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K-Swiss Inc. (KSWS)

Q3 2009 Earnings Call

November 5, 2009 11:00 am ET

Executives

Steven Nichols – Chairman and President

George Powlick – Chief Financial Officer

Analysts

Jeff Van Sinderen – B. Riley & Company

Sam Poser – Sterne, Agee & Leach

Christopher Svezia – Susquehanna Financial Group

Brad Hathaway – Jay Goldman & Company

Presentation

Operator

Welcome to K-Swiss's Third Quarter conference call. For opening remarks and introductions I would like to turn the call over to Chairman of the Board and President, Mr. Steven Nichols.

Steven Nichols

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 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 therein, 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 said forth in the company's periodic filings, including its Form 10-Q for the quarter ended September 30, 2009, which is currently on file with SEC.

Backlog as of any date represents orders scheduled to be shipped within the next six months. Backlog does not include orders scheduled 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

We know that last quarter that the second half of the year would be tougher as we methodically work through our inventories and closeouts. The third quarter results were consistent with the strategy and are evident in the decision to leave our full year estimates relatively unchanged. We are on target with running some encouraging sell-throughs continue at select [inaudible] sold by shoes. Our triathletes are doing well in recent events which in turn is broadening our brand recognition.

The same can be said for [Klagen], we have tightly controlled distribution of this brand, and the customers that are trying out these shoes are reporting good sell-throughs as well. We've a long way to go and we'll of course take it slow and steady, but we like what we see so far. The breakdown of sales by product category for the third quarter of 2009 was as follows, performance 18%, lifestyle 62%, other 20%.

Our performance revenues were up 20% when compared with the prior year end period. This category includes all genders, tennis, running, and training. Lifestyle revenues were down 38% when compared with the prior year period. This category includes all genders of non-performance footwear.

The biggest sellers for the quarter in lifestyle were the Classic, which sold 268,000 pair, which is a decrease of 24% for the prior year period, the Lozan II with 122,000 pair, the Molten with 77,000 pair, the Albury II with 68,000 pair, and the Mohr with 65,000 pair. The top performance seller was the ST329 with 75,000 pair. Other revenues which include apparel and Palladium were up 21%.

After strategic analysis and planning, we've established a new direction for marketing our product. The [inaudible] will focus on positioning the K-Swiss brand as the California Sports Company. Our brand was born in California in 1966. The original Classic shoe was designed here in Van Nuys, California, and our current tennis running and classic business fits nicely into the California Sports Company.

This brand positioning is the catalyst for us to create emotional connection with our consumers everywhere. Note that California has a spirit that is both different from other places as well as aspirational around the world. For us this is not about California stereotypes, instead our new brand voice will communicate a playful, creative, and progressive California attitude towards sports and lifestyle. We think this is what consumers want, K-Swiss authenticity or the unique attitude versus competitors cache and sports performance.

Tennis is our California heritage and we'll build it into this foundation; world class pro tennis players, product innovation, events sponsorship, and grass root tennis programs are keys to expanding our affinity with the tennis consumer. We're looking to add top athletes to our brand team. We've signed a term sheet with Sam Querrey, the number 2 ranked U.S.A. player. Sam grew up in California just a kick serve distance from our office.

We'll continue to bring new unique product technology to tennis community, and to maintain our commitment to the sport. The California Sports Company is real for the Classic II. Our white Classic tennis shoe is an icon of California Sports aspired lifestyle off the court.

Running is another important pillar in K-Swiss being the California Sports Company. To support this, we recently signed a multi-year partnership with the L.A. Marathon to be its official footwear and apparel brand. Serving as the hub of the L.A. Marathon will be our new K-Swiss running retail store that will soon open in Santa Monica. The store will showcase our full line running shoes including the K Series, as well as our proprietary miSOUL, and tubes cushioning technologies.

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