K-Swiss (NYSE:KSWS) is set to report earnings on Thursday. Whether or not you like the shoes, you probably despise the stock: Shares are down more than 35% in the past year, underperforming footwear manufactures like Nike (NYSE:NKE), Skechers (NYSE:SKX), Steve Madden (NASDAQ:SHOO), and Deckers Outdoor (NASDAQ:DECK).

It's no surprise why the stock has cratered. In 2007, revenue fell almost 20% and net income was nearly cut in half. By the end of March of this year, net income had plummeted more than 60% from the same period a year ago. Analysts have all but lost hope, and are looking for just $0.02 per share in net income on average for this coming quarter.

Now the question becomes: Is K-Swiss a bargain, or a bargain trap?

Baby needs a new pair of shoes, quick
You don't have to look very far to find the base of K-Swiss' problems. The first page of its annual report reminds investors, "[T]he K-Swiss 'Classic,' [type of shoe] has remained relatively unchanged from its original design, and accounts for a significant portion of our sales."

In fact, the "Classic" accounted for 69% of revenue in 2007. An apparel company that's made it this far with one piece of merchandise is just as frightening as it is impressive. You can imagine the outcome if Reebok tried to push 69% of its sales with the "pumps" shoes that were so popular in the early '90s. Or if Nike's future was exclusively dependent on Air Jordans. It would never work. Now K-Swiss has to grapple with a question that plagued Crocs (NASDAQ:CROX) and Heelys (NASDAQ:HLYS) in the past year: Is this a one-hit-wonder catastrophe in the making?

Yes, and no
Look, I'm hardly a fashionista, but I know that Classics are about as cool as culottes. If the Classic is K-Swiss' road map going forward, don't expect anything spectacular out of the stock. Yes, the company has tried to offset waning domestic interest with a big push into global markets like Germany and the U.K., but I'm willing to bet even they have some fashion sense. There's one key to turning this ship around: new products.

Of course, management isn't blind to this. They've made an attempt to branch out into running shoes, children's shoes, tennis dresses, track suits, socks ... all sorts of things. How much of a dent have they made? Little, so far. Tennis products have grown from 5% of sales in 2005 to 7% in 2007. Children's products haven't budged. Training products have actually gone down. For the time being, K-Swiss needs the Classic as much as it ever has.

The plot thickens
K-Swiss has a diversity problem on its hands. No question about that. However, if there's a company set up to handle a storm like this, it just might be this one. With $273 million in cash -- or about half its market cap -- at the end of last quarter and no debt to speak of, how long can K-Swiss wait to turn itself around? About as long as it wants, or, more importantly, as long as it needs. That alone could make it a compelling value story.

Some of the cash will be needed to design new shoes, infiltrate new markets, and promote new advertising, but just how much? That's the real kicker, and that's the big kahuna that investors should pay attention to during quarterly conference calls.

In the near term, a few things can happen with the cash that will dictate K-Swiss' future:

  • It can be used to successfully integrate new designs, juicing earnings.
  • It can be used to buy back a gargantuan amount of shares.
  • It can be used to develop new designs that go nowhere.

The verdict
In any outcome but the last, K-Swiss should do quite well over the next two years. What makes it a compelling story is that, barring a complete swindle of the company's cash, downside is limited. Crocs crashed well more than 90% when its one-hit-wonder came undone. Heelys fell nearly 90%. Is K-Swiss set for a similar doom?

Unlikely. Even if management fails to use the cash wisely and integrate new products, it's hard to imagine the stock falling more than another 20% or 30% from here. If they do manage to pull their act together, there's no reason to believe shares can't rebound to where they were in recent years -- meaning more than double where they stand today.

Your turn
What do you think about K-Swiss? Our CAPS community gives it a neutral three-star rating. We'd love to get your take on it, too. Click here to come on over to CAPS and tell us what you think.

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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Crocs is a Motley Fool Hidden Gems Pay Dirt recommendation. The Fool has a disclosure policy.