K-Swiss Inc Q4 2007 Earnings Call Transcript

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 |  About: K-Swiss Inc. (KSWS)
by: SA Transcripts

K-Swiss Inc. (NASDAQ:KSWS)

Q4 2007 Earnings Call

February 26 2008, 11:00 am ET

Executives

Steven Nichols - Chairman and President

George Powlick - Chief Financial Officer

Analyst

John Shanley - Susquehanna Financial Group

Jeff Van Sinderen - B. Riley

Virginia Genereux - Merrill Lynch

Sam Poser - Sterne Agee

Stan Steinman - Cedar Creek Management

Brad Cragin - Goldman Sachs

Steven Martin - Slater Capital Management

Operator

Good day and welcome to the K-Swiss conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Chairman of the Board and President, Mr. Steven Nichols. Please go ahead, sir.

Steven Nichols

Thank you, and good morning, everyone. With me today is George Powlick, our Chief Financial Officer. We appreciate you being on the call this morning. Before I begin, I would like to have George cover the Safe Harbor language. George?

George Powlick

Certain matters discussed in this press release are subject to certain risks and uncertainties that could cause actual results to differ materially, including but not limited to non-achievement of the assumptions discussed herein, general and regional economic conditions, industry trends, merchandise trends, including market acceptance of the company's product offerings, customer demand, competition, the impact of terrorism and/or potential global conflict on the worldwide economy, and order cancellations and reduced sales resulting from a slower worldwide economy.

A complete description of these factors as well as others which could affect the company's business is set forth in the company's periodic filings, including its Form 10-K for the year ended December 31, 2007, which is currently on file with the SEC. Backlog as of any date represents orders scheduled to be shipped within the next six months. Backlog does not include orders scheduled to be shipped on or prior to the date of determination of backlog. The mix of futures and at-once orders can vary significantly from quarter-to-quarter and year-to-year and therefore, futures are not necessarily indicative of revenues for subsequent periods.

Steven Nichols

Thank you, George. The message on today's call is very similar to what we've been describing throughout 2007. Worldwide revenues and backlog are down overall on continued weakness in the domestic market, while international revenue and backlog are up, albeit at a slower pace in the fourth quarter than we experienced earlier in the year.

The investments in our premium sports branding initiative were also clearly evident in the quarter, as we experienced our first quarterly operating loss in 10 years and our earnings per share was at the low-end of our guidance. We've been saying for several quarters now that domestic business will be weak until at least late in 2008. And what we have seen over the retail environment of late and early order indications suggest that expectations need to extended to 2009.

As we'll discuss in a moment, there are a number of branding efforts underway and our new team continues to make progress. It will take time and we're prepared to manage through this cycle with tight inventories and a very sound balance sheet. The breakdown of sales by product category for the fourth quarter of 2007 continues to reflect a decline in the Classic business, but demonstrated improvement in other areas. The breakdown was: Classics 62%, children's 20%, Royal Elastics 5%, tennis 7%, training 4% and other 2%.

Our Classic category revenues were down 28% when compared to the prior year period. This category is segment into Classic Originals, which accounted for 45% of the fourth quarter revenues and was down 30% when compared to the prior year period. The other Classic category accounted for 17% of revenues and was down 23% in the quarter.

Our biggest seller for the quarter was the Classic, which sold 260,000 pair and was down 23% from the prior year period. The other top sellers were Lozan II with 180,000 pair the Lozan II Strap DX with a 132,000 pair and the Rathburn Limited Edition shoe with a 137,000 pair. The children's category was down 2% for the quarter, mirroring the weakness in our Classic category. For the quarter tennis was up 72%. Sales of our training category were down 12% for the quarter. Royal Elastics sales were up 36% in the quarter and Royal Elastics backlog at Q4 2007 is up 5%.

During the last quarter significant focus was placed on developing and planning our new global campaign in 2008. This campaign will showcase our premium sports direction and unify the brand positioning under a single tagline "Keep It Pure". We feel it is important for K-Swiss to have a single message around the world and we're striving to accomplish this by the end of 2008. This campaign will showcase our athletes in many media vehicles including television, print, outdoor, online, in-store and in and out of sports in our performance and lifestyle apparel.

We've also some interest in consumer experiences, this spring we plan to round out the media campaign including a multi-marketing free running tour on college campuses and temporary pop-up retail stores in Santa Monica and Soho. The media mix is more diverse than before, realizing that no one format can reach all of our consumers. We're also increasing the amount of funding to give to online consumers the experience given the importance of these things to our target consumers. We continue to pursue our performance strategy in both product and marketing, realizing that that is what will give us the authenticity for our brand. Tennis is obviously our heritage so we'll continue to focus on this from both an athlete and a media standpoint. We've added a couple of new tennis players to our arsenal to continue to have high visibility and hopefully victories during Grand Slams. Mardy Fish, a top American tennis player and Michaella Krajicek a top European player are two of our most recent signs.

In running we will continue to work with Triathletes and world class [runners] for product development and exposure. We've recently signed two female Triathletes, Kim Loeffler and [Linda Cave]. Running is a big opportunity for the brand to grow in the future. However it will take time and persistence from a product marketing and sales standpoint.

Finally we have an opportunity to be first with an emerging sport, free running. We are fortunate to have the founding father Sebastian Foucan as a face of our brand and a key partner in product development. Additionally we have (inaudible) and free running teams around the globe working for us and product ware testing and events and expeditions. Free running will be showcased from K-Swiss as a key part of our 2008 marketing with advertising in store, online events.

We've already seen that momentum behind the sport is growing and is something that appears to young teams 20 and some thing males would tend to buy a lot of sneakers.

I'll now turn the call over to George for a few more minutes to go into the financial details.

George Powlick

Thanks Steven. Revenues were within the range we had expected for the quarter with a 17% decrease from the prior year quarter and a 26% decrease in the volume of footwear sold. At-once business was 15% from the quarter which is in line with the 8% to 20% we had anticipated compared with 19% a year ago. Earnings however were at the lower end of our range of zero to $0.09 in earnings per share due to higher than projected SG&A expenses related to advertising.

For the K-Swiss brand, the average wholesale price per pair increased to $28.46 for the fourth quarter compared to $25.71 in the prior year period. The volume of footwear sold was 2.5 million pairs in the fourth quarter, compared with 3.4 million pairs in the fourth quarter of 2006.

Overall gross profit margin as a percentage of revenues was 47.6% in the fourth quarter, compared with 45.4% in the prior-year period, due to European revenues being a larger portion of total sales.

Our SG&A, measured as a percent of revenues was 52.3% compared with 34.2% a year ago. We had originally anticipated SG&A would be no higher than $37 million for the quarter or approximately 47% of sales.

The higher SG&A principally represents investments and advertising. We posted an operating loss in the fourth quarter for the first time in 10 years compared with $10.5 million on operating income or 11.2% operating margin for the fourth quarter a year ago.

We had an income tax benefit in the quarter of $1.9 million due to the operating loss compared with a tax rate of 15% for the prior year period. We are expecting an annual effective rate for 2008 of about 0% due to the projected breakeven operating income and tax free interest income.

Our balance sheet at December 31, 2007 remained strong with working capital reaching $355 million compared with $324 million a year ago. Accounts receivable were $34.8 million or 40 days outstanding compared with 39 days the previous year.

Our inventories were up 7% compared with December 31, 2006, and we ended the quarter with approximately $291 million or $8.38 per share in cash on the balance sheet. I'll now turn the call back to Steven to wrap up the operational highlights.

Steven Nichols

Our international business continues its positive momentum in the quarter. Revenues were up 6% in the fourth quarter and backlog is up 14% at December 31st. Europe sales were up 22% in the quarter with a 16% increase in backlog. Europe accounted for 39% of our worldwide revenues, up from 27% a year ago. Sales in the Asian region were down 14% for the quarter, opposed to the 21% increase in backlog.

Asia is our largest region, accounting for 13% of worldwide revenue in the quarter, compared with 12% a year ago. Our largest customer continues to be FootLocker. The sales to the FootLocker group were 8% of Q4 worldwide sales compared with 12% a year earlier. In Q4, sales to FootLocker were down 41% and sales to all others were 13%. FootLocker represents approximately 9% our backlog at December 31, 2007 compared to 11% the year earlier. A 28% decrease in our total backlog, while the worldwide backlog with all customers is down 10%.

Royal Elastics operated a loss of $0.03 per share for the quarter compared with breakeven a year ago. We expect that the investment in Royal Elastics will continue in 2008 with a net loss per share expected to be no more then $0.06 per share. The Royal Elastics brand has achieved a notable milestone in February with the grand opening of its first U.S. retail store, measuring roughly 1,200 square feet. The Royela Main Street in Santa Monica gives us an opportunity to showcase new shoes such as King and Queen high tops as well as licensed shoes such as Lamb Sneakers and Andy Warhol. The full Royal Elastics offering will be on display in the store for the first time in the United States. We already have three Royal Elastic stores in Taiwan.

There were no purchases of Class A common stock during the fourth quarter of 2007. We've approximately 4,061,000 shares remaining in our current authorization. As we've discussed many times before, we continue to explore options for allocating capital to insure the best long-term returns for our shareholders.

I'll now turn the call over to George one more time to wrap up the financial review.

George Powlick

Thanks, Steven. As noted in our press release, the total worldwide futures order backlog decreased 12% to $148 million at December 31, 2007. The domestic backlog decreased 40% while the international backlog was up 14%. The total backlog is comprised of a 14% decrease in the first quarter 2008 futures orders to $96 million and a 9% decrease in the second quarter 2008 futures orders to $52 million. Domestic backlog is down 39% for the first quarter of 2008 and down 40% for Q2, '08. International backlog is up 12% for Q1, '08 and up 19% for Q2, '08. Current domestic Q3, 2008 bookings imply continuation of materially declining domestic sales.

As stated in the release, we expect revenues for the first quarter of 2008 to be approximately $95 million to $105 million and earnings per diluted share to be in the range of $0.18 to $0.28. For 2008, we expect revenues to be in the range of $310 million to $340 million and earnings per diluted share in the range of $0.10 to $0.35. The annual EPS range is larger than usual to reflect the uncertainties surrounding cost pressures in Southern China where almost all of our product sourcing is located.

All estimates for the first quarter of 2008 and full year 2008 continue to reflect the significant decline in domestic revenues. Substantial investments in product development and marketing for the K-Swiss brand and continued investment in the Royal Elastics brand.

The estimates are based upon the following assumptions. Gross margins will be approximately 47%; SG&A will not rise above $43 million for the quarter and $152 million for the year. Customer order cancellations will be moderate. The company's growth initiatives with respect to Royal Elastics will not exceed a net loss of $0.06 per share for the full year and the annual income tax rate will be approximately zero, due to the approximate breakeven results from operations and tax-free interest income.

I would also add that these estimates do not include the impact from any disruption to the worldwide economy from a global conflict or a terrorist act here in the United States.

That covers our prepared remarks. We will now be happy to answer any questions you may have.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Our first question comes from John Shanley with Susquehanna Financial Group. Please go ahead.

John Shanley - Susquehanna Financial Group

Thank you and good afternoon guys.

Steven Nichols

Hi, there.

John Shanley - Susquehanna Financial Group

Steven, with the guidance that you're giving us implies a fairly negative year '08 with earnings down and -- sales rather down and expect to 17% to 24% in more troubling earnings guidance that you're giving us down somewhere between 64% and 90%. Are you still planning to maintain the level of spending that you had over the last year or so? I know it's important for marketing and so on, but it's certainly deleveraging your SG&A with the amount of spending versus the sales decline?

Steven Nichols

We're very fortunate in that we have an exceedingly strong balance sheet and we think we have some programs that will be received positively and rather than put them [triple] amount very, very slowly, we think we're going to be aggressive with it. So yes, we will think it through and overspend and hopefully by 2009, we'll have the brand looked at significantly better by the consumer and possibly at the same time the retail environment will be stronger. So yeah, we're planning on doing that job.

John Shanley - Susquehanna Financial Group

Okay. Can you still justify hanging on to small business like Royal Elastics that's also declining in this kind of a market environment where the core domestic business is really taking it right on the chin?

Steven Nichols

That's something that we're going to keep reviewing. Somewhere as along the way we think there is a light at the end of the tunnel and there will be a point where we'll give up on it but we have not done that yet, John.

John Shanley - Susquehanna Financial Group

Okay. Fair enough. Just turning international, you're doing a really a good job in spite of the tough market environment in Europe and the international business as a whole with sales now little over 50% of which you're generating looks like coming out of the international arena, and more importantly 65% of your forward orders coming from international.

Can you give us an update in terms of where you stand in terms of penetrating countries other than France, Italy -- I am sorry the U.K., Benelux, and Germany, are you starting to penetrate France, Spain and Italy to a better degree than you had in the past?

Steven Nichols

I would say that we have not made a lot of progress in France or Spain. We have people in places where we are beginning to market our shoes. We've been in France for a full year, may be even a little more and have not had results that are meaningful. Spain we are just barely getting our toe in. Italy, where we recently started, we are off to a better start and the brand is being received and having some little successes in Italy. So, I think we still have potential but no results from about 50% of the business that's available in Europe.

John Shanley - Susquehanna Financial Group

Are your distributors doing any thing in terms of getting their brand placed in Eastern Europe and Russia specifically?

Steven Nichols

Yes, we are starting to do nicely in a bunch of Eastern European countries. We do not have distribution in the former Soviet Union, but we are very aggressively pursuing that and we also have a distributor in the Middle East and that business is starting to come around, so I guess Eastern Europe, the Middle East and Southern Europe are all places where we are very much under distributed and underachieving.

John Shanley - Susquehanna Financial Group

Right. Just to summarize, the international will likely continue to outperform the domestic market, not only for the balance of this year but if I heard you correctly, into '09, is that the fair assessment?

Steven Nichols

Well, I would say, absolutely for the balance of this year and '09 we haven't, yeah, we are going to invest in '08 -- over invest in '08 with the hope of having more positive results domestically in '09. So '09 is still up in the air but '08 absolutely international will definitely outperform the United States.

John Shanley - Susquehanna Financial Group

Okay. Can you give us an update in terms of the order placements for the free running shoe, how was it done? What kind of reaction did you get from last weeks WSA to the shoe and?

Steven Nichols

The order placement has mostly been with FootLocker both in Europe and the United States and the advertising and shipments into FootLocker USA will happen in the first week in March. So it's quite under the radar and all of a sudden the first week in March big things should happen domestically. In Europe we had two weeks of advertising and marketing and [windows] at FootLocker and the results were -- I think just about at expectations. We did surprisingly well in Italy, which we think is a breakthrough for us about 60% or more of the total European sales of free running took place in Italy.

We offer two shoes, a $100 shoe and an $80 and the sales are about 4 to 1 to the $100 shoe which also surprised us and but was a very, very good sign. So as far as free running in the Untied States at the end of the month of March it will be significantly smarter and we learned a lot real quick.

John Shanley - Susquehanna Financial Group

Okay. That's fair enough as well. And last question I have is with the stock down at least every month till today would it make sense to at least give some further consideration to buying back some shares. I know you want to keep it, a bunch of cash on hand for some of these marketing programs that you have but sitting on a bucket load, George maybe you could just tell us what your cash availability is at the end of 4Q? But it seems like you got more than enough cash to do whatever you want to on marketing and maybe this would be an opportunity to enhance shareholder value by buying back some shares.

George Powlick

John the fact that we are not going to trip any covenants and bank loans and that the management, even though we're public, the management is so stable, it allows us to do things like overspending for a year to reposition the company. We think this is one of our competitive advantages. We've been very aggressive and who doesn't get our shoes. We do almost no short-term things. Everything we do has a long-term mentality to it and yes I think we do have sufficient capital to repurchase stock. Just to remind you we spent in the last 10 years about $165 million repurchasing our stock, which is a very nice number for a company, our size. So yes we will purchase it when the time is right and I'm not sure that we're totally finished with our -- with all our bad news. And we buy it on an opportunistic basis and just tell everyone about it. So, yes we're prepared to buy stock on no given formula though.

John Shanley - Susquehanna Financial Group

I appreciate that and you are certainly candid in terms of your outlook that's for sure. But best of luck, hopefully it's going to work out a little bit better than you're anticipating at this juncture.

Steven Nichols

Great. Thank you, John.

Operator

Our next question comes from Jeff Van Sinderen with B. Riley. Please go ahead.

Jeff Van Sinderen - B. Riley

Good morning. As you look at your futures orders for the international business, maybe you can give us a little color on what the composition of those orders is in terms of Classics versus some of the newer generation product, and or I guess, however you can break that out for us, any color that would be helpful? And then, I know you mentioned that you think that international outperformed U.S., also wondering if you think that means that we'll continue to see the international business grow in 2008?

Steven Nichols

Composition of the orders in Europe are Classic shoes, they are our number one shoe, generally is a shoe called Lozan, which is a base of white cup sole plain toe shoe continues to be Europe's most important shoe. Europe is developing very nice children's business. It's kind of developing along the lines that the Untied States had for many, many years. Tennis is very important in Europe and we have an excellent tennis business. Last time I checked we were like the number one tennis company in Benelux, number two in Germany and in the top three in the U.K. And tennis is a bigger business in Europe than it is in the United States.

So, the brand is kind of mirroring very much what we were and what we have accomplished in the United States is not a totally different product and distribution base. Their select distribution in Europe is very, very powerful. We probably run the cleanest distribution in the United States and Europe, with sanitized sparkling clean and a very, very choosy, who we sell and the brand gets a lot of respect for that. So Europe continues to be very profitable mostly due to the differential between currencies, which is also a benefit. So, was there another part to that?

George Powlick

The second part is that in our model and in our forecast for the entire year of 2008; we are showing the entire international non-domestic as about flat growth from a top-line standpoint.

Jeff Van Sinderen - B. Riley

Okay. That's helpful. And then, I know you've been pulling back in distribution for some of your Classic product domestically, any color you can give us on how your accounts have been reacting to that and transitioning to some of the newer products to test it?

Steven Nichols

The Classic shoe which is now in its 41st year, is something that is not only the icon and the kind of the headlight of the company, it's something that we've always managed very, very carefully and about 18 months ago we started to pull it back from about 40% of our distribution. 18 months ago that meant [that our] net orders were on hand. So, there was about six months worth of orders that we honored. So then another six months it took them to get rid of their inventory.

So, right now we think that the cupboard is finally very, very clean and dry with the retailers that we chose not to continue the shoe. And little by little, we believe that even though we can't control demand, we can control supply, and as we get supply beneath demand, then the velocity of turnover for the retailers we've continued to sell the shoe will increase and that's one of the ways we start our turnaround.

So, we are just getting a little [whiniest]. The Classic shoes starting to pick up again. It also was a phase of a decline of Classics. Reebok and other companies that had relied on Classics, they felt a soft market for a while. So, I think we did the right thing at the time again it was very, very long-term mentality and this is about the third time we've been in this scenario since I've been here. And I think we've handled it, well the first two times and the jury is out to see how we handle it this time.

Jeff Van Sinderen - B. Riley

Okay. And then, my last question, I know it's still very early days, but as you look at your new product introductions at this point, what do you think looks the most promising in terms of potential order volumes or is it just too early?

Steven Nichols

It's early, but I'll tell you what we're working on. We're starting to work on [free] running programs and showing those to what they call Geek running shops and these are very high performance items. The plan would be or is to show them to those small retailers that only cater to the running stores that have great sales people in place and have a following of people that really pursue the sport.

This is a strategy that we've used for many, many years in tennis and we've a specialty tennis sales force that only sells pro shops, country clubs and various places like that and we've maintained a spectacular position in tennis for 40 years. Breaking into running will be difficult, but we very early it turns out that the key [paucities] running shops know our brand and know us a high performance tennis company. We make $100 tennis shoes and sell them every day at very, very good margins for us and the retailers. And this is what we're launching and running.

So this also is the strategy that will take a few years to put in place. This is like water to our [chests] slow drips but it's something we think we'll be able to pull off. The early shoes that we've shown to these people and some of the very key running shops around the country have been very favorably received, almost surprisingly so. So that's one of our long-term initiatives. The mid-term initiative is this free running and free running could be an important sport in the United States and around the world. Its virtually unknown for a company our size to launch and explain something as new as this is very difficult. If we do put it all across then when you're first with something you get credit with it and the authenticity that goes with it forever and we're investing very heavily in free running.

Additionally we're staring to do some technologies that we'll be introducing towards the end of this year at wholesale and early in '09 at retail. And these are technologies that will go into tennis shoes and running shoes and some of those we think are unique. So we have a lot of initiatives. We're spending money on them and the proof of the pudding and the eating won't be until somewhere in '09.

Jeff Van Sinderen - B. Riley

Okay, fair enough. Thanks very much and good luck.

Steven Nichols

Thank you.

Operator

Our next question comes from Virginia Genereux with Merrill Lynch. Please go ahead.

Virginia Genereux - Merrill Lynch

Thanks gentlemen. George and Steven, let me just understand the math on your thinking, your top line thinking for '08. If I've got the U.S. down -- if I take a 40% lax of the U.S. business but international grows 10%, I'm at 350?

George Powlick

Yeah we got international at flat Virginia.

Virginia Genereux - Merrill Lynch

So what do you see in there George why does the -- I mean the backlogs are up I think backlogs are up 14 look like a sequentially a little better into June?

George Powlick

Yeah. What we do, the way we construct ours is we ask the regional managers for their forecast revenues by quarter and we did that we updated that and within the 10 days. And they see some trends that are not positive for the second half of the year.

Virginia Genereux - Merrill Lynch

And what are those math?

George Powlick

Well. It is just their view of what they believe the products will we received by the retailers based on their discussions with the retailers and showing them product.

Steven Nichols

A little slow down in current push numbers.

Virginia Genereux - Merrill Lynch

Okay. And so where is that, geographically where is that happening now?

George Powlick

Primarily more in Europe than in Asia.

Virginia Genereux - Merrill Lynch

Okay. And is that do you guys feel like that's sort of macro -- do you folks think that is macro driven or is that Steven Locker cut back more I mean there is some dynamic.

Steven Nichols

No. Taking a step back about two years ago, 18 months ago our products started to get a little stale. And the brand in the United States suffered. We have since changed our product management department and brought in a new head of product management, and Europe had such tremendous momentum that it just kept going but they also receive the same products as we do in the United States.

So we think that the managers in Europe are saying, hey, your product is stale, the pushes are starting to slowdown here. Hopefully the slowdown in the Europe will become evident just about the time we introduce new and exciting product. So they've been significantly ahead of the United States for the last two years in growth and we have to supply great product to them also and if we didn't here we didn't there. So I think it's just which cycle the brands are in, but eventually if we don't fix our situation in the United States that will also affect Europe and even Asia at some point.

Virginia Genereux - Merrill Lynch

Okay. And Steven, let me ask about Locker for a second. Is -- because the declines there for that business to be down 40% or so in the quarter, when it looked like sort of prior to that, over the year, the declines were sort of improving, sequentially improving. Are they, to the degree they are your buggiest account, are they getting out of the Classics in a big way or pulling -- not, sort of re-upping the free running product, what is?

Steven Nichols

Well, it's not them not re-upping the free running product. They have made the biggest commitment in the world for free running for us and we just delivered a very large amount in Europe and we'll deliver in the next 10 days a very large amount in the United States with cooperative adverting, with Windows, with everything. We've got a wonderful relationship with FootLocker. They are smart people. I think that the difference between them and most of our other accounts is that they really get a very clear look at the United States and we generally find in a downturn they are ahead of everybody on our brand and in an upturn ahead of everybody in our brand.

So, I think that their purchases of our brand really are based on our push numbers in a very, very hard, cold, computer driven choices and we are okay with that. So, we love if our business is down, we don't want a lot of shoes out there at cheap prices and if anything we encourage our retailers buy less and when things get great, you will be there for us and we'll be there for you. We're not big on markdown money and buying away in and out of markets. We play it very, very straight and I think the lack of future orders at FootLocker, 100% reflects the lack of push on our brand right now at retail.

Virginia Genereux - Merrill Lynch

And then sort of lastly, Steven, do you, correct me if I am wrong here, I feel like this sort of repositioning of the business is more, it is a bigger step than your sort of prior two turnarounds, because you're trying to really establish this performance beach head?

Steven Nichols

A is yes, and B, for us the performance beach head allows us to do everyday takedowns of these shoes in what we would call the more Classic mode. We delivered a $100 tennis shoe in our 7.0 series and a $70 version of the shoe which we call it Tennis, but it's really almost the Classic everyday shoe and the $70 shoe was selling excellently. So the fact, once you just establish yourself as a position in a market with some credibility. If we could have a $10 million brand in true running, we might be able sell a $100 million worth of casual running shoes and tennis has done that for us for years. The reason we are so interested in running is tennis is about 6% to the market worldwide and running is about 30%.

And so we don't have to get to $100 million in true running to have a $100 million running business and the fashion side of that business, whether the casual or classic side of the business will come very, very rapidly once you establish yourself at the performance side and that's basically our strategy and it really is a strategy that the other great companies do. The true running companies Brooks, Saucony and people like that. They don't have the big Classic business. Their business is all running, but a company like Nike probably for every running shoe they sell, they'll sell a dozen pair of everyday footwear and we'd like to be more like the Nike's of the world. Everyone would like to be more like the Nike's of the world.

Virginia Genereux - Merrill Lynch

Right, and lastly I'm sorry that the -- is it just too early to say, Steven, whether your guys are being successful with whether you can make this performance lead. Would you point to anything? You talked about free running at Locker. It sounds like that sort of on plan but anything else that sort of bears out your ability to make that segway because that's big.

Steven Nichols

No, if we could make it in the running segment and then have the secondary business, which should be larger than the true performance business, there are two phases. The first phase is we have to be able to sell it in. We have a list of 700 running stores and of the 700 there are about 50 which are really elite. These are the special, special stores. We are not allowing the salesmen to go into those stores without a regional manager and a tech rep and we are flying people around the country that really understand the running business to go in there, and our hit rate has been excellent but that's only half of the story.

So we are able to convince these very special running shops that we are and we'll be a player in running. Now that the stuff will come in and that will happen in about four or five months and it will go up and they will and now the consumer has to actually buy the stuff.

So there is two phases, I am slightly happy and joyous with the first phase but if the second phase doesn't work then it all unravels. So we've got a rough road ahead of us and I think we also have the staying power and perseverance to actually pull this off. And I think there is an end game for us. So we are happy with the fact that we are doing it. It will be expensive early on and it's difficult to break into something new but I think we have a good chance of pulling it off.

Virginia Genereux - Merrill Lynch

That's great. Well, and I applaud you are not buying back stock I think these companies are telling you they don't have any more capacity, when they bought back at times 50% in a go and you guys never go for that, so congratulations.

Steven Nichols

Thank you.

Virginia Genereux - Merrill Lynch

Okay. Thank you.

Operator

Our next question comes from Sam Poser with Sterne Agee. Please go ahead.

Sam Poser - Sterne Agee

Good afternoon or good morning. George, can you talk about with your 47% gross margin that you are guiding to for 2008 with all the price increases going on and that's significantly higher than, well, it's higher where you were this year. Can you give us some more details there, please?

George Powlick

You've got two things going on, Sam. You've got the international, primarily European business, being a greater portion of our total business and that's on the plus side and on the minus side there is definite. We're anticipating some cost increases probably more in the second, third and fourth quarter than right now. But, we haven't totally factored that in yet and that's why we made a larger range on the annual estimate from $0.10 to $0.35 than we normally would. And that is to realize that there is the potential for some downside with respect to margin, primarily due to cost pressures in southern China. The issue that we have that may not be to the same extent that others have, other competitors of ours is that we are almost exclusively in southern China. We don't have, we've got very little outside of southern China, so we might be slightly more exposed. That led to some great benefits over the last 10 years, but now it could be an issue.

Sam Poser - Sterne Agee

And what kind of price increases are you all seeing right now?

Steven Nichols

Let me just amplify that a bit more. There is close to turmoil currently in southeast China, in Guangdong area and factories are closing. There is going to be major changes. We are working with some factories to open in other provinces in China. We are looking at moving more of our business outside of China. And one of the things that has us very, very cautious is we are not sure and I don't know that anyone else is sure where this will all end up, but there are red flags that the manufacturing base of so much of our industry is going to go through a very difficult year, in this year 2008.

It might be a year or 18 months until it's sorted out and repositioned. It will happen. We've been through this when we made our shoes primarily in Taiwan and Korea and those countries kind of reached a point where it wasn't economically feasible for the shoe industry to compete with other forms of manufacturing pharmaceutical, automotive and electronic. We sensed that's what's happening in China right now. So this will be a very difficult year and if we get through it unscathed that will be fine but rather unlikely.

Sam Poser - Sterne Agee

Okay thank you and then just I just let it miss. Can you just walk through the fourth quarter European and U.S. - European and other international sales one more time?

George Powlick

Fourth quarter?

Sam Poser - Sterne Agee

Yes.

George Powlick

Sure. The domestic was down about 35% and international in total was up 6%.

Sam Poser - Sterne Agee

Okay could you break that out between Asia and Europe?

George Powlick

I can give you that Europe was up significantly and everybody else was down a little bit. Europe was significantly above the 6% increase and Asia, Canada and Mexico and others were down.

Sam Poser - Sterne Agee

Okay. Thank you.

Operator

Our next question comes from Stan Steinman with Cedar Creek Management. Please go ahead.

Stan Steinman - Cedar Creek Management

Hi, can you guys talk a little more about your customer relationships and maybe starting with FootLocker how the tone of that relationship is so far and could you also size it at 9% of sales relative to maybe your 2, 3, 4, 5 customers that you get a sense for how much bigger it is than your other customers and how much a 40% decline of that takes it down to the level of others customers?

Steven Nichols

Our relationship with FootLocker the management that's in place there and our team that works with them is close to a 20 year relationship in total and we view it as excellent. They're straight forward and honest with us and I hope they feel the same way about us. FootLocker traditionally has been about double, our number 2 customer. And that ratio hasn't changed much. The results, that we've had in the United States really, is us and it's off world and I would say that our business is pretty much mirrored in everyone of our accounts. So we have not delivered the marketing and product design we need.

Hopefully we're in the process of fixing that. We are ahead of the curve in diminishing inventories at retailers. We don't do wheels-and-deals. There is not an overhang of inventories out there that we're first going to have to deal with. In 18 months our inventories are clean at retail and mostly the retail is I think will be excited when we have product and demand back because when times are good we're probably the most profitable vendor. And we know a lot of people rooting for us. Somehow we got to get message to the consumers.

Stan Steinman - Cedar Creek Management

Great thank you. As you look out at the macro environment I think many retailers are facing this issue, but your company specific problems started well before the macro economy around the world and then the U.S. started to take a leg down. In your past [renaissances], if you will, when you've come out of these down turns I think the economic environments probably been a little more favorable. How do you view the sort of confluence of what the company specific issue and also now worldwide economic slowdown? Is that something that you factored in that how much more difficult this could be than previous upturns?

Steven Nichols

For one thing, we said the earliest we could turn things around was the end of '08 and now we're telling you its '09. So and we're saying the difference is kind of a little bit of the perfect storm. We've done things wrong and as we catch up, the retailers are suffering. There is a third element and the third element really is what is going on in the total mix. And things like crocs and flip flops and canvas, have played a very important role in the last 18 months in our marketplace and these are low-end or less expensive items, and that's disrupted the market, from the market we knew in our past turnarounds.

So we've got three things, one is us, the second is retailers in general that we do business with, and the third is what is the product that the prime consumer of our goods 14 to 24 year old young people are going to want. The nice part of about that is after I described the three price point successors, one of the successors out there has been Ugs, which is not price point. That's a very expensive item.

So when you get things right the consumers will pay. And it's incumbent upon us to get things right.

Sam Steinman - Cedar Creek management

Just the last question, maybe more of a hypothetical, if there is a very high quality company out there that sold a shoe that had a high 40s gross margin for sales at, say half of sales. Is that something that you guys would be interested in acquiring?

Steven Nichols

I am not sure what that means but we are aggressively looking at acquiring companies.

George Powlick

I have never seen anything like you just described.

Sam Steinman - Cedar Creek management

Right and that's sort of where your company is currently trading?

Steven Nichols

Right, so, from time to time we acquire our own company. We get around and look at lot of companies in the end historically and they're buying our own stock back. We have been in that scenario a few times and the one that has been the benefit of that is the stockholders that haven't sold. I think the average price we paid for stock buyback is about $6.50 and we bought back about 40% to the company on that basis.

Sam Steinman - Cedar Creek management

Are you sure your metric there is selling at half sales?

George Powlick

I don't know what the current stock price is right now. But, if you take out the cash, I believe the enterprise value is probably somewhere around 50% to 60% of sales, projected sales.

Sam Steinman - Cedar Creek management

I'd have to check that out, you might want to redo that in your math.

George Powlick

Okay.

Sam Steinman - Cedar Creek management

Thank you.

Steven Nichols

Thank you.

Operator

[Operator Instructions]. Our next question comes from Brad Cragin with Goldman Sachs. Please go ahead.

Brad Cragin - Goldman Sachs

Yes, good morning. Thank you. Just one point of clarification on your guidance, George you've talked a bit about the international deterioration and that sounds like you are expecting --how about the at-once orders. Is that included in that full year outlook as well?

George Powlick

It's not possible to calculate an at once for the full year, until you know your backlogs. So, we just get point estimates from each of the regional managers for the quarter, add them all up and then put a range around it. So, I can't really give you an at-once yet.

Brad Cragin - Goldman Sachs

All right, okay. And then on the SG&A, can you just help me understand that a bit better in terms of how you guys are thinking about managing that? I think you have it down about 3% for the year, if you hit the number you've laid out. What components of that are you thinking of now as more fixed and where is the spending coming from to help support the additional marketing expense if you will?

George Powlick

The SG&A in total is roughly the same as last year's $5 million as you pointed out and it's a similar composition in terms of percentages for advertising and marketing. I think we're going to be spending as Steven mentioned earlier slightly differentially, it isn't all going to be television advertising, there is going to be a sort of a multi-prong approach to the marketing and demand creation. But some of the fixed items that are bigger than they have been in the past, as you know, we're implementing SAP so our IT -- information technology costs are definitely up and we also have probably some legal costs that are up a little more than normal.

Brad Cragin - Goldman Sachs

Okay. I think that covers it, almost everything else. It has been discussed already. Thank you.

Operator

Our next question comes from Steven Martin with Slater Capital Management. Please go ahead.

Steven Martin - Slater Capital Management

Hi guys.

Steven Nichols

Hi.

Steven Martin - Slater Capital Management

Couple of questions, you made the decision, you've talked about it to pull Classics out of the mid-tier channel and leave it with the more specialized sneaker retailers. In hindsight, given everything that's happened and given the fact that during your heyday, with the FootLockers of the world that were selling Classics and doing [bogos], et cetera. In hindsight, would you have been better off leaving it in the mid-tier channel and deemphasizing it for the time being at FootLocker and [Finish Line]?

Steven Nichols

I don't know. That's really a hypothetical question. I assure you that; that's debated in this company full time. It's a full time debate. Now we don't do a lot of looking backwards. I think the goal of controlling the supply that, you are making it more scarce I think has always served us well. And when times get good the retailers and our people too just crank it up and get more and more into the market place until its an over supply and then you have to pull it back again. We're so fortunate that at least we have the ability to make that decision. Other companies, when downturns go out and start making inexpensive shoes and wheels-and-deals and all kinds of things to save a quarter we go the other way and usually that kind of planning -- at least twice before that kind of planning has really served us well.

Steven Martin - Slater Capital Management

Great, Steven I am not questioning that because you've done it twice before. I guess the question is, the mid-tier guys have always been very strong proponents of your product where as you said earlier the FootLocker dies or, quick to get into it, quick to get out of it. And right now they're clearly getting out of it. So would you be better off going forward at least for the near-term giving it back to the mid-tier channel to may be the volume at FootLocker is just not that great anymore?

Steven Nichols

Those are fair questions as far as we're concerned. Looking backwards we're happy with the way we're handling our current brand positioning and going to stick with.

Steven Martin - Slater Capital Management

Okay.

Steven Nichols

So, I mean your question isn't, its not Greek or Chinese, it's a legitimate question and one that we faced ourselves.

Steven Martin - Slater Capital Management

All right. You are -- a lot of the running shops as you try to make that penetration are also into, the related apparel. Can you talk about where you were up to your apparel initiatives a year ago? Can you talk about where that stands and is that going to be part and parcel to the running initiatives?

Steven Nichols

That the answer is yes, yes and yes. The number one we're investing relatively large amount of money in apparel and it's the second year that we are really improving our apparel position. We also are [elevating] where it's going starting very upscale I believe there are orders in house for our Classic lifestyle apparel from Barney's and Saks Fifth Avenue. We do have running apparel and yes these geek running shops carry shoes and apparel and many of them do 50-50 as much apparel business of shoes.

We do have appropriate apparel to go along with our running footwear also appropriate apparel to go along with our tennis footwear for the last dozen years. High performance tennis apparel has been some kind of number like 75% of our apparel business. So, just the way it made the analogy that we think that there is crossover in managing a high performance upscale tennis business to running we think the same thing will happen. And in footwear we think the same thing will happen and in apparel and yes we are getting aggressive with running apparel.

Steven Martin - Slater Capital Management

All right. George one last question knowing how conservative you guys are I am assuming that your cash is pretty much invested in treasuries, et cetera. Although you did say that it was tax exempt. Have you reviewed -- a lot of companies are checking their cash balances for exposure to auctions rates or less liquid cash vehicles?

George Powlick

Yeah, we've never been exposed to that, Steve. You are right. We have invested our cash conservatively. We might have given up a few basis points, but we have avoided that whole situation.

Steven Martin - Slater Capital Management

George in your case I'd expect nothing less.

George Powlick

Thank you.

Steven Martin - Slater Capital Management

Thanks a lot guys.

Operator

There are going to be no further questions. Mr. Nichols, I'd like to turn the call back over to you.

Steven Nichols

Thank you for your participation today and your continued interest in K-Swiss. Bye.

Operator

Ladies and gentlemen this concludes the K-Swiss fourth quarter 2007 Earnings Call. You may now disconnect and we would like to thank you for your participation.

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