K-Swiss saw its shares tumble last week as the Californian company reported that its sales had slumped and its orders were on the slide. The company's entire turnover decreased by 4.3 percent to $69.3 million for the first quarter, with an increase of 17.8 percent to $48.5 million in international sales but a drop of 33.5 percent to $20.8 million in the U.S. market. The rise in international sales included a jump of 32 percent in Europe and a slight increase of 3 percent in Asia.
The overall slump was caused by K-Swiss footwear in the performance category, focusing on running and tennis, which saw its sales decrease by 24 percent for the quarter. Meanwhile, sales of K-Swiss lifestyle footwear were up by 12 percent and sales of other products climbed by 19 percent.
Sales were down by 6.4 percent in pairs for the quarter, as sales of K-Swiss footwear reached 1.6 million pairs, down from 1.8 million pairs, and combined sales of K-Swiss and Palladium dropped from 2.1 million pairs to 2.0 million pairs. On the other hand, average wholesale prices slightly increased, up to $30.73 for K-Swiss, compared with $29.31 for the same quarter last year, and up to $31.90 for K-Swiss and Palladium together, compared with $30.33 at the same time last year.
More worryingly, the company's orders for deliveries from April to September slumped by 32 percent to $71.5 million. The fall was most painful in the U.S. market, where orders were more than halved, decreasing by 54.0 percent to $21.7 million, but orders also declined in international markets, down by 14.0 percent to $49.9 million. Orders for the Palladium brand shrank by 4.5 percent.
European orders were down by 12 percent and Asian orders declined by 38 percent. The company attributed this to the later transmission in orders from its largest distributor in Asia, and the fact that orders at the same time last year were inflated by delayed shipments.
The Californian group's gross margin contracted by 1.6 percentage points to 37.8 percent, as it continued to clean up its inventory and closeout sales increased. At the same time, it earned fewer royalties due to the loss of an international partner.
The company's net loss was reduced to $6.7 million, compared with a loss of $9.8 million for the same period last year, but that did not suffice to reassure investors. The figures exclude Form Athletics, which is treated as a discontinued operation.
Steven Nichols, chairman of the company's board, said that K-Swiss wanted to address the issue of flagging U.S. sales and sagging orders with the launch of its Clean Classics range. The orders reported by K-Swiss indicate that sell-in for the range has been rather timid so far, but the company expects that consumer demand will push the range in the coming quarters. Clean Classics will be delivered from June, with leading accounts such as Finish Line and Footaction. The range will be supported with an advertising campaign focusing on five young men on a California road trip.
Nichols described Clean Classics almost as a make-or-break range for K-Swiss. He said he had already twice revitalized K-Swiss with a return to Classics, and admitted that it would be in bad shape if consumers did not bite again. However, Nichols said that the investments of the last years in a performance running range had been justified, and that the efforts were beginning to pay off.
While some analysts were disgruntled about Palladium, Nichols explained that the brand had suffered from the mild weather in the winter, but that the company was adequately building up the brand and that orders reaped for Palladium in April, after the end of the reporting period, were outstanding. Nichols was particularly upbeat about a distribution agreement for Palladium in South Korea: E-Land already opened a multi-brand store that delivered strong results for Palladium, and it intends to rapidly open another five of them. Palladium is also expected to obtain substantial orders from India and the Middle East before the year is over.
The company predicted that its sales would reach between $225 million and $240 million for the full year, down from $268.4 million in 2011, while its gross margin should land at 37 to 39 percent. When it reported its performance for last year, only two months ago, K-Swiss was still confident that its gross margin would reach 40 to 41 percent for the year.
On the other hand, the company did slash expenses, as it pledged to do two months ago. While selling, general and administrative expenses reached $175.7 million in 2011, K-Swiss predicts that they will end the year at $107 million to $109 million.
Meanwhile, a new generation is taking over the helm of the group's main brand, K-Swiss. David Nichols, executive vice president of the company, has been named global president of the brand, taking over the slot from his father, Steven Nichols. The elder Nichols will stay on as chairman of the board and chief executive of K-Swiss Inc. David Nichols has been with the company since 2005, working his way through various management positions such as president of K-Swiss Direct and president of European operations. In his new leading role he will oversee all aspects of the brand, including marketing initiatives.
