Long Shot: K-Swiss Faces an Uphill Battle

 | Apr 16, 2012 | 11:30 AM EDT
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Real Money's Long Shot column is dedicated to trading ideas that are highly risky, but which present an opportunity for significant payoff if they work. Such ideas are sometimes characterized as "lottery tickets" and are for only the most risk-tolerant investors, as the potential for 100% loss is high.

The term "long shot" means different things to different investors. For me, a long shot is typically a broken company that at one time or another showed some level of success but has withered to the point where the market no longer pays any attention. The questions are whether there's any breath left, and whether there are any resources left to sustain the name while it fights for life and whether there are any assets of value on the books or the possibility that the company could be acquired.

The footwear company K-Swiss (KSWS), was founded in 1966, the same year it introduced its flagship product, the Classic. This was a growth company for many years, but in recent years the road has been extremely difficult, and the company has yet to recover from declining revenue that began prior to the last recession.

In 2005, revenue was nearly $500 million, and K-Swiss earned $75 million, or $2.26 per share. At that point, shares were trading above $30. At the current price of $3.90, the company is close to being a reverse 10-bagger.  By 2008, revenue had fallen to $327 million, and earnings to about $21 million ($0.70 per share), and that was the last full year that the company has been in the black. By 2010, revenue was down to $217 million, 57% below 2005 levels.

The company has tried a variety of moves to help resurrect the business, from expanding into the running and triathlon markets to making acquisitions in order to expand its product line, but it has had little if any success. While revenue recovered to $260 million in 2011, the bottom line did not, and the company lost $70 million as costs increased and margins fell. While fourth-quarter revenue was better than expected, the loss of $0.71 per share was much worse than the $0.42 consensus estimate. Adding insult to injury, the company announced that 2012 may actually be worse than 2011 in terms of revenue, and it issued revenue guidance in the range of $240 million to $250 million.

There's certainly not much to get excited about with this story, and the market is not expecting much from K-Swiss. The situation has gone from bad to worse, and being in such a competitive industry puts the odds of a K-Swiss recovery at the low end. The fact that the company has survived the past several years, however, is a testament to the strength of what historically has been a strong balance sheet.

K-Swiss has typically maintained a relatively large amount of cash, with little or no debt, and this has sustained the company. But time is running out, and so is the cash. K-Swiss ended 2011 with $53 million, or $1.50 per share in cash and investments ($23 million of which is restricted), and $10 million in debt.

While the company currently trades at fairly compelling levels of net current asset value (1.09x) and tangible book value (0.90x), these levels are somewhat meaningless unless the company shows some signs of recovery. While there may still be some value in the brand, it remains to be seen whether any of the bigger players would have any interest in acquiring it.

K-Swiss is the epitome of a long shot. The market is not expecting much, and any surprise, such as a profitable quarter or an unexpected uptick in sales, could demonstrate that there's some life left. But the odds grow longer with each passing day.


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