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