K-Swiss Still A Value Trap?

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I woke up 5 years too early today when I noticed K-Swiss (KSWS) down 23% for the day. Ouch. The additional announcement of eliminating the dividend didn’t help things either.

Current Status

KSWS is a small player in the lifestyle and athletic footwear industry. Until now, they derived most of their revenues from a single product, the Classic, and they were caught flatfooted as consumers started to tire of the design. This trend started to show domestically and the company realised that the same effect will spill over to Europe. So KSWS ramped up designs and new strategies including free running, tennis and now running. New models and spokespersons such as Anna Kournikova, Tommy Haas, and Sebastian Foucan make up the new look to attract new consumers from different fields.

Strong Balance Sheet

The economy is terrible, people are not going to buy shoes that start from $65, and todays announcement didn’t please anyone but it seems like KSWS is getting more interesting as the company nears its cash value.

Cash makes up $5.86 of its $7.09 share price and has a net net working capital value of $5.66 as the company has very minimal debt and other obligations. There are no off balance sheet obligations or any other alarming warnings signs.

Good Management

Skechers is also in a similar position except the difference is that while Skechers and other companies mark down their inventory to liquidate inventory, KSWS does not offer any fire sales and has always managed their inventory quite well.

Their strategy of selecting a handful of distribution channels allows KSWS to maintain their “upper class” brand niche. This can be seen in their impressive margins. For KSWS to have margins of 40% and up (39.8% in 2008 and 46.3% in 2007) is very impressive. It is in line with NKE and DECK in both gross and operating margins but 2008 has proved difficult for KSWS as they end the year with a loss and is expected to lose more in 2009.

Management has always been very open and straight forward. They do not hide behind words. This is the confidence usually found within a select group who run the business as owners and not to please Wall Street or to inflate share prices. With CEO Nichols holding approximately 93% of the voting power, shareholders cannot do anything except trust and wait. What makes me continue to hold is that the management have never focused on near term results or a quick fix. For over a year, on every conference call, they have warned investors that the outlook is grim with revenues diminishing. Quite a contrast to the financial CEO’s and even Immelt of GE.

Value Trap?

I’ve only covered a few points but with such a strong balance sheet and good conservative and expereinced management, KSWS will surely survive the downturn. The price has the potential to fall further but if it nears the mid $5 mark, we are entering net net territory for a good quality company. Interested people may soon be able to get the brand as well as its subsidaries for free.

KSWS may be surrounded in a fog with low visibility but it does not fall into the category of a value trap swarmed in darkness.


I own KSWS at the time of writing.

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5 responses to “K-Swiss Still A Value Trap?”

  1. jeff says:

    Here is an idea that I have been wanting to bounce off someone for a while.

    Something that I like to look at for these cash rich companies is “how long can they not sell any product, and still pay their executives.” While this is pretty simplistic (and, like so many metrics is not a case for buying or selling), it can help make the case for some companies, and can eliminate others…

    2 examples:

    JOB can burn through all their cash in a few quarters, despite trading for a fraction of it…

    K Swiss can pay their executives (the last people that will take a pay cut), sell no shoes, and still stay cash solvent for roughly 2 years… That seems like a company that will be surviving to me!

    jeff’s last blog post..Someone Changed Jeffrey Macke’s SHLD Article!

  2. Jae Jun says:

    Good point Jeff. That’s similar to how I think about net nets and cash companies.

    The only thing that I am concerned is that KSWS is the type of company that does bad with the economy but also does well if the economy is healthy. I would prefer a business that still manages to make money in both hard and good times.

    Will be selling KSWS as soon as it inches close to my sell target.

  3. Chicago Guy says:

    I own some shares too, but I’m worried. Yes, the balance sheet looks excellent, but sales have declined from $500 million to $340 million from 2006 through 2008. One has to wonder whether an economic rebound can help this firm. How long can such declines in sales continue before they burn all their cash? And what was that recent special dividend all about?

  4. Jae Jun says:

    Hi Chicago Guy,

    You’re right, sales have declined and quite dramatically and it is a worry but here is why I am continuing to hold.
    KSWS (the stock) became quite popular by employing the same sales and marketing method as now. Back 3-4 years ago, they were getting good traction with the Classic and they did it by selecting a handful of distributors rather than just throwing it on any shelf. Their recent strategy and plan to get into the running and triathlon market is going to be very tough but they are focusing on getting the product right and established within the athletes before occupying shelf space.

    The norm for retailers would be to create the shoe and try to get it into as many places as possible, but KSWS is being very deliberate and sure-footed. This is definitely something experienced management would do.

    The special dividend was nice wasnt it? Management know they have plenty of cash and felt they needed to distribute it to shareholders even in a time of uncertainty. This doesn’t follow the tradition nowadays of trying to hold as much cash as possible.

    Tf they keep performing the way they are, they can still survive around 3 years.

  5. Jae Jun says:

    Have you also noticed that KSWS markets and begins to target specific niche demographics as well?

    First it was free running, and now with regular running shoes, they are sponsoring ironman and triathlon competitions. Nike is definitely the industry leader, but KSWS is always finding ways to run around them to get into the same market.

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