K-Swiss has decided to limit 2004 sales of the white/white Classic shoe, moving to an allocation program that will only enable retailers to buy as much product next year as they did in 2003. K-Swiss said the decision was made to “prevent over exuberance” by their retail customers that bought 918, 000 pairs of the shoe in the third quarter. The shoe accounted for 9% of sales in the nine-month YTD period. The action will cut across all trade channels and all accounts which could prove problematic for retailers aggressively adding doors.

Overall, Classics represented 65% of the business for third quarter, increasing 39% to approximately $79 million. Original Classics were up 48% and accounted for 40% of Q3 sales, while the “other” Classics, which includes Limited Edition styles, was up 28% in Q3. Other top sellers were Twylo, an LE shoe which sold 465,000 pair, Thurin, another LE product that sold 323,000 pair, and Verstad which sold 320,000 pair.

KSWS hopes that the move on the White Classic can add additional fuel to its black and other white-with-color stripes models. The black shoe is already coming on strong again this year, supported by additional advertising that proved very effective last year.

Children's contributed 19%, or approximately $23 million, for the period, a 51% increase in sales. Training, which was said to be “up nearly three-fold in the quarter, was 9% of the business and Tennis, up 101% in Q3, was 5% of the total.

The at-once business, which includes Q2 open backlog that did not ship on time, were 30% of total sales versus 30% in the year-ago period. Without the Q2 orders, Q3 at-once was 20% of sales. The fourth quarter at-once business is forecast “between zero and 6%”.

The business in Europe is being driven by Foot Locker, which KSWS said is “probably up somewhere north of 200%”. They also said the brand had been performing spectacularly in the JD Sports chain in the U.K.

The National Geographic business remains difficult, but KSWS intends to invest further in the Royal Elastics business. KSWS is presently in discussions with National Geographic on “how to best move forward”. The company saw a two cents per share loss on the NG business in Q3 and a nine cents loss in RE.

During the quarter they incurred a loss of 2 cents per diluted share related to National Geographic. During the quarter we incurred a loss of 9 cents per diluted share of the Royal Elastics brand.

Fourth quarter diluted EPS are now forecast in the 37 cents to 42 cents range on sales of approximately $75 million to $80 million. Full year earnings are seen in the range of $2.55 to $2.60 on sales in the $425 million to $430 million range.

KSWS has asked shareholders to increase the number of authorized shares, enabling the company to conduct a 2 for 1 stock split. The company also expects to increase the quarterly dividend by a one percent.


OTHER KEY METRICS:

  • Foot Locker was 30% of sales vs. 29% in Q3 LY
  • Finish Line is growing faster than FL
  • New TSA has grown in “triple-digits”
  • FL is 25% of Q3 backlog vs. 18% LY and 33% of Q4 backlog. Backlog for Q3 without FL is up 35%
  • Europe sales jumped 57% in Q3, backlog up 78% and Asia sales up “slightly”
  • Q4 futures are up 56%, Q1 2004 backlog is up 41%
  • ASP declined to $24.51 vs. $24.96 in Q3 LY
  • Units sold in Q3 increased 54.8% to 4.8mm pair from 3.1mm pair LY
  • Operating margin was 20.5% versus 16.4% LY