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K-Swiss Inc. (KSWS)

Q2 2008 Earnings Call Transcript

July 31, 2008 11:00 am ET

Executives

Steven Nichols - Chairman, President and CEO

George Powlick - CFO

Analysts

John Shanley - Susquehanna

Jeff Van Sinderen - B. Riley

Sam Poser - Sterne, Agee & Leach, Inc.

Jack Ripstein - Potrero Capital Research

Steve Martin - Slater Capital Management

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, 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 June 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 second quarter results were above what we had anticipated on higher revenues, offset by lower margins. As our business is always looking ahead the biggest news for us in the quarter was the continued deterioration of our domestic business and the double-digit decline of our international backlog. Two transactions during the quarter. However, significantly bolstered our financial position and provided another avenue for future growth.

The first was the acquisition of 57% interest in Palladium SAS, a French footwear company that has operated primarily in Europe. The second was our settlement with Payless for $30 million. We will speak more about each of these later.

The breakdown of sales by product category for the second quarter of 2008 were as follows. Performance 13%, Sports Style 83%, other 4%. Our performance revenues were up 8% when compared to the prior year period. This category includes all genders of tennis, running and training.

Sports Style revenues were down 21% when compared to the prior year period. This category includes all genders of nonperformance footwear. The biggest sellers for the quarter in Sports Style were the Classic, which sold 263,000 pairs, was down 10% from the prior year period and the Lozan II with 186,000 pair.

Other revenues were up 10% when compared with the prior year period. This category includes apparel and Royal Elastics.

The second quarter continued to leverage the new global brand campaign of our tagline "Keep It Pure" featuring our ath-lebrities. The campaign featured our Life Style and Performance footwear and ran in sports, fashion and lifestyle magazines as well as on TV during the NCAA tourney and on select MTV programming. We laid an outdoor advertising in key markets and reinforced our message regionally.

Additionally, we invested more in online efforts which is an important media for our target consumer. The media mix continues to be one that we will utilize in the back-to-school fall time period given there is not one single best media format to reach our target.

During the second quarter, we continue to strengthen our sports marketing effort. We're investing and supporting the sport of triathlon. We sponsored two triathlon events in April in Miami and in China where we had K-Swiss athletes winning top spots. We now have a dozen world-class tri-athletes wearing and winning in K-Swiss from head to toe and excited about the upcoming ironman races in Kona. We are confident that K-Swiss sponsored athletes will make the podium and provide exciting news for the brand over the next few months.

We think our participation in triathlon is important for two reasons. The first being it gives us authenticity in running and the second it connects us with a growing sport with consumers, who are open to new brands who provide products that meet their need. We are launching running for Q3 and have a portfolio styles for men and women. We are getting our shoes placed in specialty running stores for the first time. This channel provides us authenticity and credibility in the running market and paves the way for new breakthrough concepts we have for running in 2009.

Tennis is part of the K-Swiss DNA and continues to be a focus of our marketing as well as our footwear and apparel efforts. We had our athletes play in the French Open, Wimbledon and are excited to have them representing the brand in the upcoming U.S. Open. We recently signed a new top-10 women's player, Vera Zvonareva, who is the highest ranking -- I almost said her name right, too, who is the highest ranking of any player in the K-Swiss history. We now have six singles players in the Top 50 and the two top doubles teams wearing the K-Swiss shield.

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