August wasn't a good month for footwear manufacturer K-Swiss (Nasdaq:KSWS). Its stock lost half its value and now trades near an all-time low of $4.85. Five years ago, it was trading near $40. Most of the decline came between 2007 and 2009. This year's rough ride in the markets finished it off. No analyst in his right mind would touch its stock. But I'm going to suggest three reasons why K-Swiss is a speculative buy right now.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Financial Health
Despite a precipitous decline in its share price caused by four consecutive years with an operating loss, K-Swiss is still very much alive. Its current Z-Score is 3.3, which means it has a low probability of bankruptcy. Furthermore, its total debt is $11.8 million, just 6% of shareholder equity. When comparing K-Swiss to similarly sized peers (see below), it's clear that its cash position is much stronger than any of its competitors is. The question remains for how long. Prior to its four-year losing streak, it had $291 million in cash on the balance sheet. In 2007, it could go almost eight quarters without revenue compared to less than two today. Skechers, which has the next-best level of cash-to-total-debt, actually fares worse, able to survive 1.3 quarters compared to 1.6 for K-Swiss. It has the balance sheet to survive but not with another four years of losses.

K-Swiss and Peers

Company Cash/Total Debt
K-Swiss (Nasdaq:KSWS) 5.3
Rocky Brands (Nasdaq:RCKY) 0.1
RG Barry (Nasdaq:DFZ) 0.9
Weyco Group (Nasdaq:WEYS) 0.4
Skechers (NYSE:SKX) 1.8

This is the key to its future. Its second quarter gross margin was 34.3%, 310 basis points lower year over year. For the entire 2011, it expects a gross margin of 37.5%, 170 basis points worse than in 2010. Margins are currently heading in the wrong direction. Its most profitable year in the past decade was 2005, when its operating profit was $107 million with a gross margin of 46.7%. Every year when its gross margin is below 40%, it has lost money. Steve Scruggs, portfolio manager for the Queens Road Small Cap Value fund (QRSVX), believes K-Swiss is moving in the right direction with a good marketing plan and should be able to get its gross margins back into the mid-40s soon enough. If so, this stock won't be under $10 for very long.

Revenue Growth
This is where the picture turns positive. Second quarter revenues grew 40% year-over-year to $65.5 million. Future orders are up 39.2% to $89.9 million with 2011 revenues expected around 25% higher at $271 million. It's still a long way off the $509 million it recorded in 2005, but at least it's in the right direction. Revenue growth at this point, while nice to have, is not nearly as important as higher gross margins. However, what is nice to see is the growth of its Palladium brand, which it acquired for $15.5 million in two parts in 2008 and 2009. Its diversification beyond athletic footwear will ultimately pay dividends. K-Swiss just needs to hang in there long enough to see it through.

The Bottom Line
K-Swiss is a speculative buy. There's no denying it. If you can't afford to lose your entire investment, you shouldn't be buying. Furthermore, a lot has to happen in the next few quarters for its turnaround to continue, including margins over 40%. However, if you have some fun money, the upside potential is tremendous. (For additional reading, take a look at Investing In Fads.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center