K-Swiss posted a wider loss in second quarter, hurt by continued sluggish top-line growth; a write-off for its Palladium brand; and the closing of one of its contractor factories. One encouraging note is that domestic backlogs were up 17% at quarter-end.
The company’s net loss widened to $14.5 million, or 41 cents a share, from $11.5 million, or 33 cents, in the year-ago period. Results this year include a one-time charge of $3.3 million for recognition of the net present value of the €3 million ($3.82 mm) future purchase price of Palladium SAS, which was revised in May 2010.
Worldwide revenues decreased 13.3% to $46.8 million. Domestic revenues decreased 21.0% to $22.7 million and International revenues decreased 4.6% to $24.1 million.
European sales were down 20% in the quarter with backlogs down 31%. Europe accounted for 26% of sales compared to 28% a year ago. Sales in Asia were up 17%, with a 21% increase in backlog. Asia accounted for 15% of revenue versus 11% in Q2 2009. At-once business for the quarter was 52.3% of sales versus 65.1% of sales in Q2 2009.
For the K-Swiss brand, the average wholesale price per pair increased to $26.39 in Q2 compared with $23.15 in the prior-year period. Volume footwear sold was 1.5 million pairs, down from 2.1 million a year ago. Including K-Swiss and Palladium, the average wholesale price increased to $26.29 versus $23.15. Volume was 1.6 million pairs, down from 2.2 million. Lifestyle accounted for 55% of sales; Performance, 32%; and Other, 13%. Lifestyle revenues were down 36%. Performance revenues including tennis, running and training – were up 40%. Top performers were the ST329 and Tubes Run 100 product. Other revenues, which include apparel and Palladium, were up 66% off of a small base.
Sales were affected in this quarter by approximately $2 million to $3 million because of the loss of a contract manufacturer in Thailand that ceased operations in April.
As K-Swiss warned in May, the plant was scheduled to produce approximately 700,000 pairs during second and third quarters. The company has secured temporary production capacity in other facilities to partially replace this lost capacity and the lost capacity is expected to be fully replaced by October 2010.
“This quarter might be best described as the proverbial duck floating calmly on the water with his feet furiously paddling under the surface,” said Steven Nichols, K-Swiss chairman, president and CEO, on a conference call. “We still don't have much to show for our efforts in pushing innovation and marketing.” But Nichols still believes the company is “taking all of the right steps to invest for success in 2011 and beyond.” He noted that efforts to establish K-Swiss around its California heritage-through product and marketing as well as limited editions of new running products-are where they are seeing the most upside.
Worldwide futures orders decreased 8.6% to $64.6 million as of June 30. Domestic futures increased 17.1% to $25 million while International futures decreased 19.7% to $39.6 million. Domestic backlog is up 16% for Q3 and up 19% for Q4. International backlog is down 24% for Q3 and down 4% for the fourth quarter.
Asked about the upturn in domestic backlog, Nichols said a more important indicator of whether K-Swiss had turned the corner is whether third-quarter backlog turns positive.
But he believes K-Swiss “has some of our best product we've had in many years, just everywhere across the board, every new thing we introduce we think was marginally better than the shoe it replaced.”
Nichols believes Tubes is “maybe a five-year product category for us,” and fifth, sixth, or seventh variations of Tubes are being developed to extend the technology across its product lines. Blades will also feature several variations down the road. Management also sees strong growth potential for the Bigshot tennis shoes, tested as the fastest tennis shoe by the P3 Sports Science Institute.
But Nichols also credited the launch of the California-themed advertising effort five months ago, which put the brand back on television for the first time in five years.
“The campaign is relatively small, but I think it's starting to resonate,” said Nichols.
Other newer marketing vehicles starting to pay off its endorsement by Jillian Michaels, a fitness expert best known for her association with the TV show, The Biggest Loser. Tubes in-store merchandising, featuring Michaels, has been rolled out to Nordstrom's, Shoe Carnival, Famous Footwear, and many independents.
Nichols also has high hopes for its marketing push featuring Kenny Powers, star of the HBO show, Eastbound & Down. The Powers campaign, aimed at 14-to-24 year-old males, includes multi-network TV buy, print, outdoor billboards, and a new Tubes micro-site. K-Swiss' triathlon athletes and tennis athletes also continue to do well.
