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K-Swiss Slips As Fashion Trends Shift

Sometimes even a classic can fall out of fashion. That seems to be the case with K-Swiss Inc., which saw its earnings fall 27 percent for the first quarter ended March 31 as domestic sales slipped nearly 40 percent. K-Swiss, a revered athletic shoe brand, has been on the best seller list for years with its Classic white tennis shoe. But the shoe became so popular that it grew to account for the lion’s share of K-Swiss revenues, and more recently, as footwear styles have shifted to more flamboyant styles, K-Swiss lost much of its kick. For the first quarter of 2007, K-Swiss reported domestic sales decreased to $62.4 million, off from $103.4 million in the first quarter of 2006 and a major contributor to an overall sales decline of 18.3 percent to $122.6 million for the March 31 quarter. Net income declined to $17,997,000 or $0.51 per share compared to earnings of $24,910,000 or $0.70 per share in the prior year quarter. Even more troubling to The Street, K-Swiss reduced its prior full year guidance for 2007, now projecting revenues of $415 million to $440 million instead of the $420 million to $460 million it forecast earlier and taming its full-year earnings guidance to a range of $1.20 to $1.35 per share. In February, K-Swiss projected full year earnings in the range of $1.20 to $1.50. “While we believe the company is taking the right steps to reinvigorate consumer and retailer demand within the brand’s important domestic market, we do not expect domestic sales to stabilize until full year ’08,” wrote John Shanley an analyst with Susquehanna Financial Group LLP while lowering his own full year earnings estimates for the company. The Westlake Village-based footwear maker has been able to compensate for some of its declining U.S. market with a push into worldwide sales, and the effort has shown results. For the first quarter international revenues increased 29.2 percent to $60.2 million. But the company and the analysts who cover it, believe that, without a strong turnaround in the domestic market, the effort will fall short. “Customer acceptance of our domestic product has been weak and is likely to continue for the near term,” the company said in its first quarter SEC filing. “We have recently hired several individuals in product design and management; however, it will take additional time for the full impact of the contribution of these individuals to affect our business. In the first quarter, K-Swiss signed tennis star Anna Kournikova to be its spokesperson. In addition the company is investing in new strategies including apparel and a retail component including flagship stores in important domestic and international markets. “As we have noted before, we will remain patient in letting our new team have an impact in apparel, product development, international operations and marketing,” said Steven Nichols, chairman and president of K-Swiss in announcing the first quarter results. “We will also continue to rely on our strong cash position to make the necessary yet financially responsible investments to bring the K-Swiss brand back and build on our successes internationally.” Despite the recent challenges, analysts appear optimistic about long term prospects at K-Swiss, largely because the brand has already proven its might and longevity and it has withstood several down cycles in the years since its white tennis shoe came on the market in the mid-1960s. “And although I just ripped on K-Swiss for relying too much on one product, the Classic sneaker is one of the more durable footwear brands,” wrote Ryan Fuhrmann, in The Motley Fool’s Fool.com in February. ” Classic is suffering right now, but sales trends should eventually recover.” ECHO Fallout Continues An aborted merger with Intuit and its regulatory tangles took their toll on the second fiscal quarter financial performance at Electronic Clearing House Inc. Last week, the company reported a net loss of $1.9 million or $0.29 per diluted share for the quarter ended March 31, compared to net income of $424,000 or $0.06 per diluted share for the comparable period a year ago. Revenues rose 4 percent to $20 million in the second fiscal quarter compared to $19.2 million in the same period in 2006. “During the second quarter, ECHO management dedicated a substantial amount of time and resources to issues that diverted our attention from furthering our core business, namely our terminated merger with Intuit and our participation as a witness in the federal investigation related to our Internet wallet business,” said Joel Barry, chairman and CEO of the Camarillo-based electronic payment processing provider. The news sent shares downward, losing 16 cents in late afternoon trading, but the decline was relatively modest compared to the share price losses the company has already suffered as a result of the termination of the acquisition agreement. ECHO in March announced that it had terminated an agreement to merge with Intuit following a deal it made to cooperate as a government witness in a probe of online gaming Web sites. As part of the agreement, ECHO agreed to return $2.3 million, a sum it estimated was the profit it received from providing services to Internet wallet companies. That one-two punch sent its shares falling from the $18 range to the $12 range where it has traded since then. ECHO said that its difficulties kept it from developing its new business pipeline and implementing new initiatives. Officials said the company has returned its focus on its core business, but they believe it will take “a couple of quarters to regain momentum.” Senior Reporter Shelly Garcia can be reached at (818) 316-3123 or at [email protected] .

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