K-Swiss Inc.

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K-Swiss Inc.

31248 Oak Crest Drive
Westlake Village, California 91361
U.S.A .
Telephone: (818) 706-5100
Toll Free: (800) 938-8000
Fax: (818) 706-5390
Web site: http://www.kswiss.com

Public Company
Founded: 1966
Incorporated: 1969
Employees: 522
Sales: $501.15 million (2006)
Stock Exchanges: NASDAQ Global Select Market
Ticker Symbol: KSWS
NAIC: 315223 Men’s and Boys’ Cut and Sew Shirt (Except Work Shirt) Manufacturing; 315232 Women’s and Girls’ Cut and Sew Blouse and Shirt Manufacturing; 315299 All Other Cut and Sew Apparel Manufacturing; 316211 Rubber and Plastics Footwear Manufacturing; 316219 Other Footwear Manufacturing

K-SWISS’s BEGINNINGS: 1966–86

THE RENEWAL OF K-SWISS

CHANGING IMAGE FOR CHANGING TIMES

RIDING THE RETRO BOOM

BEYOND THE CLASSICS

PRINCIPAL SUBSIDIARIES

PRINCIPAL COMPETITORS

K-SWISS’s BEGINNINGS: 1966–86

K-Swiss was founded by two Swiss brothers, Art and Earnest Brunner, who moved to California in 1966 and promptly started their business venture. The Brunners were both avid skiers and tennis players, and together the two decided to design a shoe that would respond to and support the specific needs of the tennis player. The Brunners focused particularly on cushioning for the soles of the feet, as well as the construction of a firm upper that would not easily give way to the pressure of forceful lateral movement.

Calling their shoe “the Classic,” the Brunners introduced their design at Wimbledon in 1966 to instant success. The shoe’s design was intended for intense use, but its appearance was pointedly austere: three sturdy leather pieces constituted the shoe’s upper, which was held in place by five narrow leather strips. The shoe’s sole was a thin but strong strip of lightly treaded rubber, which allowed it to be light and relatively frictionless. Outside of a small Swiss flag on the heel of the shoe, K-Swiss’s design was entirely white in color, and thus gave the shoe a timeless, preppy appearance.

Tennis players and upscale consumers took to the shoe immediately, and soon K-Swiss was enjoying a small but growing popularity in the United States. Because K-Swiss was located in California, the company’s products were particularly visible along the West Coast, an area that attracted a great number of Japanese residents and tourists. In the 1970s, K-Swiss’s shoes began to gain an almost cultlike status in Japan, and during the course of that decade the company opened up dozens of accounts in that country. As the company’s U.S. market grew, it began to have its shoes produced in Southeast Asia, where labor costs were low, thus making K-Swiss products even more readily available to Asian markets.

Much of K-Swiss’s success was paradoxically based on what the company did not do: it did not advertise on radio, in magazines, or on television; it did not put out new styles of shoes every season, and it made no attempt to create consumer interest through eye-catching logos or colorful designs. The shoes were worn by athletes, and gained their popularity primarily through a reputation for durability and reliability. K-Swiss’s quiet but steady presence kept the company small, but also allowed it to maintain a stable niche in the growing athletic footwear industry. Such a strategy held the young company in good stead throughout the 1970s, when athleticwear was reserved exclusively for the courts and the track, but when trends began to change in the next decade, K-Swiss found itself faltering.

In the 1980s the athletic apparel industry exploded, with companies such as Nike, Reebok, and adidas popularizing everything from sweatshirts to basketball shoes. Athletic gear was no longer just for working out: it became a fashion statement. The simple sneaker was no more, as footwear became increasingly specialized, as styles for cross-training, running, walking, basketball, and aerobics took the place of what was once a relatively generic design. Simplicity gave way to flashy and colorful styles, with such companies as L.A. Gear becoming more popular than the staid lines offered by K-Swiss. By the mid-1980s, K-Swiss was still enjoying some success, particularly in Japan, but its sales had slowed.

THE RENEWAL OF K-SWISS

In the mid-1980s a retail executive named Steven Nichols took an interest in K-Swiss that was to change the shape of the company’s future. Nichols was aware that K-Swiss’s sales were stumbling and thought the company’s founders might be amenable to being bought out. At the time, Nichols was president of Stride Rite Corporation, maker of the famous Sperry Top-Sider, and as president he encouraged his company to buy K-Swiss. When Stride Rite refused, Nichols resigned, convinced that with the proper backing he could acquire K-Swiss himself and take advantage of the rapidly expanding athleticwear market.

Nichols’s dramatic exit from Stride Rite was proof that risk takers are needed in the business world: within eight months, the executive had raised more than $116 million, and in January 1987 he purchased the company and assumed the role of CEO. Nichols thought that much of the company’s success lay in its snob appeal. It was a popular label with wealthier consumers—the average price of a pair of K-Swiss shoes was well above that of many of its competitors—and in a sense its almost anonymous styling was what made the shoe so desirable. Year after year “the Classic” endured, while trends came and went. However, Nichols also knew that in the increasingly competitive arena of athletic footwear, K-Swiss needed more visibility in order to survive. The trick, then, was to maintain the label’s “country club” appeal while simultaneously broadening its targeted market.

COMPANY PERSPECTIVES

K-Swiss was founded by two Swiss brothers who became avid tennis players after moving to Southern California. In 1966, they introduced the K-Swiss “Classic,” the first all-leather tennis shoe with a one-piece rubber outsole, reinforced toe-design, five-stripe bands on each side, and D-Ring lacing system.

Since then, K-Swiss has continued to build on its performance heritage with new footwear for serious tennis players, as well as training shoes for all athletes. Today, the “Classic” still enjoys popularity as a clean, original, athletic look that is always appropriate off the court.

After Nichols took over at K-Swiss, the company began to advertise for the first time. Eschewing television ads as too mainstream and expensive, K-Swiss began a print campaign in athletic magazines, utilized billboard space, and bought radio air time in select cities. The ads quietly emphasized quality, simplicity, and durability, and did not follow the trend set by Nike in which high-profile athletes donned company sweatshirts and shoes emblazoned with slick logos.

Nichols’s strategy worked, and between 1988 and 1989 the company increased its revenues by a phenomenal 72 percent, bringing in over $60 million in sales. In addition, K-Swiss discontinued all of its Japanese accounts with the exception of certain exclusive department stores, and within a year revenue was up in Japan and comprised 31 percent of its sales. By 1990 K-Swiss shoes were selling for the U.S. equivalent of $100 in Japan, a price that made the shoe desirable as a “luxury” item.

In 1990 K-Swiss went public at $17.50 a share, and within a year its share price rose to $21. Nichols had gambled and won: in 1986, K-Swiss had sales of about $21 million; only three years later the company had almost tripled that number. In November 1991, K-Swiss opened a 251,000-square-foot distribution center in Fontana, California, which allowed the company to keep up with its rapidly increasing pace. In 1991 K-Swiss began to cultivate a customer base in Europe, forming a partnership with the 175-year-old company C & J Clarks to distribute K-Swiss shoes to selected department stores in Britain and continental Europe.

The early 1990s brought other successes as well. In February 1992 K-Swiss was granted the patent to two designs, the Cushion Board sole construction and the D-R Cinch lacing system. The former patent was a design in which a shoe’s padding was moved from the heel of the shoe and redistributed throughout the shoe’s sole, allowing for more support and shock absorption in high-impact exercise. The D-R Cinch lacing system was a multiring design in which the shoe’s laces were wrapped all along the upper of the shoe, which gave the wearer more support during lateral movement. Such a lacing structure had been used by K-Swiss since the company’s inception, and after 1992 no other company could copy it.

Around this time K-Swiss began to expand its inventory and make overt attempts to compete, or at least keep up, with competitors such as Nike and Reebok. In 1993 the company introduced three new designs made specifically for basketball and made a foray into the crowded aerobics gear market, offering two styles, “the Belais” and “the Belais-LT,” which at about $70 a pair were priced to compete with other upscale shoes. The early 1990s also saw K-Swiss make a transition from being an exclusively “indoor” footwear company, producing shoes intended only for the courts or the track, to being a producer of footwear for the trail as well. In the fall of 1994 K-Swiss premiered 12 new designs, most of which were intended for light hiking or walking. The company’s “Davos” collection, consisting of five different styles, was intended for hardcore technical climbing. K-Swiss started advertising in magazines such as Outside and Backpacker, expanding its reach to different types of athletes.

CHANGING IMAGE FOR CHANGING TIMES

In 1996 K-Swiss began advertising on television for the first time, expanding its target market beyond its traditional upscale customer to a younger, more active market. By the next year K-Swiss, while not anywhere near such companies as Nike, Reebok, or adidas in sales, was carving out a higher profile, with sales at $116 million and stock trading at $28 a share.

By the late 1990s K-Swiss had more than 2,000 accounts and was sold in such stores as Foot Locker, Just for Feet, Footaction, Finish Line, Champs, Nordstrom, and Dillards. While it kept its products highly visible to the consumer, the company was methodical about limiting its inventory. By introducing certain styles for a limited amount of time, or making only a certain number of a particular design available, K-Swiss ensured its reputation for making quality shoes which were not “mass produced.” Thus, even when K-Swiss began to advertise and expand, it sought to preserve its exclusive image. In a 1999 interview with Sporting Goods Business, Nichols stated, “Many of our shoes we introduce for a very short period of time and then at some future date we reintroduce it and we reintroduce it on allocation to make sure that nobody buys too many. ...When a retailer sells out virtually to the last pair, that’s when we’re the happiest.”

KEY DATES

1966:: K-Swiss is founded.
1986:: The company is purchased by Steven Nichols.
1990:: K-Swiss goes public.
1996:: Television advertising dramatically increases sales.
1998:: K-Swiss launches a $17 million ad campaign to update its image.
2001:: Rights to Australia’s Royal Elastics skater shoe brand are acquired.
2005:: Sales exceed $500 million after retro shoe boom.

Selling to the last pair, however, took more than reputation in the highly competitive athleticwear environment of the 1990s. In 1998 K-Swiss launched a $17 million ad campaign that the company called “Club K-Swiss.” In this campaign, the company utilized professional athletes as spokespersons for the company and produced commercials in which hip-hop music and fast, flashy images of sports events were interspersed with pictures of K-Swiss products. The revamping of the company’s image worked, as 1998 sales soared to $162 million. K-Swiss stock continued to climb, prompting the magazine Footwear News to maintain that K-Swiss “epitomized the little athletic footwear company that could.”

RIDING THE RETRO BOOM

A new line of tennis clothing debuted under the “7.0” brand in 1999. This was a complement to the company’s premium shoes marketed toward serious tennis players (the number 7.0 refers to the U.S. Tennis Association’s highest ability rating, reserved for touring professionals). Apparel would represent a very small portion of the company’s business over the next several years, however.

A line of trainers debuted in 2000 and proved more popular. K-Swiss brought out a higher-priced “Luxury Edition” of its Classic in 2000 as well. The Classic and its derivatives continued to dominate the business, with two-thirds of total sales.

Sales were slipping significantly in spite of the new products. Revenues of $222 million in 2000 were $64 million less than in the previous year. It was a difficult environment for the shoe industry in which hundreds of stores were closed.

More new styles were added in 2001 to broaden K-Swiss’s product offerings and enhance its economies of scale. The company won a license to produce casual footwear under the National Geographic label, though this line was discontinued after a couple of years.

In 2001 the company also acquired part of Australia’s Royal Elastics, producers of a slip-on athletic shoe for skateboarders, for approximately $3 million. K-Swiss did not immediately bring the novel designs to the U.S. market, preferring to let the brand develop overseas first. In 2005 K-Swiss tapped the Royal Elastics unit to produce shoes for the L.A.M.B. clothing label fronted by pop singer Gwen Stefani.

The company also experimented with adding more color to its offerings. Beige and light-blue shoes began appearing in European stores only in 2001, noted Footwear News. The company also brought out U.S. models with accent stripes.

K-Swiss’s Classic model claimed timelessness, but its fortunes were lifted by a “retro” athletic shoe craze that lasted through 2002. K-Swiss had another banner year in 2003: revenues leapt 48 percent to $429 million, aided largely by an opening at one of the nation’s largest athletic shoe retailers. Foot Locker Inc. had slashed its orders for Nike Inc. over a trade dispute, opening the door to K-Swiss and other brands. Foot Locker suddenly came to account for nearly one-third of K-Swiss’s business. Much of this disappeared, however, after Nike and Foot Locker mended their relations in 2004.

BEYOND THE CLASSICS

Sales rose to $508.6 million in 2005 but slipped to $501.1 million in 2006. Classic tennis shoes were still the company’s mainstay, but it was a category that was falling out of fashion in the United States: sales of the Classic slipped 52 percent, Nichols told Footwear News, partly because K-Swiss proactively limited distribution to protect the brand’s value. Domestic sales continued to drop in 2007, and total revenues were expected to be less than $440 million for the full year.

Nichols told Footwear News he intended to grow the performance tennis shoes business. Another area for growth was clothing, which had met with success in Europe, but then represented less than 1 percent of the company’s total business. There was plenty of room to expand the company’s geographic distribution. It was spreading into southern Europe, and venturing into mainland China via a new distributor.

The company was launching a new series of “Ultra-Natural” court, sailing, and running shoes in 2007. The vast number of runners in the population attracted K-Swiss to that market. However, its offerings focused on the new pastime of “free running,” a kind of extreme sport that combined running with acrobatic movements across urban obstacles.

K-Swiss was behaving more and more like traditional athletic shoe companies in its marketing. To pitch its new products, it hired Anna Kournikova, the tennis star-turned-fashion pinup, to help the aging brand appeal to a younger demographic. Other lesser-known athletes were on the roster as the company shifted its marketing emphasis from casual tennis shoes to performance athletics.

Rachel H. Martin
Updated, Frederick C. Ingram

PRINCIPAL SUBSIDIARIES

K-Swiss Pacific Inc.; K-Swiss International Ltd. (Bermuda); KS UK Ltd.; K-Swiss Europe B.V. (Netherlands); K-Swiss S.A. de C.V. (Mexico); K-Swiss Australia Pty. Ltd.; K-Swiss Direct Inc.; K-Swiss Sales Corp.; K-Swiss NS Inc.; K-Swiss Canada Corp. 1166789 Ontario Inc. (Canada); K-Swiss Germany GmbH; K-Swiss France SAS; K-Swiss S.r.l. (Italy); ERE Footwear Inc.; Royal Elastics LLC; Royal Elastics Inc.