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K-Swiss, Inc. (KSWS)

Q3 2008 Earnings Call

November 5, 2008 11:00 am ET

Executives

Steven Nichols - Chairman, President and Chief Executive Officer

George Powlick - Chief Financial Officer

Analysts

Christopher Svezia - Susquehanna International Group

Jeff Van Sinderen - B. Riley & Company, Inc.

Jack Ripstein - PCAP

Henry Patner - Third Avenue

Berna Barshay - Swiss Re

Presentation

Operator

Good day and welcome to the K-Swiss conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Chairman of the Board and President, Mr. Steven Nichols. Please go ahead, sir.

Steven Nichols

Thank you and good morning, everyone. With me today is George Powlick, our Chief Financial Officer. We appreciate you being on the call this morning. Before I begin I would like to have George cover the Safe Harbor language. George?

George Powlick

Certain matters discussed in this press release are subject to certain risks and uncertainties that could cause actual results to differ materially, including but not limited to, non-achievement of the assumptions discussed herein, general and regional economic conditions, availability of credit, industry trends, merchandise trends, including market acceptance of the company's product offerings, customer demand, competition, the impact of terrorism, and/or a potential global conflict on the worldwide economy and order cancellations and reduced sales resulting from a slower worldwide economy. A complete description of these factors as well as others which could affect the company's business is set forth in the company's periodic filings, including its Form 10-Q for the quarter ended September 30, 2008, which is currently on file with the SEC.

Backlog as of any date represent orders scheduled to be shipped within the next six months. Backlog does not include orders schedule to be shipped on or prior to the date of the determination of backlog. The mix of futures and at-once orders can vary significantly from quarter-to-quarter and year-to-year, and therefore futures are not necessarily indicative of revenues for subsequent periods.

Steven Nichols

Thank you, George. The bottom line read on our third quarter, despite better than expected revenues and headway on our branding and product development is right in line with the abysmal results being reported at retail. There is an awful lot of pain out there in the market today, both domestic and international. The extraordinary cautious stance taken by footwear buyers continued to show up in our backlog despite our best efforts.

As you will hear this morning, we still prefer to look at the industry for its long-term growth and have fashioned our product development, branding and liquidity strategies accordingly. The breakdown of sales by product category for the third quarter of 2008 was as follows: Performance 11%, Sports Style 73%, other 16%. Our performance revenues were up 4% when compared with the prior year period. This category includes all genders of tennis, running and training.

Sports Style revenues were down 22% when compared to the prior year periods. This category includes all genders of nonperformance footwear. The biggest seller in the quarter in Sports Style were the Classics, which sold 352,000 pair, and was up 3% from the prior year period, and Lozan II with 149,000 pair.

Other revenues were up 110% when compared to the prior year period. This category includes apparel, Royal Elastics and Palladium. Excluding Palladium, the other revenue category was down 38% on a 48% decline of Royal Elastic and a 31% increase in apparel.

For the back to school season we continue to use multi-media vehicles to reach our target consumer. The advertising campaign featured lifestyle and performance, running and tennis footwear and apparel and could be seen in sport, fashion and vertical publications, outdoor, online, online and select sports programming.

Sports marketing and showcasing our performance portfolio continues to be a strong focus for K-Swiss. During the third quarter many of our athletes had great victories on national television.

Marty Fish, our top male tennis player made it to the quarter finals in the U.S. Open. David Brittan, the top junior male player made it to the finals of the U.S. Open. Vera Zvonareva, our highest ranking singles player in the history of K-Swiss won a bronze medal in the Beijing Olympics and Anna Tunnicliffe, our top laser sailor won a gold medal in Beijing as well.

In addition, K-Swiss continues to be a brand that is a leader in the triathlon space. This is far more than our advertising commitment in that we have dozens of sponsored athletes wearing and winning in K-Swiss. During the third quarter our athletes participated in podium in several full and half Iron Man, Olympic and sprint distances. We sponsored the Malibu triathlon as well as the Iron Man World Championship in Kona.

These events helped us cement our commitment to the sport of triathlon and we will launch a new 2009 running shoe, the K-ONA, which was very successful in Kona in October. We continue to build traction with our running products with running specialty stores supporting the line and their excitement building about what is to come for K-Swiss running in 2009.

Looking ahead to 2009, we really have three key initiatives. The most important one is to re-introduce and reignite our Iconic Classic style as it defines the K-Swiss brand. This will be done with a compelling advertising campaign that is relevant to both a nostalgic consumer who fondly remembers his heritage style as well as younger consumers who want a cool alternative to the other brands out there.

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