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I woke up 5 years too early Thursday when I noticed K-Swiss (NASDAQ: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 realized 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 Thursday's 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 (NYSE:SKX) 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 Nike (NYSE:NKE) and Deckers (NYSE:DECK) in both gross and operating margins but 2008 has proved difficult for KSWS, as they end the year with a loss and are expected to lose more in 2009.

Management has always been very open and straightforward. 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 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 CEOs 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 experienced 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 subsidiaries for free.

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

Disclosure: I own KSWS at the time of writing.

Source: K-Swiss Looks Interesting as It Nears Cash Value