Shares of K-Swiss (Nasdaq: KSWS ) are trading at a 52-week low, and the price to earnings ratio is below 12. That makes K-Swiss look like a bargain, especially when other footwear companies, such as Nike (NYSE: NKE ) and Wolverine Worldwide (NYSE: WWW ) , are trading at earnings multiples of 15 and 17, respectively. I like a few things about the company, but I also have some concerns.
First, I like that K-Swiss generates cash and has a solid balance sheet. The company produced $92 million in owner earnings in 2005. With a market capitalization of around $800 million, that equates to an owner-earnings yield of 11.5%. That is outstanding, especially when you consider that 30-year Treasuries are yielding 5% to 6% and offers no potential for growth. The company also has a solid balance sheet. It boasts $192 million in cash, and it has zero long-term debt. The only blemish is accounts receivable. In the last quarter, receivables were up to $81 million from $42 million in the previous quarter. Rapidly raising receivables is often a sign of channel-stuffing. Although I doubt that is the case at K-Swiss, I do believe it is an indication of general business weakness.
However, I am concerned about the near-term business prospects for this company, and I think many investors are looking in the rearview mirror with K-Swiss. Results in the past years have been terrific, but past results are not an indication of future performance. The truth is that K-Swiss is in a difficult competitive position, which the latest guidance confirms. Management expects full-year revenues to be approximately $460 million to $480 million and diluted earnings per share to be approximately $1.55 to $1.70. Compare that with the $2.11 per share that K-Swiss earned in 2005. The company's earnings are falling. Chairman and President Steven Nichols cited "negative trends we have been experiencing in our domestic business. ... Realistically, we do not expect this turnaround to happen until 2007 at the earliest."
Perhaps management has a tendency to be overly pessimistic. Earnings have surprised on the upside for each of the past four quarters. However, actions speak louder than words. If management thought shares were undervalued, I'd expect to see them repurchasing at a rabid pace. Management currently has authorization from the board to repurchase more than 4 million shares, and in the past, management has done a terrific job of reducing share counts through shrewd buying. Between 1996 and February 2006, the company repurchased 25.3 million shares at an average of $6.46 per share, at a total cost of more than $163 million. In 2004 and 2005, the company spent $55 million to repurchase shares. However, it looks as though management is less optimistic about the stock, because it spent only $289,000 on repurchases in the first quarter of 2006.
Ultimately, K-Swiss is a solid company, but the near-term future doesn't look bright. Although I have faith that management can turn it around, I am going to wait until the stock gets cheaper, management starts repurchasing shares, or hopefully both. That is when I'll buy.
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