It was another quarterly sales decline for K-Swiss as growth in performance and fashion product could not offset the continued softness in the white-leather-foot-covering Classics business. International proved a positive market again this quarter, though only slightly, but backlogs were down for both the U.S. and overseas. Though sales were down, the company saw a spike in net income due mainly to the $30 million settlement with Payless. Excluding the 52 cents per share gain, earnings were 23 cents per diluted share with 6 cents coming from operations and approximately 17 cents from a reduction in the annual tax rate due to projected deteriorating U.S. results of operations for Q3 and Q4 2008.
Looking at product categories Performance, which includes tennis, running and training footwear, accounted for 13% of net sales or approximately $11.1 million growing 8% year-over-year. Sports Style, or the classics business, accounted for 83% of sales or approximately $70.7 million, decreasing 21% for the quarter. The biggest sellers for the quarter in Sports Style were the Classic, which sold 263,000 pairs, was down 10% from the prior year period and the Lozan II with 186,000 pair. The Other category accounted 4% of net sales or approximately $3.4 million, up 10%. Other sales included both apparel and Royal Elastics. Tennis, apparel and sales through the companys website were all said to have increased.
The companys At-Once business accounted for 26% of net sales for the quarter, which was above the 3% to 18% originally anticipated, and up 500 basis points from the 21% of sales for the year-ago quarter. CFO George Powlick commented on a conference call with analysts that “we may be getting less futures orders and may get more At-Once behind that, but it’s really hard to figure out .”
Overall footwear units sold decreased 18% for the quarter. For the K-Swiss brand, the average wholesale price per pair increased slightly to $27.59 for the second quarter compared with $27.58 in the prior-year period. The company sold 2.9 million pairs in the second quarter compared with 3.6 million pairs in the second quarter of 2007.
The international business managed a slight bump in revenues, but backlog was down 14% at quarters end with revenues continuing to decline. The company expects the next quarter to “finally show the first decline in international revenue in years.” Europe sales were down 2% in the quarter with a 17% decrease in backlog. Europe accounted for 40% of worldwide revenues, up from 34% a year ago. Sales in the Asian region jumped 25% in the quarter, but backlogs were down 16%. Asia accounted for 11% of worldwide revenue in the quarter compared with 7% a year ago.
Sales to the Foot Locker Group accounted for 7% of Q2 worldwide sales, compared with 12% a year earlier. In Q2 sales to Foot Locker were down 51% and sales to all other retailers were down 12%. Foot Locker represents approximately 7% of the companys backlog on June 30th, 2008, compared with 17% a year earlier, a 74% decrease. The worldwide backlog with all other customers was down 24%.
After a breakeven result last quarter, Royal Elastics was back in the red in Q2, losing 4 cents per share in the quarter compared with a loss of 2 cents per share a year ago.
For the full year, the company expects Royal Elastics to show a net loss per share of approximately 9 cents, lowered from a loss of 6 cents expected at the end of Q1.
Speaking of the Royal Elastics business and the recently acquired stake in French footwear company Palladium, Chairman and CEO Steven Nichols commented, “I think right at the moment they have their best shot to get over the top of the hill and start going into auto glide. They have some shoes that I think are perfectly on trend and probably before this year is over well either get some results or put all our efforts into Palladium.”
The total K-Swiss backlog is comprised of a 29% decrease in the third quarter 2008 futures orders to $68.9 million and a 39% decrease in Q4 2008 futures orders to $35.3 million. Domestic backlog is down 48% for the third quarter of 2008 and down 55% for Q4. International backlog is down 10% for Q3 and down 21% for Q4.
Third quarter net sales are expected to be between $65 million to $80 million with earnings per diluted share in the range of zero to a loss of 15 cents. For 2008, KSWS expects revenues to be between $300 million and $320 million with earnings per diluted share between 50 cents and 65 cents, including the Payless settlement.