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K-Swiss Inc. (KSWS)

Q1 2010 Earnings Call

May 6, 2010 11:00 AM EST

Executives

Steven Nichols – Chairman, President, and CEO

George Powlick – CFO

David Nichols – EVP

Analysts

Jeff Van Sinderen – B. Riley

Sam Poser – Sterne, Agee

Brad Hathaway – Jay Goldman

Chris Svezia – Susquehanna

Presentation

Operator

Welcome to K-Swiss’s First Quarter 2010 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded, Thursday, May 6th, 2010.

I would now like to turn the conference over to Mr. Steven Nichols, Chairman, President, and Chief Executive Officer. Please go ahead, sir.

Steven Nichols

Thank you and good morning, everyone. With me today is George Powlick, our Chief Financial Officer, and David Nichols, our Executive Vice President. 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 the 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 March 31, 2010 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 the subsequent periods.

Steven Nichols

We started to year off as we expected with some momentum carried over from our marketing launches in the fourth quarter and earlier this year. We made quite a few announcements during the quarter that highlights where we are investing in growing the Palladium brand and extending the K-Swiss brand. We will continue to ramp up our investments during the year. This is a pivotal year to setup for success in 2011. We will speak more of these efforts in a moment.

Let me first touch on our sales performance during the quarter. The breakdown of sales by product category for the first quarter of 2010 was as follows: performance 28%, lifestyle 52%, other 20%.

Our performance revenues were up 2% when compared to the prior-year period. This category includes all genders of tennis, running, and training. Lifestyle revenues were down 28% when compared to the prior-year period. This category includes all genders of non-performance footwear.

The biggest sellers for the quarter in lifestyle were the Classic, we sold 258,000 pair and increased 8% from the prior-year period; the Trifuno with 80,000 pair; the Albury II with 72,000 pair; and the Grande Court with 44,000.

Top performance sellers were the ST329 with 75,000 pair and the Contesta II (ph) with 44,000 pair. Other revenues which included apparel and Palladium were up 34%, but on a small base. Overall, our domestic business was down 21% in the quarter and backlog was up 3%.

Our international business was down 4% in the first quarter and backlog was down 4%, as well at March 31st, 2010. European sales were down 12% for the quarter with a 16% decrease in backlog. Europe accounted for 41% of our worldwide revenues compared with 42% a year-ago. Sales in Asia were up 22% in the quarter, but a 33% increase in backlog. Asia is our third largest reason, which accounted for 15% of worldwide revenues in the quarter compared with 11% a year-ago.

You will note in our press release, we were notified in April that our contract manufacturer in Thailand has ceased operations. This is the only one of three we use in this capacity worldwide. And this particularly manufacturer was fulfilling orders for 700,000 pair, primarily vulcanized rubber soles and some cold cement. This production was primarily concentrated for Latin America and to a lesser extent Europe. We are working hard to replace this loss capacity, but it will likely take us some time to line it up.

We have already experienced some cancellations due to our inability to deliver the primary canvas products and there is no guarantee that there won’t be more cancellations over the next two months. However, we hope these cancellations will be contained only to these orders which would represent the loss of approximately $5 million in revenues right across the second and third quarters.

I would now like to turn the call over to David Nichols to discuss our product and marketing initiatives.

David Nichols

In March, we officially launched our positioning of the K-Swiss brands to the California Sports Company to consumers with a new marketing campaign. We think that our progressive, creative, and playful California attitude towards sports and lifestyle will connect with consumers around the world.

We see the California Sports Company as the bridge that connects our California heritage in classics and tennis products, our performance in running and training efforts, and more youth driven California lifestyle products like skate that will continue to evolve.

Read the rest of this transcript for free on seekingalpha.com