K-Swiss, Inc. (NASDAQ:KSWS)

Great line of new shoes coming out!

Down and out? We'll see. All they need is a marketing catalyst.

not a wild company, but its pretty consistent. Once they bring back those sweet commericals and get some sponsors, people will be kissin the swiss.

Overview
Historically K-Swiss operated a great niche business which was fueled by its “Classic” product, a popular all white shoe, which required very little innovation, promotion and working capital investment. With a change in trends and a consumer downturn, the old cash cow has fast declined and revenue is expected to decline another 5-10% this year down to ($225M off a peak of $500M). K-Swiss is attempting to replace that business with a brand overhaul and a foray into the highly competitive performance footwear segment, a foray I believe is likely to fail and significantly changes the cash flow dynamics of the business.

Investment Thesis:
-K-Swiss trades at a 1.4x 2010E Revenue multiple and is 4-5 years away from being cash flow positive

-KSWS will continue to show negative cash flow through 2013 even in the rosier high growth scenarios

-CEO and controlling shareholder Steve Nichols is (67 years old) is essentially betting the company on its new performance line and its ability to compete with behemoths like Nike and Adidas as well as well established performance brands like New Balance, Asics etc

-Even if this program is successful, the margins, on-going promotional expenses and working capital investment of these sales is far inferior to that of the historical Classics business
-To achieve expected growth KSWS will need to penetrate additional retailers including mass retailers which will demand lower prices and better terms – a fact I believe the street is underestimating

-Further to this "grasping at straws" strategy - KSWS acquired Form Athletics this past quarter which is tied to earn out payment. Form is focused on MMA gear and is meant to be part of a new KSWS "Orange County" division. While small, I think this move supports the short story here.

Catalysts:
-Continued cash burn (~$30M this year or ~$1/ a share)
-Company took no reserve against its deferred tax assets in Q2 citing history of prior operating earnings and expectations for 2011 and beyond – I believe the company will be forced to record a $15m allowance in Q3 or Q4 given the outlook for the business
-Lack of margin improvement / cash flow generation

View vs. Street:
-Street is assuming improved working capital metrics and margins, along with significant revenue growth, while the 15-25% top-line growth may occur over the next few years, I believe the street does not appreciate the decline in cash flow conversion given the source of the revenue growth
-Street is not focused on working capital but I believe this will be a major use of cash given the expected revenue growth and the number of new product launches
-Street has margins expanding to 45% (8 pts +) which made sense historically but would be in line/superior to the larger performance competitors
-Consensus estimates do not account for the $15m reserve against DTAs

Risks
-Incremental spending on promotions and advertising yield results in significant top-line outperformance
-Potential acquisition although unlikely at these valuations and ownership of the business

This is a brief outline of how and why I selected KSWS to underperform:

(1) KSWS has maintained a ceiling in the $13 to $14 range since April and had a celling about $11 during 2009.

(2) KSWS has traded below $11 every month for almost the last two years expect September 2010, and it is likely shortable at $12.50 now.

(3) KSWS's revenues are down some 13% and future orders are down some 9% year over year for the last quarter.

(4) KSWS's lost some 50% more money year over year for the last quarter.

(5) KSWS's attempts to turn itself around with "K-Swiss Orange County" and the "Kenny Powers" TUBES™ campaign look pathetic and weak. Moreover, with the later, KSWS makes a mockery of itself.

(6) KSWS has already written off 2010 and hoping some results might materialize in 2011 or later.

(7) KSWS has always been a small, weak, trendy brand and it was forced into the mainstream without a solid base.

(8) KSWS's TUBES™ seem to lack any real novelty or appeal to the moronic youth market.

(9) One of three KSWS contract manufacturers ceased operations in April and KSWS has had to get temporary capacity elsewhere.

In short, KSWS is a joke and has no expectation of making money for about year or perhaps longer. Before it has another profitable episode, it is highly likely that KSWS will drop below $10.

They're burning cash, and will continue to do so for 2009. Don't see any short-term reason for a turnaround.

beat up name good brands

Way too cheap - low PE, good dividend, lots of cash on the balance sheet.

Over $8 a share in cash assets, solid fundamentals, experienced management, very undervalued (possible takeover target?)

Cash available, let's see if they can turn things around.

good company with a cold . . .

Well-managed company with a strong track record of delivering solid business results. They are investing for the future and working on some new designs that should get the business rolling again, hopefully in time for the rebound of the US economy over the next year or so.

Hit a wall with domestic business but mangement is experienced with these recessions.

Still earned 15% ROC and have no debt.

$8 cash per share, EV only 7x FCF

LOT OF CASH NO DEBT ONLY CONCERN THE PENETRATION OF THE PRODUCTS IS NOT OPTIMAL.

MFI CAP 88 TOP 50 8/16/07

Good shoes. Good company. I have seen this stock featured in several investment newsletters lately.

This one is a keeper for the long-term.

http://shadunskymethod.blogspot.com/2007/05/k-swiss-more-downside-on-way-in-short.html

Take advantage the low price.

Good management and low PE.