With weakening backlogs and at-once orders, K-Swiss Inc. warned that fourth quarter results would show a loss ranging from 10 cents to 35 cents a share. Revenues are expected to range from $45 million to $60 million. That estimate compares with Q4 2007 earnings of 24 cents a share on sales of $107.3 million. Worldwide future orders were $102.8 million at Sept. 30 versus $145 million a year ago, a 29.1% decline. Domestic futures decreased 34.9% to $37 million, while international futures decreased 25.4% to $65.9 million.
On a conference call with analysts, Steve Nichols, K-Swiss' chairman and CEO, termed third quarter results as “right in line with the abysmal results being reported at retail.” He added, “There's an awful lot of pain out there in the market today, both domestic and international. The extraordinary cautious stance taken by footwear buyers continue to show up in our backlog despite our best efforts.”
The third quarter sales decline reflected a 22% revenue decline in sports style, which made up 73% of sales in the period. The top sellers in the quarter in sports style were classics, which were up 3% from the prior-year period.
For the K-Swiss brand, the average wholesale price per pair decreased to $26.44 for the third quarter compared with $27.93 in the prior year period.
Performance, which includes tennis, running and training and made up 11% of revenues, was ahead 4%. Other revenues representing 16% of sales (apparel, Royal Elastics and Palladium) were up 110%. Excluding Palladium, acquired in June, other revenues were down 38% on a 48% decline in Royal Elastics and a 31% increase in apparel. Royal Elastics lost one cent per share in the quarter compared with a loss of 1 cent a year ago. Royal Elastics is expected to show a net loss of 8 cents per share for the full year.
Internationally, Europe (41% of overall sales) posted a gain of 9% in the quarter although backlogs were down 32.9%. Excluding the $9.9 million of revenues from Palladium in the quarter, international sales declined 11.2%. The fourth quarter is expected to show K-Swiss' first decline in international revenues in years. Sales in Asia (13% of sales) were up 1%, but backlogs were down 16%.
Net revenues were well above internal expectations of $95.8 million due to sales from Palladium, acquired in June, as well as better-than-expected sales in the U.S. from primarily close-out product due to cancellations in earlier quarters in the year. The at-once business for the quarter was 25% of sales, not including Palladium, compared with 11% at-once a year ago, reflecting the close-outs.
The virtually break-even loss was near the top end of management's projected range for the quarter, when excluding Palladium. The 690 basis point reduction in gross margin to 39.9% was due to higher close-out sales and a $1.8 million accrual for an underpayment of certain business taxes and related interest in a foreign jurisdiction.
Regarding its guidance, full-year EPS is now projected to range from 60 cents to 85 cents a share with revenues coming in between $329 million and $344 million. In reporting Q2 results, KSWS had estimated full-year EPS to come in between 50 cents and 65 cents a share with revenues between $300 million and $320 million. In the prior year, the company earned 99 cents on $317.3 million in revenues. Management said the new guidance reflects a significant decline in domestic revenues; substantial investments in product development and marketing for the K-Swiss brand; a slow down of international operations; and continued investment in Royal Elastics.
Customer order cancellations are expected to be moderate.
Looking to 2009, K-Swiss said it will continue to invest heavily in brand initiatives and marketing in the first half in an attempt to reinvigorate the K-Swiss brand. Overall, K-Swiss has three initiatives for 2009. The “most important one is to reintroduce and re-ignite our iconic classic style as it defines the K-Swiss brand” through advertising campaigns aimed at the nostalgic consumers, according to Nichols. The company plans to go back to the original classic shoe, which is slimmer and less bulky than the current version.
The second initiative is to continue to position K-Swiss as a leading tennis brand and the third is to establish K-Swiss in the running category, with the help of triathlon sponsorships and its new My Soul technology. Nichols said although the macroclimate is tough, K-Swiss' success is more greatly tied to the company getting the product and marketing right.
Said Nichols, “Our brand is not properly resonating with the consumers and we're not getting the huge sell-through percentages that we did a few years ago. And the only way it will be solved is by better product and better marketing and working diligently on that. So there is no other reason except we just haven't cut the mustard correctly.”
