The footwear industry is brutally competitive, and it looks like K-Swiss (Nasdaq:KSWS) is well on its way to being one of those cautionary tales. Although K-Swiss technically broke a five year streak of year-on-year revenue declines, free cash flow has declined six years running and the company's ongoing survival is no sure thing. While a hit product could turn things around relatively quickly, K-Swiss is starting to look like a longer and longer shot with each quarter.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

A Fairly Lousy Fourth Quarter
Although K-Swiss did report 18% revenue growth for the fourth quarter (against expectations of a 3% drop), that surprising jump in sales did the company little good. Domestic sales rose more than 10% and international sales jumped almost 24%, but profitability was a major issue.

Gross margin fell about seven points from last year and missed the relatively few estimates out there by a wide margin. Management held the line on SG&A expenses and adjusted operating loss was basically in line with the year-ago level. (For related reading, see Understanding The Income Statement.)

Futures Looking Grim
To beat by so much on the top line and still miss by so much on the bottom line is bad enough. Worse still were the company's futures sales. Futures orders were down 21%, with domestic orders down 52%. That's a pretty crushing outlook, and not surprisingly management revised guidance for 2012 sales below prior analyst expectations.

Just to offer a frame of reference, Nike's (NYSE:NKE) future sales through April 2012 reported back in December were up 13%.

A Downward Spiral
The dynamics of the retail trade make the K-Swiss situation even worse. When Kohl's (NYSE:KSS), Foot Locker (NYSE:FL) and other retailers find that they can't move product, not only do they order less, they also give less shelf space to that company in the future. Less shelf space means less opportunity to move product and it quickly becomes a self-perpetuating downward cycle.

Retailers sometimes can afford to be patient or generous. After all, giving too much space to Nike, Adidas and ASICS means giving too much power to those companies and too much control over margins. So while Skechers (NYSE:SKX) has had its difficulties lately, the sales trends of recent years has been quite a bit different than for K-Swiss and Skechers may still get some benefit of the doubt.

For K-Swiss, though, the clock is ticking. Although the company's sales base has fallen to a point where a hit product (like a refreshed Classic lineup) could make a major difference, stocking K-Swiss product is no longer a must for footwear retailers.

Familiar Pressures
Like many footwear companies, K-Swiss gets a lot of its product from China, Thailand, and Vietnam. As has been reported fairly widely in recent years, wage inflation is pushing up COGS from these countries and applying more pressure to margins. While Nike and Adidas can offset this with price hikes, the weakness in K-Swiss's market position suggests less pricing power. (For related reading, see Analyzing Operating Margins.)

The Bottom Line
It wasn't too long ago that footwear retailers Foot Locker and Finish Line (Nasdaq:FINL) were in terrible shape and plenty of writers were consigning them to the boneyard. Even more recently, footwear retailer and wholesaler Brown Shoe (NYSE:BWS) was in pretty rough shape as well.

Unfortunately, these are not especially relevant stories for K-Swiss investors because of the differences in running a retail business versus a manufacturing business. To whatever extent Brown Shoe's experience is relevant, their turnaround in their proprietary footwear business has been a byproduct of having a wide range of styles and brands to leverage, as well as competing more effectively up-market. With K-Swiss, that means going head-to-head with Nike or Adidas's Reebok brand, and that hardly seems like a winning formula.

Days inventory outstanding is close to half a year now and the pace of negative free cash flow just isn't sustainable for much longer. If K-Swiss can somehow turn it around, the rewards to shareholders would be considerable. Unfortunately, there's nothing in recent financial reports to suggest that results have bottomed, let alone are on the way back.

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

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Why did Wal-Mart's Stock Take a Fall in 2015?

    Wal-Mart is the largest company in the world, with a sterling track-record of profits and dividends. So why has its stock fallen sharply in 2015?
  2. 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.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. 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.
  5. Investing

    Retailers Rebel Against Black Friday: Bad Move?

    The Black Friday creep may have hit a wall as some stores are shutting their doors on Thanksgiving and even Black Friday to give employees the day off.
  6. Economics

    Is Wall Street Living in Denial?

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

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

    Is DKS a bargain here?
  8. 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?
  9. 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?
  10. 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?
  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