Kswiss

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DANIEL TAUB

Staff Reporter

It may not have celebrity endorsers like Shaq or Michael Jordan. But athletic shoemaker K-Swiss Inc. of Westlake Village is scoring steady earnings gains, even as its flashier competitors including Nike Inc. and Reebok International Ltd. seem to be stumbling.

While the giants keep concocting ever-more-elaborate shoe concepts, K-Swiss keeps growing by not straying far from the same simple, white-on-white tennis shoe it has been making since 1966.

“They have a niche product that is doing very well,” said Jeffrey Van Sinderen, an analyst at securities research firm B. Riley & Co. Inc.

Part of K-Swiss’ success, according to Van Sinderen, is a stepped-up advertising budget and small production runs. That helps keep the shoes out of discount bins, where a brand’s reputation can be damaged.

But the primary driver of two straight years of consecutive earnings growth has been a simple change in fashion trends.

“One of the major macro kind of trends is the switch from denim to khakis, and they have capitalized on that, primarily with their white-on-white-type shoes,” Van Sinderen said. K-Swiss shoes simply look better with khaki pants than do the shoes of many of its competitors, he said.

“We do make a shoe that you can call the Oxford button-down, blue blazer of athletic shoes,” agreed Steven Nichols, K-Swiss’ president and chief executive. “It goes well with khakis. It’s very vanilla and when you don’t know what to wear, this works. And you’re always in good taste when you wear this.”

But in the fickle world of fashion, nothing is forever. That has led to concerns about how long K-Swiss can maintain its stellar growth.

The majority of K-Swiss’ revenues come from its line of white-on-white “Classics” the upper of which is made from just three separate pieces of leather. The Classic has remained virtually unchanged over the last three decades and is marketed today as a casual shoe. It is part of a line that also includes the K-S Collection and the Limited Edition line. Shoes in those two lines are offered only for a limited time, which is intended to boost demand for them.

While the strategy has worked so far, Van Sinderen said there is growing concern about long-term success.

“The issue is, they have to keep coming up with a new shoe every season, or every couple seasons in the case of the K-S Collection,” he said. “The question everyone has is how long can they continue to put out great shoes every season without stumbling, and I think that’s on everyone’s mind.”

In March, Van Sinderen downgraded his rating on K-Swiss’ stock to “neutral” from “outperform.”

Investors apparently have similar concerns. After driving up K-Swiss’ stock price from less than $10 a share a year ago to a high of $59.81 late last month, they have been aggressive sellers in recent weeks. The stock was trading at $36.50 late last week, nearly 40 percent off its 52-week high.

“I don’t know what’s driving the stock down,” Van Sinderen said. “You’ll have some profit taking. That would be normal and healthy. But at the same time it’s hard to point to one thing to say why the stock is down.”

Nichols would not speculate on the reason for the recent sell-off. “People buy it, people sell it,” he said.

The company’s financials, however, still reflect the shoes’ reborn popularity. In 1998, net income was $12.5 million, about triple the $4.2 million of a year earlier. Revenues rose to $161.5 million, up from $116.2 million.

The financial performance was even more impressive in the first quarter ended March 31, when K-Swiss reported net income of $13.3 million a 275 percent increase from the like year-earlier period, and a 6 percent increase over the entire previous year.

Given its relatively small market cap of $284.5 million, K-Swiss is only followed by a handful of analysts. A consensus of four analysts surveyed by First Call Corp. concludes that the company will generate per-share earnings of $2.38 this year more than double its 1998 level.

Driven by its growth, K-Swiss moved last August from its 53,000-square-foot headquarters in Chatsworth to a new, $6 million building in Westlake Village with nearly 100,000 square feet of space.

The headquarters facility houses K-Swiss’ design, development and marketing staff, which has grown about 20 percent in the last 18 months. Its manufacturing is done overseas, mostly in Southeast Asia.

While the company continues to sell a large number of shoes to tennis players (its original shoe was marketed and sold as a high-performance tennis shoe), the majority of its sales are coming from its Classic line.

K-Swiss is slated this August to introduce a high-performance training shoe, intended for endurance running, weightlifting, gym workouts and other athletic activities. “It’s a way of expanding it our core business which has been tennis,” Nichols said. “We think many elements of our tennis shoe can be used in this training category.”

But Van Sinderen said he is concerned that with the introduction of the training shoe, K-Swiss may be moving away from its time-tested emphasis on casual shoes.

The company’s success “could last for a long time, don’t get me wrong,” he said. “If they’re successful with the cross-training shoe, more power to them.”

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