Investors didn't take the time to lace up before running out the door last week as shoe and apparel retailer K-Swiss Inc. hit the skids with a weak quarter and glum prospects for the future.
Shares in the Westlake Village-based company, which makes athletic shoes, shed more than 10 percent after the company reported a 94 percent drop in fourth quarter profit and a 17 percent decline in sales. The news resulted in a sell-off.
The company's management didn't ease concerns. They warned during the company's Feb. 26 earnings conference call that even though domestic sales tanked 35 percent year-over-year, there was still room to fall. They said future backlogs, or deliveries scheduled in six months, declined 40 percent during the quarter.
The company reduced its forecast for fiscal year 2008 revenue to a low of $310 million and a high of $340 million significantly below 2007's $410 million.
Analyst John Shanley, with New York-based investment firm Susquehanna Financial Group, was one of the first analysts to downgrade the stock after the poor earnings report.
Shanley said that management's frankness about the company's grim outlook prompted him to downgrade the stock.
"Management advised that declines in its backlog have continued to outpace declines in its overall business," he said. Foot Locker, the company's biggest customer, also saw considerable declines that Shanley expects will continue.
Shanley was also concerned about the cost of manufacturing K-Swiss' product. Factories are almost exclusively in Southeast China.
"We believe there could be further downside risk if the company encounters pressures from its suppliers," he added.
The K-Swiss product line has been dominated by the all white "Classic" style of athletic shoe, which accounted for 62 percent of the company's total sales in the fourth quarter. It's been losing popularity.
"Management noted that it intends to heavily invest in new product and marketing initiatives in the coming year," he said. As a result, additional declines are expected as both retailers and consumers adapt to its new product lines.
There is some hope, though.
Analysts have speculated that the revamped marketing approach and product offering, combined with the company's push to penetrate the European market with particular emphasis on France may be enough to get K-Swiss back on track.
Another advantage is that management has kept K-Swiss nearly debt-free and has also been extremely frugal with its cash amassing more than $290 million making a stock buyback another likely way of reinvigorating the struggling company.
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