K-Swiss Jumps Into the Training-Shoe Sweepstakes

The white-shoe sneaker maker makes a bid to insulate itself from the trials and tribulations of fashion.
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Hot sneaker companies come and go. And sometimes they come again.

In an effort to hold its ground as the sneaker of the moment,

K-Swiss

(KSWS)

is getting technical. Departing from its focus on tennis and fashion, the Westlake, Calif.-based manufacturer next spring will introduce a line of training shoes for running, biking and other workout activities.

The move comes at a critical time for the company, which is under pressure to maintain its sprinting sales and earnings growth -- the result of inner-city style setters championing the brand's sleek, signature white look. But the strategy has its share of risks, including the fact that it places the company in the path of Beaverton's big boy,

Nike

(NKE) - Get Report

, for the first time.

The stock already has been hit by concerns about K-Swiss' strategy, along with worries about customer

Just For Feet

(FEET)

, which is cash-strapped and bloated with inventory. After soaring 327% from January to a 52-week-high of 59 13/16 in May, it tumbled, closing off 3 3/4 at 42 3/4 Thursday. (Wednesday, K-Swiss shares had jumped 20% to 46 1/2 after another retailer,

Finish Line

(FINL)

, made positive comments regarding the brand during its quarterly earnings conference call.)

Just For Feet's

problems are "a legitimate concern," says Steven Nichols, K-Swiss' president and chief executive. Just For Feet accounts for about 6% of K-Swiss' annual sales. Nichols, who's described by one shareholder as "over the top in how squeaky clean he is," is known for telling it straight.

Yet even were K-Swiss to lose half of its Just For Feet business in the current year, sales would still grow 72%, down from 79%, according to a June 17 note by

Goldman Sachs

analyst Margaret Mager. Not bad considering industrywide sales are expected to be flat at best this year. Mager rates K-Swiss a buy, and her firm has performed underwriting for the company.

K-Swiss, which was founded by two Swiss brothers in 1966, has been known for innovations in the past. It introduced the U.S. to one of the first leather tennis shoes -- the

Classic

-- which is still popular today, 33 years after its debut. More recently, the company's

7.0

system, a performance shoe also for tennis, has developed a wide following in that sport.

But outside the neat, white lines of tennis, K-Swiss is a virtual unknown. Kids pair their K-Swiss Classics with khakis, not workout gear.

"If K-Swiss can penetrate the technical market -- great," says Jeffrey Van Sinderen, an analyst with

B. Riley

. "We're just not sure they can, because other than in tennis, they don't have a technical background and they'll be going up against

Nike

(NKE) - Get Report

and

Reebok

(RBK)

." Those concerns are one reason Van Sinderen lowered his rating on the stock in March to neutral from outperform, making him one of the few analysts to take a cautious view of the company's prospects. (His firm hasn't underwritten for K-Swiss.)

Nichols, the CEO, says the success of the 7.0 system, which has seen sales double in each of the three years it's been on the market, is the very reason K-Swiss decided to target more athletic types. "It proves we can sell high performance," he says.

The training line will be backed by an advertising campaign that features rookie athletes like Gabe Kapler, who was recently tapped from the minors to join the

Detroit Tigers

.

The campaign is just one part of a growing marketing effort designed to reach the 14- to 24-year-olds who buy 60% of athletic footwear, Nichols says. In 1999, K-Swiss will spend $17 million on television ads directed at this group, up from $4 million three years ago.

So far the strategy appears to be working. Irma Zandl, president of market research firm

Zandl Group

, says K-Swiss has been turning up increasingly as the favorite shoe of African-American and Hispanic girls.

K-Swiss knows from experience the perils of fashion trends. In the early 1990s, its white sneaker was all the rage.

Then, after a few seasons, that "tennis anyone?" look played itself out as style setters moved on to a new look in the endless ebb and flow of fashion. By 1996, profits had collapsed to a nickel a share from $1.10 two years earlier. In the same period, sales dropped 30% to $107 million.

Fast-forward to 1999: K-Swiss is at it again. Classic retro is the trend du jour and so, once again, are K-Swiss' nifty sneakers. Earnings last year climbed back to $1.10 a share on sales of $162 million, and analysts surveyed by

First Call

expect the company to earn $2.38 a share this year.

The training sneakers, if they are well received, would go a long way to protecting K-Swiss from the whims of fashion. Buyers are only just getting their first inkling of the shoes, which will be on display at trade shows in August and in stores by February. Their impressions are favorable, according to one money manager, who owns shares of K-Swiss and declined to be named. This person typically talks to dozens of buyers in the course of his research.

What are they telling him? "They love the new spring line and will be increasing orders."

Whether customers will opt to run or bike in K-Swiss sneakers remains to be seen. If they do, K-Swiss could finally have the staying power to outlast the latest fad.