K-Swiss reported that total worldwide revenues decreased 3.3% to $107.9 million for the second quarter of 2004 compared with $111.6 million in the prior-year period. Domestic revenues decreased 9.7% to $88.5 million in the Q2 and international revenues increased 42.1% to $19.4 million.
Net earnings increased 4.5% to $13.2 million, or 35 cents diluted earnings per share, for the quarter, from $12.6 million, or 33 cents diluted earnings per share, for the quarter ended June 30, 2003.
Worldwide futures orders with start ship dates from July through December 2004 increased 3.9% to $165.0 million at June 30, 2004, compared with $158.7 million at June 30, 2003. Domestic futures orders decreased 4.1% to $134.9 million at June 30, 2004, from $140.6 million at June 30, 2003. International futures orders increased 65.8% to $30.1 million at June 30, 2004, from $18.2 million the previous year.
K-Swiss brand revenues decreased 3.9% to $106.0 million for the second quarter from $110.3 million for the year-ago quarter. The decrease for Q2 was the result of a decrease in the volume of footwear sold partially offset by higher average wholesale prices per pair.
The volume of footwear sold decreased to 4.1 million pair in Q2 from 4.3 million in Q2 last year. The decrease in the volume of footwear sold for the quarter was primarily the result of decreased sales of the Classic (-5.7%), training (-18.9%), and childrens shoes (8.9%), offset by an 18.7% increase in sales of tennis shoes. This decrease was offset by an increase in the average wholesale price per pair to $25.55 for the quarter from $24.93 for the year-ago quarter, an increase of 2.5%, due to the mix of sales.
During the second quarter of 2004, domestic K-Swiss brand sales were negatively impacted as a result of implementing a direct-to-customer shipping program. Under this program we ship containers of footwear directly from its contract manufacturers to customers, bypassing the K-Swiss Mira Loma distribution facility. Title to the footwear passes upon reaching the customers rail yards which is when KSWS recognizes revenue.
At June 30, 2004, approximately $9.5 million of orders scheduled for delivery in June were in transit, but were not recognized into revenue in the second quarter of 2004 because the footwear had not arrived at our customers rail yards. These orders are excluded from our backlog at June 30, 2004. During July 2004, this footwear arrived at our customers rail yards and therefore we will recognize the associated sales of such footwear as revenues during July 2004.
Overall gross profit margins, as a percentage of revenues, increased to 46.1% for the quarter, from 46.0% for the quarter ended June 30, 2003. Gross margin for the quarter was affected by product mix changes and changes in our at-once business. KSWS said gross margins may not be comparable to some of its competitors as they recognize warehousing costs within selling, general and administrative expenses.
K-Swiss also issued guidance for the third quarter of 2004 and revised guidance for 2004. KSWS now expects revenues for the third quarter of 2004 to be approximately $117 to $123 million and earnings per diluted share to be in the range of 33 cents to 37 cents. The Company expects full year revenues to be approximately $450 to $460 million and expects to report full year earnings per diluted share of approximately $1.39 to $1.47.
The Company's estimates for the third quarter and the year reflect the continued investments in marketing, sales and product development for the Royal Elastics brand as well as the expansion of European operations. They are based upon the following assumptions: gross margins will be between 44% and 45% for the year; SG&A will not rise above $117 million for the year; cancellations will be moderate; and the Company's growth initiatives with respect to Royal Elastics will not exceed a net loss of $0.15 per share for the entire year.
Steven Nichols, Chairman of the Board and President, stated, “Domestic sales decreased almost 10% in the second quarter as our brand has begun to adjust to the competitive balance in the current retail environment. We have instituted several initiatives aimed at reinvigorating our momentum. Conversely, growth in our international operations during the quarter was strong with sales increases in every geographic region. Europe and the Asia region were notable highlights with sales increases of 41% and 59%, respectively. We expect that the encouraging initial results from MoonStar's plan for rejuvenating the K-Swiss brand in Japan as our new distributor will lead to continued growth in Asia.”
K-Swiss Inc. Consolidated Statements of Earnings
(In thousands, except earnings per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
(Unaudited) (Unaudited)
2004 2003 2004 2003
-------- -------- -------- --------
Revenues $107,904 $111,629 $259,924 $227,438
Cost of goods sold 58,151 60,328 140,405 121,921
-------- -------- -------- --------
Gross profit 49,753 51,301 119,519 105,517
Selling, general and
administrative expenses 28,307 28,649 62,514 55,180
-------- -------- -------- --------
Operating profit 21,446 22,652 57,005 50,337
Interest income, net 173 177 300 364
-------- -------- -------- --------
Earnings from continuing
operations before income
taxes 21,619 22,829 57,305 50,701
Income tax expense 8,431 9,003 22,349 19,975
-------- -------- -------- --------
Earnings from continuing
operations 13,188 13,826 34,956 30,726
Loss from discontinued
operations -- (1,207) -- (4,463)
-------- -------- -------- --------
Net earnings $13,188 $12,619 $34,956 $26,263
======== ======== ======== ========
Basic earnings per share $0.38 $0.36 $0.99 $0.74
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Diluted earnings per share $0.35 $0.33 $0.93 $0.69
