K-Swiss Inc. saw its business with Foot Locker, Inc. come back in the fourth quarter, a trend that appears to be continuing as the worlds-largest-athletic-specialty-retailer boosts the brands backlog position for the first half of 2005. With the help of a robust Q4 fill-in business, K-Swiss beat its original estimates for Q4, posting revenues of $88.4 million versus $80.4 million in Q4 last year and above the forecasted range of $78 million to $82 million.
Earnings per share, which benefited from a 20 cents per share gain from a repatriation of dividends related to foreign subsidiary earnings, came in at 43 cents per share versus 23 cents per share in the year-ago period. EPS were essentially flat excluding the one-time benefit, but easily beat the companys estimate of 17 cents to 21 cents per share. Net income was up 79.7% to $15.6 million, compared to $8.7 million in the year-ago period. Earnings for the full year were up 28% when excluding the repatriation benefit. Gross margins improved 170 basis points to 45.2% of sales versus 43.5% in Q4 last year. SG&A increased 280 basis points to 32.1% of sales, due primarily to an increased advertising spend in the quarter.
The upside in fourth quarter was clearly a result of a strengthening Classics business, especially at Foot Locker. The LE business, which is futures-based, did suffer a setback for the quarter and the year, a result of poor product according to comments made by chairman and CEO Steven Nichols in an analyst conference call.
The at-once business was 16% of sales in Q4, compared to just 6% in the year-ago quarter and the companys projection of 3% to 8% of sales. Management said the primary catalyst was a boost in TV advertising in the period. The TV ad spend was doubled in the fourth quarter versus last year. The decline in LE sales had an impact on average selling prices, which declined to $24.47 a pair versus $25.37 a pair in Q4 last year. The decline was more than offset by a larger unit volume sold.
Original Classics revenues were up 65% in the quarter, while the Other Classics category, which includes the LE product, was down 45% for the period. Total Classics revenues were up 8% for the fourth quarter. Childrens revenues were up 9%, the Tennis business was up 5%, led by a 31% increase in Traditional Tennis, and Training category revenues were up 38% for Q4. The Royal Elastics business was up 103% off of a very small base.
Domestic revenues decreased 0.1% to $68.4 million in Q4 and International revenues increased 66.2% to $20.0 million. Europe sales were up 178% in the fourth quarter and backlog was up 104% at year-end. Management said that Europe was profitable for both the quarter and the year. Asia revenues were up 21.8% and backlog in the region was up 40%. Japan, which completed its second full quarter with new distributor Moonstone, saw sales increase 282% for Q4.
At Foot Locker, sales increased 7% to 21% of total sales for the period versus 22% of sales in the year-ago period. Sales elsewhere rose 11% for the quarter. However, Foot Locker represented 20%, or roughly $45 million, of backlog at year-end versus 15%, or about $34 million, of the backlog at year-end 2003. This would indicate that while Foot Locker futures increased 33%, all other business saw backlog decline about 6.0% at year-end.
For 2005, K-Swiss expects earnings per diluted share for the first quarter to be in the range of 52 cents to 57 cents on revenues to be in the $138 million to $143 million range. The company is projecting that at-once business will represent about 8% of sales in Q1, roughly even to the 7.8% of sales in Q1 last year. KSWS expects full year revenues to be approximately $480 million to $500 million and expects to report full year earnings per diluted share of approximately $1.70 to $1.80 per share.
Nichols acknowledged that they were in the bidding process for Brooks Sports, an effort that fell short to a higher bid from Russell Corporation, which acquired the company in December. He also said they are pursuing a Classics Running strategy, but the product — much like the Basketball effort — is not a performance product. He also hinted that they may entertain an Apparel licensee since its not a big business for them. He said the trick is finding a licensee that they could “trust to handle our brand in a way that we would be very, very comfortable.”
The year-end bankruptcy at The Athletes Foot cost the company about 2.5 cents on the bad debt line and hurt futures by “a couple of million dollars”.