K-Swiss (NYSE: KSWS ) served up an ace with its second-quarter results. Earnings per share were $0.58, compared with Wall Street's estimate of $0.46. That's a 23% improvement on the second-quarter earnings last year, and the stock is up by more than 20% Thursday. However, I have not changed my original thesis. I am still bullish on the shoe company, but I'm looking for a better time to buy.
I like K-Swiss' ability to produce cash. Capital expenditures are light: The company hasn't spent more than $2 million a year since 1999. As a result, almost all of the cash from operations is free to be distributed to owners. In 2004, the company produced $88 million in owner earnings, and in 2005 it was $94 million. For a company with a market capitalization of less than $1 billion and almost $200 million in cash, that is terrific cash generation.
The problem is that this year probably will not be as successful as 2004 or 2005. Worldwide futures orders for July through December are down 2.2% compared with last year. Second-quarter worldwide revenue is down 1.8% compared with last year. Net cash from operations from the first half of this year is only $1.7 million compared with $20.6 million last year.
These shortfalls are largely a result of problems selling shoes domestically. K-Swiss CEO Steven Nichols described domestic sales as "soft" and predicted a turnaround in the second half of 2007. To be fair, growth in international sales has been excellent, and I respect management for making investments in the international market. However, the United States accounted for more than 80% of sales from 2003 to 2005. Without strong domestic sales, it's unlikely that K-Swiss will be able to match last year's success.
Also, during the first quarter, I was concerned about an increase in accounts receivable. This quarter, receivables increased again, but only slightly, to $83.6 million, in line with last year's second-quarter receivables of $81 million. I feel confident attributing this rise to seasonality, but I will be looking for receivables to come down significantly in the second half, which usually has happened for K-Swiss.
Finally, my ultimate reason for not buying K-Swiss is that the company has not been repurchasing many shares. During the second quarter, it repurchased only 10,000 shares. With almost $200 million in cash and authorization to repurchase 4 million shares, management would be expected to repurchase shares if it believed the stock was a good value. As soon as it starts buying, I'll be doing the same. Until then, investors might be more interested in other top footwear companies: Timberland (NYSE: TBL ) and Nike (NYSE: NKE ) .
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