Hit by a sharp decline in American orders, K-Swiss managers said the company's costs would be “viciously attacked” to redress its sagging profit margin and to align the group's structure with the current situation. Costs could be reduced by about 20 to 25 percent next year.
The drastic move comes as the Californian sports brand's orders declined at the end of the third quarter and it remained saddled with excess inventory estimated by Steve Nichols, the company's chief executive, at about $50 million. Its margin was impacted badly in the third quarter, and should be hit further as K-Swiss begins to liquidate its inventory. To partly make up for this impact, the company said that SG&A expenses in the range of $155 million would be reduced by at least $30-$35 million next year.
The company still reported improved results for the third quarter, with a sales increase of 30.8 percent to nearly $80.5 million for the K-Swiss and Palladium brands. Its domestic revenues inflated by 21.0 percent to nearly $32.7 million for the quarter, while international revenues jumped by 38.6 percent to just under $47.8 million. The largest increase came from Europe, where sales grew by 52 percent, compared with 20 percent in Asia.
The quarterly sales rise was driven by K-Swiss performance products, which saw their sales rise by 73 percent for the quarter, led by running and tennis footwear. Meanwhile, sales of K-Swiss lifestyle products inched up by 3 percent.
Large-scale investments to push K-Swiss performance running footwear were rewarded with much-increased exposure. Apart from receiving several awards, the company said it was the third brand in the shoe count at the Ironman World Championships. Its sponsorship deal with Gaël Monfils, the French tennis player, paid off handsomely as well.
The turnover of the Palladium brand climbed by 35 percent for the quarter, buoyed by Europe. The K-Swiss group has also been building up the Palladium brand in the U.S. market, with the opening of three Palladium stores in the country in the last two months. Distribution has been expanded rapidly in the last two years, China and India being the only large markets yet to be covered.
Separately, K-Swiss said that it had decided to discontinue the operations of Form Athletics, an apparel brand focusing on mixed martial arts, which it acquired only last year but no longer regards as fit to contribute to the prospects of K-Swiss. Form's revenues were reported in the third quarter as discontinued business. It represented a loss of $1.8 million for the quarter.
K-Swiss suffered a drop of 4.9 percentage points in its gross margin, down to 35.8 percent. While it slightly raised its average selling price, it was still hit by higher product costs, more inventory reserves and more closeout sales. The company suffered yet another quarterly loss of about $15.4 million for the third quarter, which was still better than the loss of $28.3 million recorded for the same quarter last year.
Furthermore, orders for K-Swiss products decreased by 4.2 percent to nearly $76.6 million, which includes an increase of 12.3 percent for orders to be delivered in the fourth quarter of this year, but also a decline of 11.3 percent for orders intended for the first quarter of next year.
A decline of 24.1 percent in domestic orders comprised an increase of 12.6 for orders to be delivered in the last quarter of this year, but a painful drop of 40.6 percent for orders to be shipped in the first quarter of next year. On the other hand, international orders increased by 12 percent for the last quarter and by 11 percent for the next three months. Orders were up by 20 percent in Europe, but they eased by 2 percent in Asia.
As for Palladium, its orders increased by 27.7 percent, which includes a decline of 20 percent in the U.S. market, an increase of 106 percent in Europe excluding France, and a jump of 181 percent in Asia.
While the focus in the last quarters has been on building up sales of performance running footwear, K-Swiss said that next year would be chiefly dedicated to the launch of an updated Classics range – a fresh and cleaner version of its white sports lifestyle footwear.
The four stripes that characterize K-Swiss shoes will no longer be so apparent, which will make the new Classics less conspicuous. Described as probably the largest launch K-Swiss ever had, the Clean Classics range is to be offered in three different price ranges.
At the same time, K-Swiss will continue to capitalize on its performance range, with the launch of its patented Blade technology into more categories.
K-Swiss expects that it will end the year with sales in the range of $260 million and a gross margin of about 36.5 percent, compared with 39.2 percent last year.