Company analysis of K-Swiss

K-Swiss

Company Description

K-Swiss is an American footwear company, traded on the NASDAQ exchanged under the ticker symbol KSWS. The company is a niche player in the industry. The athletic footwear industry in the U.S. was worth $12.39 billion in 2008 (SGMA, 2009). K-Swiss had U.S. revenues of $99 million, which implies a 0.8% market share. The company also had international sales of $110 million, for total revenues of $209 million (2009 Annual Report). Compared with its competitors, K-Swiss has a relatively limited product line. The company competes primarily in the Tennis, Classic and has recently added Running to its lineup (2009 Annual Report).

K-Swiss has its roots in tennis shoes, and considers this to be its strongest category. It recently re-introduced its Classic shoe in order to compete in the industry's second-largest segment. The company attempts to compete as a differentiated producer, positioning itself somewhat away from the major brands. Brand positioning tactics include styling and exclusivity. The company does use celebrity endorsement in its niches, a common practice in the athletic footwear industry.

According to MSN Moneycentral (2011), the company lost $68.21 million in 2010, after earning revenues of $216.99 million. K-Swiss has seen declining revenues in each of the past fives, attributable to a combination of general industry slowdown (SGMA, 2009) and firm-specific weakness. Sales in 2006 were $489 million, so the most recent figure represents a decline of 55.6% in the past five years. The company has failed to downsize its operations in response to this revenue decline, with its selling/general/administrative (SGA) expense being $131.91 million in 2010 compared with $130.81 million in 2006. The 2010 figure represents 60.8% of revenue while the 2006 figure was just 26.7% of revenue. The company has lost money in each of the past two years and has seen its profits decline in at least the past five years consecutive (MSN Moneycentral, 2011).

K-Swiss currently trades at $11.55, which is in the middle of its 52-week range ($8.75 - $14.53). The company in 2009 stopped paying a dividend to its shareholders, a reflection of its ongoing weakness (Marcus, 2009). The company's current stock price therefore reflects some degree of investor optimism with respect to either future dividends or future stock price appreciations, neither of which is congruent with the firm's performance of the past five years.

The company does have a healthy balance sheet, however. Its current ratio is 7.13. K-Swiss has no debt. The company's equity is 81.5% of its capital structure. This balance sheet performance is out of character for a company that has struggled as much as K-Swiss, but it demonstrates that the company successfully saved for a rainy day. While it has struggled for a couple of years it has the financial ability to do so, a key source of internal strength for the company. K-Swiss' conservative approach to finances will help buy it time to fashion a turnaround strategy.

The Athletic Footwear Industry

The athletic footwear industry was worth $12.95 billion in the U.S. alone in 2008 (SGMA, 2009). The industry is global is scope, with international markets worth at least double the U.S. market and probably much more. The industry in the U.S. is relatively concentrated, with a handful of major companies dominating. Nike is the industry leader, with Adidas, Puma and a few other companies competing at that level. Firms such as K-Swiss are forced to compete as niche players in just a few footwear lines. With respect to footwear lines, the industry is segmented. The segments are often by sport, with Classic being a non-sport addition. The leading sport is running/jogging, which was worth $3.16 billion in 2008; classic was second with $1.98 billion and kids was third with $1.78 billion. Sport-specific segments, including tennis, basketball, soccer, skate/surf, outdoor/adventure and sports sandals are smaller, but can be high growth segments. Many of these segments are intensely competitive and the major players tend to compete in all segments vigorously. Thus, while K-Swiss has attempted to carve a niche for itself, it still faces intense competition from other differentiated providers.

The industry is dominated by two major key success factors -- marketing and design. Firms in the athletic footwear industry spent billions on marketing, including endorsements deals with athletes, advertising, and securing distribution networks. For smaller firms like K-Swiss, distribution is more difficult to achieve, but it is essential that the company be represented in major chain stores such as Foot Locker. Without this representation, K-Swiss could lose out on many customers. Design is a critical success factor in athletic shoes because of the attention to styling that most consumers pay. Shoes are turned over seasonally or annually, making fashion important. Again, there are economies of scale in design -- the biggest companies can afford the best teams of designers, putting smaller firms at a style disadvantage unless the smaller firms develop superior in-house design talent.

In recent years, there has been some consolidation in the industry. Adidas purchased Reebok in 2005 while Nike has added Umbro and Converse in 2008 and 2003 respectively. Puma has received significant investment from Gucci owner PPR. This trend towards consolidation has created a challenging environment for the remaining independent firms, who must now compete with massive global corporations that have tremendous economies of scale in marketing, merchandising, purchasing and production. K-Swiss has struggled as this consolidation trend has progressed through the past decade.

The economics of the industry are somewhat unique. Advertising is almost as large an expense as production. Production for most firms is offshore in low-wage countries as shoe-making remains a labor-intensive process. Most firms in the industry offset the high cost of shoe production with higher-margin clothing and ancillary items. K-Swiss is more dependent on shoes, and without strong marketing has reduced pricing power compared with its peers. That has resulted in COGS being 60.7% of revenues, whereas at Nike it is 53.7%. Nike's SGA as a percentage of sales is 33.2% compared with 65.6% at K-Swiss, again illustrating the benefits of having economies of scale.