International is playing a bigger role in the success at K-Swiss Inc., a trend that is driving sales higher, building margin, and fueling bottom line gains. Wall Street reacted positively to the trend as they shook off concerns over a declining U.S. order backlog and the continued impact of Foot Locker’s pullback from the brand in hopes that the International gains build additional earnings gains for the company.

For the third quarter, the International gain was driven by a 69% increase in Europe, which also had a 98% increase in backlog at the end of the period. The U.K. and Benelux were both called out for strong performances, but Germany remained a struggle. The region was said to be profitable for the quarter and “on track” to be so for the year.

Sales in Asia were up 51% in the quarter and backlog was up 44% at period-end. Much of the gains in Japan were attributed to the new distributor relationship with MoonStar. Sales in Japan were said to be up 35% over the prior-year period.

A big chunk of the sales increase for the third quarter also came from increased at-once orders, another reason margins were higher. At-once orders were 35% of sales in Q3 versus 30% in the year-ago period, due primarily to a concerted effort by the sales team to sell off the excess inventory the company held at the end of second quarter.

Chairman and CEO Steven Nichols said the goods weren’t closed out and hinted that much of the goods were sold off with as little as an extra 5 points in discount, indicating that they were able to liquidate it at “very favorable prices”.

Third quarter sales to Foot Locker made up 22% of the total quarter business versus 30% in Q3 last year, indicating a 27% decrease in sales to the company’s largest customer. Business with all other customers was up 26%.

Perhaps that new reality — and the increase in at-once sales — led to the increase in average selling price to $24.70 for the quarter.

The Classics category saw sales increase 15% for the period, with Classic Originals increasing 18% and Limited Edition product growing 10% for Q3. Children’s category sales were up 11% for the period, Tennis was up 17%, led by a 21% increase in Traditional Tennis. The Training category was down 10% in the quarter.

Total future orders dipped 0.6% at the end of Q3, with U.S. futures falling 10.1% to $153.9 million and International futures jumping 70.8% to $38.8 million.

Foot Locker represented roughly 20% of the backlog compared with 25% at quarter-end last year. This would indicate a backlog decline of approximately 21% for Foot Locker, while futures for the balance of K-Swiss accounts rose about 5% for the six-month forward look.

The impact of the backlog decline appears to be felt hardest in Q1 and is due in part to what Nichols said was a lack of good product in the LE product. But the issue appears to be largely a Foot Locker one for that quarter.

Fourth quarter futures were up 0.6% to $76 million, but Q1 2005 futures were off 1.4% to $116.7 million. Foot Locker made up 20% of backlog in both quarters, versus 19% in Q4 last year and 33% in the first quarter order book. This would appear to indicate that Foot Locker Q4 backlog actually increased 5.9% versus last year, while all other accounts dipped 0.6% for the period. For the first quarter, the reverse is apparent, as it looks like Foot Locker futures declined about 38.5% for Q1, while all other accounts showed a 21.1% increase in futures for the period.

International backlog was up 108% for the fourth quarter and up 54% for Q1, while Domestic backlog was said to be down 10% for both quarters.

K-Swiss expects fourth quarter EPS in the range of 17cents to 21 cents per diluted share on sales of approximately $78 million to $82 million. EPS estimates assume gross margins in the 44% to 45% range. For full year, KSWS expects to see earnings in the $1.69 to $1.73 per diluted share range on sales between $473 million and $477 million.

Mr. Nichols said that he expects to see the Foot Locker business get back to where they want it to be by the back half of 2005.

>>> This is starting to look very familiar. Wasn’t there another brand recently that moved to build up a stronger International business as they saw their Foot Locker business decline? Seems to us they came through it looking stronger — and more profitable — in the end…