WESTLAKE VILLAGE — Talk about a tough act to follow.
K-Swiss Inc. was walking tall back in April, when the Westlake Village maker of high-end athletic shoes delighted investors by announcing first-quarter earnings of $1.15 per share--about 40 cents above consensus estimates. The numbers came on the heels of a banner year in 1998, when K-Swiss earnings nearly tripled over the previous year to $12.5 million.
K-Swiss reported more healthy growth in this year's second quarter, but this time its earnings of 58 cents per share came in at a more modest 4 cents above consensus estimates.
The company's failure to trounce second-quarter expectations like it did the first quarter set K-Swiss stock back a few steps on Wall Street, where its share price has dropped from a high of nearly $60 in May to its current level in the $35 range. It closed Monday at $34.75.
"The price spiked in May," said Brenda Gall, an analyst at Merrill Lynch. "I think investors went a little overboard on it at the time, willing to put a high multiple on it.
"There were momentum investors in this. Once the rate of increase starts to slow, some of these momentum investors drop out. Even though growth can be great, some of the momentum buyers can get out, and that's what they did."
Analysts and K-Swiss chief executive Steve Nichols point out the company's most recent numbers would hardly leave anyone with cold feet. Earnings for the second-quarter that ended June 30 were up nearly 200% compared with the same quarter of 1998, and revenues also grew a healthy 64% over the same period. The company is also debt-free, and has sufficient cash and credit to make acquisitions for as much as $100 million, according to Nichols.
"My job is to manage our company and sell shoes," said Nichols, who has boosted K-Swiss' annual revenues from less than $20 million when he joined the company in 1987 to an estimated $250 million or more this year.
"What happens in the stock market after that--there are so many factors that are beyond my or anyone else's ability to predict, so it's hard to know what's going to happen," he said. "We're very pleased with our results. They're very good for our industry."
Indeed, one of the company's biggest boosters on Wall Street these days is K-Swiss itself, which has embarked on an aggressive stock buyback program of late. The company has purchased more than 20% of its shares during the past two years for about $35 million--including $5.6 million in the first two quarters of 1999 alone, Nichols said. K-Swiss also has returned some of its profits to shareholders, announcing quarterly dividends of 15 cents and 1.5 cents per share in June and September, respectively.
While some might say the money used to buy back stock could be better spent on growing the business, Nichols says that isn't necessarily so.
"Normally when you spend money buying back shares, people look at that as an aggressive endorsement that you believe in your brand," he said. "Every time you look at another company--and we've looked at other companies to buy--we say we like K-Swiss better and we buy more of our stock."
Nichols says the cash-flush K-Swiss is "diligently looking to acquire other companies," but has yet to find one that's the right fit.
The company will spend a sizable chunk of cash--about $17 million--on a major advertising campaign in this year's second and third quarters, when shoe sales are typically strongest, Nichols said.
In the meantime, K-Swiss is gearing up to introduce a new line of training shoes that could add as much as $100 million in annual sales within three years--if the product catches on. The shoes, which are designed for athletes who require separate footwear for various forms of training in their sports, are "very different" from anything K-Swiss has done before, Nichols said. They are now being shopped to wholesalers, and will likely reach stores in the first quarter of 2000.
"The company has been gaining share consistently, but they're a tiny niche player in a big market," said Gall of Merrill Lynch. "The big thing now is how retailers respond to these training shoes. It'll give them more balance if they're well received."
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Stock Watch / K-Swiss
Roller-coaster ride: Shares in Westlake Village-based K-Swiss approached $60 in late May, but modest earnings gains led to a sharp decline.
Monday close: $34.75