Foolish Forecast: K-Swiss at the Gate

Shoemaker K-Swiss (NASDAQ:KSWS) reports Q1 2006 earnings results tomorrow. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

• Buy, sell, or waffle? Eight analysts still follow K-Swiss, and one of them still rates the stock a buy. But one thing has changed since three months ago: The holds have dropped from seven to six, because one of the holds (Brean Murray) became a sell.
• Revenues. Sales are expected to edge up just 4% to $159.5 million.
• Earnings. Profits are predicted to slide 7% to $0.67 per share.

What management says:
If you've read ahead in this piece to see how K-Swiss's margins are working out, you'll be very surprised to hear what CEO Steven Nichols recently said about his firm's expectations for fiscal 2006: "In 2006, we do not expect as rosy an outlook as we have enjoyed of late. Based on early indications of third-quarter order patterns, we expect year-over-year declines in domestic sales during the second half of the year. We are taking steps to reignite the growth in our domestic business. However, given the timing of the development cycle, the impact from these changes would not be felt until later."

Bummer, huh?

What management does:
Now for the good news. Just look at what K-Swiss can do when things go right! Rolling gross, operating, and net margins are all up (in the latter two cases, way up) over the last 18 months. This despite the firm's "continued investments in marketing, sales, and product development for the Royal Elastics brand, as well as the expansion of European operations." You'd expect a statement like that to presage a fall in operating margins, since operating costs eat away at any extra gross profits -- but on the contrary, K-Swiss's operating margin is up 50% over the last year and a half.

One Fool says:
I have to take issue with the professional analysts on this one. They may hear the CEO's bleak outlook and fear buying. I see the clear trends of improving margins. I hear the CEO speaking forthrightly, preparing investors for potential bad news, and trying not to spin it. Take all that, and lace it up with a trailing price-to-free cash flow ratio of 11, a rock-solid balance sheet, sterling (albeit slightly declining) returns on equity and 14% projected profits growth, and K-Swiss sure looks like a long-term buy to this Fool.

Fool contributor Rich Smith does not own shares of any company named above.