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K-Swiss


For Steven Nichols it was love at first sight. As the head of children's shoes at Stride Rite Corp. (SRR) in the mid-1980s, Nichols was so enthralled when he first encountered a K-Swiss tennis shoe that he tried to persuade his boss to buy the company. When that didn't work, he put together a group of investors and bought it himself for $20 million in 1986. The sneaker's design was so timeless, Nichols thought, it could sell for the long term. "This is a 50-year shoe," he said.

So far, so good. Sales at K-Swiss Inc. (KSWS) have increased more than twentyfold since Nichols stepped in. Buoyed by a trend toward retro sneakers, especially those with white stripes on white leather, K-Swiss' profits and sales have doubled, to $54 million and $465 million, respectively, over the past two years alone, helping boost the company to No. 15 on BusinessWeek's list of the fastest-growing companies.

While Nichols loved the classic look of the K-Swiss shoe, he saw that its marketing needed a drastic overhaul. The Westlake Village (Calif.) company was still being run by the two tennis-playing Swiss brothers, who 20 years earlier had designed a leather sneaker with shock-absorbing insoles as an upgrade from the canvas shoes of the day. Nichols quickly upped the price from $40 to $60 a pair, cut out sales to discounters that he believed had cheapened the brand, and positioned K-Swiss as a conservative choice for anyone who wanted an alternative to flashier designs from companies such as Nike (NKE) and LA Gear. And he broadened his base, introducing a children's line, signing up more full-priced U.S. retailers, and expanding overseas.

But it wasn't until the late 1990s that the real breakout began. That's when Nichols beefed up his marketing team, hiring brand managers from places like Procter & Gamble Co. (PG) and targeting the core 14-to-24-year-olds who buy more than half of all sneakers. K-Swiss began advertising on television, in particular on cable networks such as MTV and in youth-oriented magazines such as Vibe and Teen People. Suddenly the shoes were off the tennis court and on the stoop. A series of ads two years ago featured a troop of trendy young people posing in street settings and rapping lines like "I wear my K-Swiss, at my place with my crew. I like them white and new."

HAPPY RETAILERS The TV ads have helped keep that first shoe Nichols fell in love with -- the K-Swiss Classic -- the company's top seller. Last year it accounted for 66% of sales. With such focus, K-Swiss doesn't get stuck with a lot of inventory from new shoes that don't sell. That gives it a profit advantage over competitors that introduce a blizzard of styles each year. K-Swiss' operating profit margin is 20%, vs. 11.6% at Nike and 7.6% at Reebok International Ltd. (RBK). It has also made retailers -- which don't have to accept as many returns from disappointed customers -- quite happy. "They are one of the most profitable brands we carry," says Glenn S. Lyon, president of the Finish Line Inc. (FINL), a sporting goods chain based in Indianapolis. "We're not taking as many guesses at new things."

But even a "50-year shoe" has its limitations. And the company's track record on coming up with new products has not been good. Last year, Nichols scrapped a line of outdoor shoes made under a license from National Geographic. Similarly, a startup line of sneakers without shoelaces called Royal Elastics has been a disappointment, to say the least.

This year the company has stuck closer to home with its new Ramli sneaker, which looks a lot like the K-Swiss Classic but has a colorful stripe running along the bottom. Another new launch, the Gorzell, has five single-color stripes and resembles a running shoe from the 1970s. Retailers say the new models are selling well. And K-Swiss is promoting its entire lineup with a series of ads encouraging sneaker wearers to customize their shoes with personal touches like fancy laces and graffiti. "The Classic look is sort a blank canvas," says marketing chief Deborah Mitchell, 42.

STOCK SLUMP Even as K-Swiss struggled to find another hit, its stock was on a tear, up from a split-adjusted price of $3 four years ago, to a high of $28 in January. The downside of K-Swiss' big runup is that Wall Street now thinks it may be short of breath. The stock has fallen 19%, to $20, since Apr. 28. That's the day that Nichols announced the company's 2004 sales and earnings growth would be less than previously expected. The main problem: K-Swiss got a temporary boost from a dispute between Nike and retailing powerhouse Foot Locker Inc. (FL). The percentage of K-Swiss' sales coming from Foot Locker doubled, to 29%, last year, as the giant athletic-shoe retailer stocked up on non-Nike sneakers. But now that Foot Locker and Nike have patched things up, orders have fallen for K-Swiss.

Now, it remains to be seen if K-Swiss' retro look will stay in vogue. "Are K-Swiss cool? They used to be," says Andre Dailey, a 17-year-old who was shopping for sneakers recently at Los Angeles' Beverly Center mall. "They're like sandals. Everybody has got a pair." That's the hazard of success in a fashion-oriented business: Nichols and his marketing team will have to work extra hard to make sure that K-Swiss' classic shoes remain stylish in the minds of young consumers.

By Christopher Palmeri in Los Angeles


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