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K-Swiss, Inc. (KSWS)

Q4 2008 Earnings Call

March 05, 2009 11:00 AM ET

Executives

Steven Nichols - Chairman, President and Chief Executive Officer

George Powlick - Vice President of Finance, Chief Operating Officer, Chief Financial Officer, Principal Accounting Officer and Secretary

Analysts

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

Sam Poser - Sterne Agee

Christopher Svezia - Susquehanna Financial Group

Mimi Bartow - Telsey Advisory Group

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. 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-K for the year ended December 31, 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 termination 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. Before I open my formal comments, I'd like to offer my condolences to the family of John Shanley. Those of us in the footwear and apparel industry lost a good friend and respected colleague with his passing last month. While it hasn't gotten any easier out there at retail, we have already report and seeing the sales results come in, in the fourth quarter and early 2009. Many of us haven't experienced a market like this in decades. As weak as these periods have been, I don't see the rest of 2009 getting better.

Footwear buyers are holding off on purchases and order return inventory into cash and there are a few willing to allocate space for new products. Our position on the current environment however, remains essentially unchanged from several months ago. We're still high in the industry for its long-term growth and believe that our product development, branding and liquidity strategies will enable us to survive for the eventual turnaround in the market.

The $64,000 question of course is when will that be? The breakdown of sales by product category for the fourth quarter of 2008 was as follows: Performance 14%, Sports Style 76%, other 10%. Our performance revenues were up 8% when compared with the prior year period. This category includes all genders of tennis, running and training.

Sport Style revenues were down 36% when compared with the prior year period. This category includes all genders of non-performance footwear. The biggest sellers in the quarter in Sport Style were the Classic, which sold a 172,000 pair, and was down 33.8% from the prior year period, the Lozan II with 97,000 pair and the ST329 with 76,000 pair, the Gowbury II with 69,000 pair. Other revenues were at 10% when compared with the prior year period. This category includes a apparel, Royal Elastics and Palladium. Excluding Palladium the other revenue category was down 20%, on a 28% decline in Royal Elastics and a 7% increase in apparel.

During the last quarter, we placed significant focus on developing three key goal global marketing initiatives for 2009, classic, tennis and running. Most important is to reintroduce and reignite the iconic K-Swiss Classic tennis show. In 2000, we made a deliberate decision to essentially replace the original Classic by introducing more atheletic-looking, contemporary Classic Luxury Edition sneaker. The initiative was very successful and grew our Classic business again. Now, in 2009, we've re-mastered our Classic from 1966. This product... this process created the original Classic 1966 look with a comfortable feel insight consumers expect today and a iconic sneaker that defines a brand and our heritage. We returned this new Classic to the market with an online initiative called K-Space, as well as pure (ph) product placement, online marketing, in-store VIP events, sponsorship and target printed advertising in select lifestyle magazine. K-Space is a new kswiss.com micro site that shows people who love the Classic.

The second priority is to continue being a leading tennis brand with world-class athletes and product innovation. Our ten pro tennis players will continue to wear K-Swiss and win tournaments around the world and we want to build on this roster with some new players in 2009. Last month our innovative interchangeable midsole insert system was introduced in the new Defier miSOUL Technology tennis shoe.

The Defier miSOUL comes with two pairs of removable midsole inserts. One set of is... one set of insert provides extra cushioning and support and is already in the shoe, while the other set of the inserts give light-weight cushioning with high energy return. Early indications are very positive for this new product in pro shops and tennis specialty stores.

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