By the time K-Swiss Inc. agreed to sell to an apparel company in South Korea earlier this month, the shoe company had long since lost pace with its competitors.
In recent years, the Westlake Village company had fallen out of touch with footwear trends. It scrambled and put millions of dollars into marketing with little effect and as a result, lost a lot of money.
For most of the past year, shares traded below $4. But news that E. Land World Ltd. in Seoul offered to pay $4.75 a share for the company – a 49 percent premium at the time of the offer – boosted the stock price. K-Swiss was the biggest gainer on the LABJ Stock Index last week after it closed up more than 48 percent at $4.73 on Jan. 23. (See page 48.)
Analyst Sam Poser with Sterne Agee & Leach Inc. in New York said he thinks K-Swiss sold to E. Land World because Chief Executive Steven Nichols wanted to retire and had to make a choice about the company’s future.
“He probably wanted to hand the business to his son, David, but if you look at what it would cost to right the ship, I think he realized the company would be worth less a year from now given the kind of progress they’ve been making, unfortunately,” he said.
By the end of the third quarter, the company reported that revenue for the year to date – about $182 million – was already down about 17 percent from the same period the previous year. Furthermore, domestic sales of its namesake K-Swiss shoe brand dropped an alarming 40 percent. International sales only fell 5 percent.
But as the K-Swiss brand has lost favor with American consumers, the company’s second brand – Palladium – has been gaining ground in the United States. The French boot brand, which K-Swiss acquired in two transactions in 2008 and 2009 for a total of about $15.5 million, increased sales by almost 79 percent domestically in the first three quarters of 2012, and by 8 percent overseas. In 2011, Palladium boots made up about 16 percent of sales for the company.
Jeff Van Sinderen, an analyst with B. Riley & Co. LLC in Los Angeles, said Palladium’s growing business is likely what most attracted E. Land World.
“I think it’s sort of the jewel that the acquirer wanted,” he said. “I’m sure that they will continue to run the Palladium business on a similar course, to grow it in the United States and grow it overseas.”
Swiss brothers Art and Ernie Brunner co-founded K-Swiss in 1966 after immigrating to Los Angeles. The two introduced one of the first leather tennis shoes to the United States, an all-white model that for decades stayed true to its original design.
Steven Nichols, who formerly worked at Boston shoe company Stride Rite Corp., led an investment group to acquire K-Swiss in 1986 for $20 million. The company went public in 1990, and in 2005 it reached its sales peak of $508 million.
Today, K-Swiss employs 609 people. More than 200 of them work at the company’s 54,000-square-foot hillside headquarters in Westlake Village. Other employees work mainly in Asia and Europe. The company manufactures the majority of its products in China and leases a 309,000-square-foot distribution warehouse in Mira Loma.
At a conference with investors last year, David Nichols, president of K-Swiss, admitted that the company had peaked by 2006 and faced challenges since.
Although K-Swiss had built a loyal customer base for its classic white tennis shoes, it failed to expand into faster growing sports segments such as running, football, basketball and baseball shoes.
So in recent years the company made a big push into athletic shoes, focusing primarily on running, and pumped millions of dollars into flashy ad campaigns.
“We wanted to get back to our sports roots, to move the brand closer to the Nikes and Adidas of the world because we believed that would give us cushion from being so trend vulnerable,” Nichols said at the conference last year.
K-Swiss contracted with fitness guru Jillian Michaels from NBC’s “The Biggest Loser” and with fictional character Kenny Powers (played by Danny McBride) from HBO’s “Eastbound and Down” to endorse its products and star in ads.
But for all the money the company threw at advertising, Van Sinderen said it didn’t pay off. Some of the company’s big ideas for athletic shoes just didn’t click with consumers, including its Tubes shoes, which feature small tubelike structures on the outer sole.
“You could do great marketing,” he said, “but if the product isn’t right, that great marketing may not help you very much.”
In the 23 years K-Swiss has been publicly traded, the stock hit an all-time high of $37.29 in November 2006. In the years that followed, the stock dropped as low as $2.28 in October.
The sale, which is expected to close in the second quarter, prompted at least one investor to sue K-Swiss last week, contending that the $170 million offer undervalues the company.
The company did not return requests for comment for this article.
But for all the missteps K-Swiss has made in recent years, Van Sinderen said there’s an upside for E. Land World. The 47-year-old K-Swiss brand still has a lot of clout internationally.
“It’s a very recognizable brand,” he said. “They just made some mistakes in terms of direction.”
E. Land World is the international arm of E. Land Group, a fashion and retail conglomerate founded in 1980 with more than 200 brands in its portfolio and 10,000 stores worldwide, such as Kate Spade LLC stores in China. In 2011, the South Korean company reported $7.1 billion in revenue.
The acquisition gives E. Land World its first outpost and important exposure to the U.S. market.
SungKyung Park, president of E. Land World, said the Asian company will use its existing international infrastructure to build upon what K-Swiss started.
“K-Swiss is a well-established international sports brand, and we are very excited about the tremendous potential both the K-Swiss and Palladium brands bring to our proven global platform,” Park said in a statement. “We look forward to investing in the company and building upon its heritage.”
There was no indication of what might happen to the local operations.
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