K-Swiss Inc. posted a much wider loss in the first quarter as sales continue to spiral downward, but there was some light at the end of the tunnel as backlogs started to improve in the U.S. and the brand starts to gain some traction in running. Still, futures overall remain down and could fall further due to cancellations stemming from one of its Thailand contractors going out of business.
The net loss for Q1 was $4.7 million, or 13 cents a share, versus $1.1 million, or 3 cents a share, a in the year-ago period. Revenues slumped 11.0% to $65.9 million.
Domestic sales slid 21.2% to $23.9 million in the quarter. International sales were down 4.0% to $41.9 million. By region, European sales (41% of sales) slumped 12% while sales in Asia (15% of sales) climbed 22% for the period.
Overall volume was down 26% to 1.9 million shoes. For the K-Swiss brand, average wholesale price per pair increased to $27.21 versus $23.84 in the prior year period. At-once business for the quarter was 26% compared with 13.4% a year ago, another possible sign of building demand.
By categories, Performance (including tennis, running and training and representing 28% of sales) inched ahead 2%, while Lifestyle (52% of sales) fell 28% for the quarter. Other (including apparel and Palladium and representing 20% of sales) was up 34% off a small base.
Worldwide futures orders through September were down 1.6% to $72.5 million at March 31. Domestic futures orders increased 2.7% to $29.1 million while international futures decreased 4.3% to $43.4 million. A 33% backlog gain in Asia was unable to offset a 16% decline in Europe.
As of March 31, backlogs reflected a 6.5% decline in Q2 2010 and a 2.3% gain in Q3 at quarter-end. But as of last week, Q3 backlog was down 3.0%, and could slide lower due to a Thailand contractor closing.
Due to the closing, K-Swiss said it will be unable to fulfill orders for approximately 700,000 pairs for Q2 and Q3, product largely headed to Latin America and to a lesser extent Europe. As a result, it expects to lose approximately $5 million in revenues during the two quarters.
“We're working hard to replace this lost capacity but it will likely take us some time to line it up,” said Steven Nichols, KSWS chairman and president, on a conference call with analysts. “We have already experienced some cancellations due to our inability to deliver the primary canvas products and there is no guarantee there won't be more cancellations over the next two months.”
For 2010, revenues are expected to decline 5% to 10% from 2009. A gain is expected for the fourth quarter.
To revive the brand, K-Swiss in March was officially launched as a “California Sports Company.” Television featuring athletes and young Californians end with the tagline, “Have an Awesome Day” followed by Designed in California under the K-Swiss shield. A K-Swiss logo was also added to the roof of the Los Angeles Dodgers team store, making it the largest branded sign in the stadium. Other efforts to further capitalize on its California roots include its L.A. Marathon sponsorship, the April launch of California Music Month, retro footwear releases, and securing key placement at Kitson and Fred Segal.
In tennis, four new tennis pros were added to K-Swiss' team, including Sam Querrey, the number two American tennis player.
Nichols also said Q1 2011 will mark the company’s “best tennis line ever.”
In running, K-Swiss' now has 42 sponsored pro triathletes in 2010, up from 30 in 2009 while its sports marketing team will be at 32 Ironman events worldwide this year versus 16 last year. K-Swiss' new Keahou II and Konesic collections have also earned magazine editorial awards.
But Nichols was particularly enthused that Tubes, which retails at $75, has gained shelf space despite resistance.
“We made our first deliveries almost a year ago in July and it was, ‘Hey, who are you guys, you're a cup sole tennis company. What are you doing in running?’ We had to overcome that,” said Nichols. “But pretty much wherever we delivered the shoes they have retailed very, very well and with no marketing behind it.”
Tubes ads featuring Jillian Michaels, the fitness expert from “The Biggest Loser,” will start appearing by back-to-school but the big payback is expected to come in Q1 next year. For run specialty, the new Blades running technology is launching late summer and is expected to broaden its reach in Q1 2011.
“One of the humungous bets that we're making in 2010 is that we have great products and we have innovative products and now we just have to bring that message to the consumer,” said Nichols. “So we are spending very disproportionately this year in hopes that we will create a tail wind for the 2011.”
