was down 4.5 percent for the prior year, to $18.6 million at March 31.
For 2012, the company forecast revenues to be approximately $225 million to $240 million. Consolidated gross margin is expected to be approximately 37 percent to 39 percent. The new guidance is slightly down from the range provided on February 17 when the company forecast revenues to be approximately $240 million to $250 million with gross margin expected to land between 40 percent to 41 percent.
On the call, David Nichols, who last week was promoted to president, K-Swiss Brand, said the Clean Classic line is launching in June, with Finish Line and Footaction likely to be the largest launch partners. The Clean Laguna, with more of a vulcanized bottom, will focus on Foot Locker and family shoe stores. Some Classics were also just launched at J. Crew as part of the Billy Reid Collection, and will reach Nordstrom in June and July as part of a more significant Lifestyle push after its recent focus on reestablishing its sports roots.
David Nichols said “pretty much every retail partner that we wanted to get involved with the Classics relaunch and the company is banking on a strong consumer response to reverse its backlogs slide.
“Lifestyle, and particularly the Classic series, does have the opportunity to grow quickly once we're there,” he said. “We've seen that before over the years. This product, in plenty of focus groups, has reacted very well with consumers and kids.”
Regarding Performance, Nichols said the K-Swiss “is growing” in the run specialty channel with its marketing group focused on integrating select retailers into the host of its sponsored running and triathlon events.
Steven Nichols noted that Palladium’s negative backlog reflects the impact of the mild winter on the boot category with overall demand for the brand strong. Two major tests were completed with Finish Line and Footaction and both retailers reordered. Less bulky and vulcanized introductions from the brand have also been well received in the market. Said the chairman, “I think Palladium is right on the edge of getting to fulfill everything we want.”
