K-Swiss, Inc. posted a pretty healthy first quarter despite a decline in Domestic sales, easily crushing Wall Street earnings estimates by a wide margin. But the positive mood was tempered a bit by estimates for the second that led shares lower for the week as KSWS guided to EPS in the 31 cents to 36 cents range on sales between $112 million and $117 million. Analysts were looking for 37 cents per share for Q2, but only 57 cents for Q1. (Click Here to View Chart)

One would think the Street would look at the YTD expectations for the company, which feels they are well on their way to deliver EPS in the $1.80 to $1.90 per share range on revenues between $500 million and $515 million.

The company is striking a positive note on a couple of key indicators. First, the business with Foot Locker appears to be on the mend as strong fourth quarter sell-through fueled by advertising helped clear the shelves. Cleaner retail inventories led to the second key point; a sharp increase in at-once business as retailers moved to re-fill empty shelves. The fill-in business in Q1 was abut 15% of the business in the period, nearly double the 8% rate last year and considerably higher than the 4% to 8% guidance from the company. Second quarter fill-ins are projected in the 4% to 8% range.

The strong Q4 performance at retail has also led to larger commitments from retailers for the back half as backlog increased 11.5% for the period through September on more commitment from Foot Locker and a strengthening International business. The last key indicator for the year is the International business, which generated a 58.4% jump in sales in the quarter and a 46.0% increase in backlog at the end of the period.

Foot Locker, which took a step back from the brand in Q2 last year, figures in most of these metrics as sales there rose at the same rate as the rest of the market for the first quarter in a year. However, Foot Locker started to increase their share of total backlog again, representing 18% of the total this year versus 16% at the same time last year. Even the International business has a little Foot Locker mixed in, as K-Swiss looks for success in Europe with its partnership with Foot Locker there. K-Swiss is in “a little more than half” of the 500 Foot Locker doors in Europe.

Europe, which saw sales grow 63% in the quarter, led a surging International business. The region was also profitable in the quarter after 15 years of investment in the region. The U.K. was said to be “doing spectacular” and France was described as “a wonderful situation.” Germany was a region where K-Swiss thought they were holding their own in a rough retail environment. France and Italy, which are markets the company sees as under-developed, are targeted for more penetration through the Foot Locker partnership. Sales in Asia jumped 81%, while backlog there grew 4.6% at quarter-end.

A change in distributors in Japan did the trick as the business there shot up 860% over the prior year to just under $2 million.

International, which was obviously boosted by FX rate benefits, also helped improve margins in the period as the segment delivered roughly 24% of revenues in Q1 this year versus about 15% in the year-ago period.

For Q1, the Classics category was up 9% for the quarter to 67% of sales. Original Classics were up 62% for the period, while LE product sales fell 57% in Q1. The Children’s business was down 5% for the quarter and the Tennis category decreased 28%. Training, which includes Basketball, was down 15%. The Royal Elastics business was up 18% for the quarter. Despite the decline in LE sales, average selling prices actually increased marginally in the quarter.

Worldwide futures orders for second and third quarter increased 11.5% to $217.4 million at quarter-end, with Domestic futures orders increasing 4.6% to $169.7 million and International futures orders growing 46.0% to $47.6 million at the end of the period. Second quarter futures are down 1.0%, while Q3 futures are currently running 27% ahead of last year.

While the second quarter forecast disappointed analysts, K-Swiss chairman and CEO Steven Nichols said in a release that the outlook for Q2 is a “slight improvement” from their original projections of a flat first half.

Based on the backlog “acceleration” into Q3, K-Swiss is increasing its ad spend for the fourth quarter by about $6.0 million in hopes they can provide a repeat performance in the quarter this year. Fourth quarter sales are estimated to be up in the 11% to 14% range.

K-Swiss, Inc. 
First Quarter Results
(in $ millions) 2005 2004 Change
Total Sales $153.1 $152.0 +0.7%
Domestic $117.6 $129.6 -9.3%
International $35.6 $22.4 +58.6%
Gross Margin 47.0% 45.9% +110 bps
SG&A 21.1% 22.5% -140 bps
Net Income $25.9 $21.8 +18.8%
Diluted EPS  72¢ 57¢ +26.3%
Backlog @ Year-End* $217.4 $195.0 +11.5%
Domestic $169.7 $162.3 +4.6%
International $47.6 $32.6 +46.0%
Inventories @ Yr-End $55.5 $56.7 -2.2%