Continuing the momentum established in the previous quarter, K-Swiss' revenues rose by 10.2 percent to $72.6 million in the first quarter ended March 31, driven by a 31.4 percent increase in domestic revenues to $31.5 million. Judging from a 45 percent improvement in orders, the rally should continue: K-Swiss expects to finish 2011 with a 25-35 percent increase in revenues.
The company finished the quarter with a net loss of $9.8 million, more than twice that from a year earlier due to continued spending on product development and marketing. K-Swiss is expected to be loss-making this year but could approach break-even in 2012 if it maintains marketing expenses in line with this year. Financial analysts see 2011 sales exceeding $280 million compared with $217 million in 2010, and the net loss narrowing to $40.0 million from $68.2 million a year earlier.
K-Swiss is not performing as well in Europe as in the U.S. Europe's share in group turnover decreased to 32 percent from 41 percent a year ago, while Asia rose to 16 percent from 15 percent. European sales declined by 14.0 percent, but orders from European customers are up by 35 percent.
By category, the company's sales of performance footwear, consisting of tennis, running and training shoes, were up by 69 percent in the quarter. The best-selling model was the Tubes Run 100, with 246,000 pairs, followed by Grande Court, 79,000 pairs. Performance shoes represented 43 percent of the U.S. company's sales, or about $31 million.
Lifestyle shoes represented 33 percent of sales, led by the Classic white leather sneaker, which only sold 184,000 pairs during the period. K-Swiss's chairman and chief executive, Steven Nichols, said it was the first time he could remember a shoe outselling the Classic model in the company.
Sales of the Tubes training shoes were supported by a major advertising campaign in the U.S. The company intends to repeat the campaign in the autumn and in January 2012. However K-Swiss believes that its lightweight running shoe, Blades, could be its next best seller, overtaking Tubes.
Other revenues, including apparel, FORM Athletics and Palladium, were up by 23 percent.
By brand, the volume of K-Swiss shoes sold dropped to 1.8 million pairs in the quarter from 1.9 million a year earlier, but the wholesale price per pair increased to $29.31 from $27.21. By combining the K-Swiss and Palladium brands, the average wholesale price was up to $30.33 per pair from $28.20. Overall, the group delivered 2.1 million pairs of shoes in the quarter.
Worldwide orders with start shipment dates from April through September 2011 increased by 45.0 percent to $105.2 million as of March 31. Domestic orders rose by 62.0 percent to $47.2 million and international orders were up by 33.6 percent to $58.0 million. The backlog for the Palladium brand was up by 82.0 percent in the U.S. and rose by 218.0 percent in Europe, excluding France. The group's inventory was up by 95.4 percent to $80.4 million at the end of the quarter.
K-Swiss' gross margin dropped to 39.3 percent from 43.5 percent due to an increase in inventory and royalty reserves as well as greater discounts stemming from production delays in China, and the gross margin should approach 39 percent for the full year. The company is undergoing a review of its manufacturing policy, switching from a wholly Chinese-based production, as recently as last year, to half of its production outside the Asian powerhouse at the end of 2011 – mostly in Thailand, Vietnam and Indonesia.
