Do you like growth? If so, shoemaker K-Swiss (NASDAQ:KSWS) probably isn't for you. But if you like money, then K-Swiss just might be a good fit.
Wall Street, it seems, falls squarely in the "I like growth" camp. When K-Swiss, a Motley Fool Hidden Gems Watch List stock, reported last Thursday morning that it had grown its first-quarter sales by only 0.7% over Q1 2004, the Street tossed this stock aside like a smelly old sneaker, dropping it by 5% in a day.
Meanwhile, value hunters on the Hidden Gems boards, where Fools wax poetic on subjects as arcane as free cash flow and as mundane as P/E ratios, began to dig into the company's numbers at a nice, leisurely pace. And guess what? We liked what we saw. Mostly.
Sure, K-Swiss's revenue growth didn't break any speed records. But just look at the quality of the shoe. The stitching is tight: Net margins expanded 260 basis points to 16.9% over the past year. There's less material being wasted: The average number of shares outstanding decreased by 2.5% over the past 12 months. And the tread has gotten a good grip on business fundamentals: Sales grew, albeit imperceptibly. Meanwhile, inventories and accounts receivable declined year over year, while accounts payable expanded somewhat. That suggests good inventory management practices, an ability to make customers pay on time, and sufficient market power to put off paying suppliers just a wee bit longer than they'd perhaps like, respectively.
As for what we didn't like, well, we're an exacting bunch here at the Fool. No matter how good an earnings report looks overall, if we see just one thread out of place, we feel obliged to give it a tug and see whether anything unravels. In K-Swiss' case, that thread shows up on the cash flow statement. Or rather, it appears on a cash flow statement that is conspicuously absent from the company's earnings release. It appears only on the simultaneously-filed-with-the-SEC 10-Q.
And why, if the cash flow statement was all calculated and ready for prime time with the Securities and Exchange Commission on Thursday, was it not also published in the more public form of a press release? Perhaps because free cash flow in Q1 2005 came in at just $1.4 million, vs. last year's $14.5 million?
So actually, call it two nagging threads. The first is the decline in free cash flow -- a possibly temporary event, but one we'll be watching in future quarters. The other is the company's strange decision not to publish what was arguably the only really bad news of the past three months. That's a thread we'll be tugging on even more insistently.
For more Foolish news and views on K-Swiss, read:
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Fool contributor Rich Smith owns no shares of K-Swiss.
