K-Swiss Inc. Q4 2009 Earnings Call Transcript

123jump.com Staff
18 Mar, 2010
New York City

Revenues fell 21.5% to $42.0 million and net loss was $12.5 million or 36 cents a share. Gross profit margin as a percentage of revenues was 36.5% compared with 24% in the prior year period. Operating loss of $17.2 million compared to an operating loss of $16.8 million in the prior year period.

K-Swiss Inc. ((KSWS))
Q4 2009 Earnings Call Transcript
February 18, 2010 11:00 a.m. ET

Executives

Steven B. Nichols - Chairman, President and Chief Executive Officer
George Powlick - Vice President, Finance, Chief Administrative Officer, Secretary and Chief Financial Officer

Analysts

Jeff Van Sinderen - B. Riley & Company, Inc.
Sam Poser - Sterne, Agee & Leach
Christopher Svezia - Susquehanna Financial Group
Mimi Bartow - Telsey Advisory Group
Michael A. Cancelleri - Mont Pelerin Capital

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the K-Swiss Fourth Quarter 2009 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please the one, followed by the four on your telephone, if at anytime during the conference, you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Thursday, February 18, 2010.

I would now like to turn the conference over to Mr. Steven Nichols, Chairman, President and Chief Executive Officer. Please go ahead,

Steven B. Nichols

Thank you. And good morning, everyone. With me today is George Powlick, our Chief Financial Officer. We appreciate you being on the call this morning. Before I would begin, I would like to have George cover the Safe Harbor language. George?

George Powlick

Certain matters discussed in this press release are subject to certain risks and uncertainties that could cause actual results to differ materially including but not limited to non-achievement of the assumptions discussed herein, general and regional economic conditions, availability of credit, industry trends, merchandise trends including market acceptance of the company’s product offerings, customer demand, competition, the impact of terrorism, and/or potential global conflict on the worldwide economy, and order cancellations and reduced sales resulting from the slower worldwide economy.

A complete description of these factors as well as others which could affect the company’s business is set forth in the company’s periodic filings including its Form 10-K for the year ended December 31, 2009, which is currently on file with the SEC.

Backlog as of any date represents scheduled orders scheduled to be shipped within the next six months. Backlog does not include orders scheduled to be shipped on or prior to the data determination of backlog. The mix of future and at once orders can vary significantly from quarter-to-quarter and year-to-year and, therefore, futures are not necessarily indicative of revenues for subsequent periods.

Steven B. Nichols

Our preference would certainly be to report progress to you on a positive year-over-year basis. At this point in the cycle with the strategic priorities we set for 2010, we have to be content with reporting sequential progress and new milestones in the development of marketing of the K-Swiss and Palladium brands.

We can expect to see more of the same from us in 2010 in terms of tightly controlling overhead costs, inventory, distribution, as well as, allocating even more of our resources to developing technologies behind a new running and tennis shoes and locking up an increased number of personalities and sponsorship opportunities.

The advertising and marketing investment for 2010 is expected to reach an all-time high as a percentage of revenues for us as well as well above our investment in 2009 as we look to reposition the K-Swiss brand as the California Sports Company.

The breakdown of sales by product category for the fourth quarter 2009 was as follows, performance, 19%, lifestyles 67%, other 14%.

Our performance revenues were up 4% when compared with the prior year period. This category includes all genders of tennis, running and training. Lifestyle revenues were down 34% when compared with the prior year period. This category includes all genders of nonperformance footwear.

The biggest sellers for the quarter in Lifestyle were the Classic, which sold 158,000 pairs and decreased 8.4% from the prior year period, Lozan II was 62,000 pair, the Mohr with 51,000 pair, the Albury II 42,000 pair and the Molten 23,000 pair. The top performance seller was ST329 with 51,000 pair. Other revenues which include apparel and Palladium were up 98% on a small base.

Our goal is to reposition the K-Swiss brand as the California Sports Company. The K-Swiss Classic tennis shoe designed in California was a performance breakthrough in 1966 when the world only new canvas.

In 2010 and beyond, new product and marketing initiatives will have to reclaim the spirit of innovation. The new brand voice will connect with consumers with a progressive, creative and playful creative California attitude.

New TV advertising for K-Swiss depicts an awesome day in the life of the California Sports Company. Our triathletes, tennis players, skaters and Californians are seen warming up, competing, winning, enjoying themselves from sunrise to sunset.

K-Swiss products are featured including the K-Ona and Tubes running shoe, Defier DS tennis shoe, The Classic and our apparel. It ends with the text Designed in California. Starting mid-March, the new advertising will run for weeks on ESPN networks, Fox Sports, MTV, MTV 2, Comedy Central and some syndication. The TV campaign will be followed up with our online K-Swiss ads.

Also for consumers online we are redesigning kswiss.com to create a global marketing hub to contemporize the brands like look and feel. This blog type redesign will be a better integration of the news of K-Swiss athletes events, products and social media conversation. Early March includes the introductory of a global launch page where consumers can see a 67 version of the new TV ad. The new redesigned kswiss.com site will go live in April.

Tennis is our California heritage and we are building on this foundation. Sam Querrey, the number two American tennis player and Bob and Mike Bryan, who won the Doubles Championship at the Australian Open are on a K-Swiss team. This is the Bryan’s eighth grand slam Doubles title.

To celebrate this achievement, the inside cover of the April issue of Tennis and Smash magazines will be a two page K-Swiss print ad of the Bryan brothers. In this ad they’re doing the signature chest bump and wearing our apparel and the new Defier DS tennis shoe.

Running is another important pillar in the K-Swiss being the California Sports Company. We recently announced an upgrade to presenting sponsor of the LA Marathon in addition to official footwear and apparel brand.

We are pleased that our new running product is receiving awards in two shoe reviews in March and April. The new Konejo II tied for the best neutral shoe in one shoe review and the new Konesic is best debut in another. These will be read by 1.4 million runners across regional magazines and 3 million runners will see them online.

Separately, we have an upcoming special insertion on the inside cover of April Runners World Magazine that includes a two-page K-Swiss running print ad plus a one-page foldout advertorial of our sponsorship of the LA Marathon.

In March and April, we are executing promotions with 24-hour fitness centers to see our Tubes product with the top fitness instructors in the United States and to advertise to their employees and members online.

Additionally, this spring we are sponsoring a Tubes Train for summer program with high school athletes in four major cities that includes donations to each school’s athletic program.

Our team of 30 triathletes won 36 major titles and 76 position on award podiums in 2009. We’ll expand this leadership with the execution of 32 Ironman events around the world in 2010, we did 16 events in 2009. This season kicks off in March with Ironman California and Oceanside. Another way to lead our Ironman partnership is forming an agreement with the leading performance bicycle brand in the world, Trek Triathlon.

The K-Swiss Trek Triathlon team includes two Ironman championships, the second-place winner of the 2009 Ironman world championship and multiple half Ironman champions who will be featured on a team and website and appears at the K-Swiss running store later this month.

In summary, and here is the summary, K-Swiss is kicking off 2010 products and marketing with new TV advertising that starts March 19th, the Las Angeles Marathon on March 21th, and the California Ironman event on March 27th.

I’ll now turn the call over to George for a few minutes to go into the financial details.

George Powlick

Thanks, Steven. Revenues were $42 million which is 21.4% below the prior year quarter and down 27% in the volume of footwear sold. At once business for the quarter was 64% compared with 33% a year ago.

The company reported a net loss of $12.5 million or $0.36 per diluted share, compared with net loss of $13.7 million or $0.39 per diluted share year ago. The results include a non-cash impairment charge of $4.8 million for Palladium that I’ll discuss in a moment.

For the K-Swiss brand, the average wholesale price per pair decreased to $24.14 in the fourth quarter of 2009, compared to $24.36 in the prior year period. The volume of footwear sold was 1.4 million pairs in the fourth quarter, compared with 2 billion pairs in the fourth quarter of 2008.

Including the K-Swiss and Palladium brands, the average wholesale price per pair increased to $25.23 for the fourth quarter of 2009, compared to $24.59 in the prior year period. The volume of footwear sold was 1.5 million pairs in the fourth quarter, compared to 2 million pairs in the fourth quarter of ‘08.

Overall gross profit margin as a percentage of revenues was 36.5% in the fourth quarter, compared with 24% in the prior year period. Our SG&A measured as a percentage of revenues was 65.9% compared with 55.3% a year ago and in terms of dollars, $1.879 million below the prior year.

We also recorded $4.8 million non-cash impairment of goodwill and intangibles related to the trademarks of Palladium. Based on our year-end review, we determined that the goodwill carried on our books from the acquisition exceeded the current fair value.

We had an operating loss of $17.2 million for the fourth quarter compared to an operating loss of $16.8 million in the prior year period. Our income tax benefit rate was 27.3%.

Turning to the balance sheet at December 31, 2009, working capital was $259.7 million, compared to $280.6 million a year ago. Accounts receivable were $27.5 million or 59 days sales outstanding, compared with 56 days the previous year.

Our inventories were down 35.3% to $48.2 million, compared with a year ago and we ended the quarter with approximately $193.1 million or $5.50 per share in cash and investments and $3.5 million in short-term debt.

I’ll now turn the call back to Steven to wrap up the operational information.

Steven B. Nichols

Our international business was down 11% in the fourth quarter and backlog was down 16% at December 31, 2009. European sales were down 10% in the quarter with 18% decrease in backlog. Europe accounted for 31% of our worldwide revenues compared with 27% a year ago.

Sales in our Asian region were up 9% in the quarter but a 13% increase in backlog. Asia is our third largest region accounting for 21% of worldwide revenues in this quarter, compared to 15% a year ago.

During the fourth quarter, the Board authorized a new stock repurchase plan for up to $70 million of our Class A common stock. This authorization replaced an existing one that expired on December 31, 2009, and now extends until December 31, 2014.

Our top goals for 2010 are to build consumer acceptance of K-Swiss as the California Sports Company, increase our performance business, increase sales of new Palladium products.

I’ll now turn the call over to George to wrap up financials.

George Powlick

Thank you. Due to the uncertainty surrounding the projected marketing investment for 2010, the potential for deferred tax asset reserve in the second half of the year and a post year-end decline in the second quarter 2010 backlog relative to the prior year, we will only issue revenue guidance and certain key assumptions for 2010.

To that extent, we expect consolidated revenues for 2010 to be comparable to 2009. On a year-over-year basis, we expect to report a decline in Q1, a flat comparison in Q2 and increases in Q3 and Q4.

The change in quarterly trends particularly in Q2 is based on the unusual subsequent decline in Q2 backlog from being up 14% at year-end to being down now about 8%. This abnormality takes away the confidence we would normally have at this time of year in forecasting revenues.

Consolidated gross margin is expected to increase to approximately 40% compared with 35.8% in 2009 due to expected lower closeout sales during 2010, compared to 2009.

Selling, general and administrative expenses are expected to rise to $135 to $140 million due to increased marketing expenditures. These expenditures will be continually evaluated and could change over time, including the possibility of an even greater marketing expenditure depending on available branding opportunities.

The tax benefit rate is projected to be approximately 30%. Should we be unable to substantiate evidence for realizing the benefit of our deferred tax asset in the second half this year, we might be required to establish a reserve of $8 million at December 31, 2010, plus any deferred tax assets established in 2010.

That covers our prepared remarks. We will now be happy to answer any questions you might have.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone. You will hear three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registeration, please press the one followed by the three. If you are using a speakerphone, please lift your handset before entering your request. On moment please for the first question.

Our first question coming from the line of Jeff Van Sinderen from B. Riley. Please proceed with your question.

Jeff Van Sinderen - B. Riley & Company, Inc.

Good morning. I guess my first question is really about the at one’s business in Q4 which was up significantly. Just wondering if a big part of that was disposal of older inventory and then also how does that play into how you stand now with inventory? Are they getting a lot cleaner, obviously the number is down quite a bit?

Steven B. Nichols

Yeah. You are correct, Jeff. It has to do primarily with disposal of slower moving inventory. You can see our inventories were down over 35% in the last quarter and they are getting very clean at the moment. So and that’s why we have upped our guidance for the gross profit margin in 2010 to be up to 40%.

Jeff Van Sinderen - B. Riley & Company, Inc.

Okay. Good. And then can you guys talk a little bit more about your thinking on Q2 futures, obviously it seems like there is an anomaly or something going on there, maybe, why you think that has happened and then I guess your thoughts on at one’s business for Q2 to get to flat revenues.

Steven B. Nichols

Yeah. Typically we disclose backlog two quarters in advance, as you know, for each quarter and typically when we disclose the 2Q backlog and it’s up 15% or 20%, by the time we have Q2, it will be up not necessarily 20%, but it will be up, same thing for the last two years when we have been disclosing the downs. If you disclose a down 30% two quarters in advance, when the quarter happens it is down not necessarily 30%.

What is happening here though, Q2 at December 31 was up 14% but since year-end the orders have not grown as fast, particularly in United States, as they did last year and so the relationship between this year and last year as of now is we are down about 8%. So we are just projecting at this point in time not an up Q2, a flat Q2. And that is our best guess at the moment and that is why we are very uncertain on the forecasting.

Jeff Van Sinderen - B. Riley & Company, Inc.

Got it. Okay. And then on your international business, just looking at the futures there, they are down a little bit more than Q4 revenues. How should we be thinking about where you guys are in turning around the international business and what regions do you think are likely to turn around first?

Steven B. Nichols

Asia is probably going to lead the turnaround and is doing relatively well and Europe, which is probably the bigger piece, is still lagging at the moment.

Jeff Van Sinderen - B. Riley & Company, Inc.

Okay. And also, I mean, it’s great to see you guys are looking for revenues to be up in second half. Can you give us any more color on what you see driving revenue improvement in the second half in terms of maybe on product line segments?

George Powlick

Yeah. For the last two years, we’ve been investing in performance running and we had first generation of running shoes and now we have the second generation. In the first generation, I felt was just slightly below par. They were adequate but not the type of shoes that would break into a marketplace that has some very powerful people significantly better established than we are. The second generation of shoes, I think, have increased multiple better than our first and now we have shoes that are competitive literally with anybody.

So now the running part of our business is just a question of marketing and putting together specialty sales force and getting the people that sell our shoes enthused. We are committed to running and we think that is a terrific opportunity.

The reason we are so interested in running is that the performance running segment, whatever we can achieve in real performance running, it will be a multiplier effect in everyday footwear on the running silhouette and we are thinking that that will be a very, very large catalyst to grow our brand.

So we are assembling a specialty running force, sales force, we are advertising more and more in running magazines. We do have great product that I’m confident it’s equal to anything in the marketplace and we’re starting to accumulate athletes that are just terrific.

We’ve used the triathlon as entry into running and the sport of triathlon is multi-disciplined. They swim, they bike and then they run and we have just invested and with some dumb luck got terrific people and the traffic following in the two years that we have been involved in triathlons we might have become one of the most important shoe vendors to the sport. Last year we were at 16 triathlon events. This year, we are buying a version of 18 wheeler that the side will open up and that will be a mobile store that will go to these events, we’re planning on doing 32-event this year.

We have become the licensee of Ironman footwear and apparel. So that will be co-branded with K-Swiss. We are the sponsorship of the run portion with many of these events. We’ve really become a major player in triathlons and we think that that is the little tip of the pyramid and gravity will bring us down into running. So we’re real happy with running.

The next area, which has been the basis of the K-Swiss brand for 40 years, is tennis. And we will be releasing in late in 2010 what I think is the number one tennis shoe we have ever made.

We have extensively tested the shoe through some very scientific testing facilities and have made advances I think might be breakthroughs in the tennis industry. We have three of the four top, no actually four of the five top American tennis players on K-Swiss tennis and I think we could make a wonderful move in tennis.

And, again, the positioning of running and tennis, the performance parts of those just positions the brand to sell every day Lifestyle shoes and the fallout for successful running and successful tennis is significantly larger than the everyday shoe business.

So literally, we think this will have a little teeny minor plus in the second part of 2010 and what we are thinking is 2010 will set the table for 2011 and all the progress that we get in place this year will really be reaped and sewn or harvested in 2011.

For all intents and purposes, most of 2010 is over. We have sold in a good part of Q3. Q4 is not a big quarter. So our dream is that some of the products that will be new and fresh in the second half of 2010 and that is Tubes and blades and new classics, if these things are successes at retail, they should be usually under bought and create an imbalance of demand over supply for 2011. So do, if our dream comes true, 2010 sets the table for 2011.

Jeff Van Sinderen - B. Riley & Company, Inc.

Okay. Good to hear.

George Powlick

That’s a long answer.

Jeff Van Sinderen - B. Riley & Company, Inc.

It’s a helpful answer. Thanks for your much and good luck this quarter.

George Powlick

Thank you.

Operator

Thank you. Our next question coming from the line of Sam Poser from Sterne, Agee. Please proceed with your question.

Sam Poser - Sterne, Agee & Leach

Good morning. Does the backlog include Palladium?

George Powlick

Yes. It does.

Sam Poser - Sterne, Agee & Leach

And could you breakout sort of that, what the pure K-Swiss backlog numbers, how that is looking right now or is most of the growth coming from the Palladium, so?

George Powlick

No. I can break it down. The second quarter, K-Swiss was the one that was principally up. The second quarter K-Swiss was up 13% at year-end but is no longer there.

Sam Poser - Sterne, Agee & Leach

And how should we think about Palladium within the discussion for the full year of flat. How does that position the case K-Swiss line versus Palladium growth which I assumed it about 90% or so, was slightly about 90% of that other business?

Steven B. Nichols

Right. Palladium, we are treating as a very valuable, wonderful infant which means that we are pretty much confining the sales at retail to vary upscale smaller retailers in the United States. So there are no big huge chains that could drive the business. We’re still brand positioning early on. The very, very good news is whoever we sold the products too have, in turn, sold it very, very well. We’ve just began on a futures program and we had our pricing from the very beginning aggressive, but we allowed for futures discounts. And up until about maybe 45 days ago, people were just getting the shoes in.

The very first deliveries were really August, September and people were not going to write futures until they had some feeling of the bland and, actually, I did see Sam on Tuesday at the Las Vegas shows. We were at three shows and people were starting to write futures and the normal things that happened to brands that are successful at retail and manufactured shoes where there is about a five-month lag time to get inventory, is starting to happen at Palladium. So our sale throughs are excellent.

Our biggest success to date has been with Urban Outfitters where we were in about 20 of their stores in back-to-school and they’ve made a decision to move us to all stores which is about 120. So the sell throughs have been great. Pretty much whoever we have done business with, the sellthroughs have been terrific and that’s in the United States.

Were delivering next week, Palladium shoes to probably the number one retailer in Japan and again, it’s a nice size order for this small little company but a small order from them and it’s a test. And if that works, we could enjoy very, very good business in Japan quite rapidly.

In Europe, and I was just at the Bread and Butter show in Berlin about three weeks ago and the brand is significantly better known in Europe that it is in the United States. And it was very enthusiastically received by retailers and we think, again, the first real year for Palladium will be 2011.

And that means that people will get serious about writing future orders and by close to back-to-school, if they want good amounts of shoes, the delivery date will be January or February.

So both K-Swiss and Palladium, Palladium for sure, no doubt, is poised for great 2011 and K-Swiss doesn’t have an option of having a good 2010. If we do everything right, we will have a good 2011 but there is some imponderable risk in K-Swiss. Palladium, I think, is a sure bet but obviously much smaller bet.

Sam Poser - Sterne, Agee & Leach

What percent of that Palladium business do foresee being in the U.S. this year? It was very, very small last year?

Steven B. Nichols

Yeah. The company does most of its business right now in France. It was a French company and many of the products that they carry in France we have not adopted around the world. So, I would think in relatively short order and that could be 2011, 2012, half the business in the world should be done in the United States.

Sam Poser - Sterne, Agee & Leach

All right. Thank you very much. Good luck.

Steven B. Nichols

Okay. Thank you.

Operator

Thank you. Ladies and gentlemen, as a final reminder to register for a question, press the one followed by the four. Our next question coming from the line of Chris Svezia from Susquehanna. Please proceed with your question.

Christopher Svezia - Susquehanna Financial Group

Good morning, everyone. I guess, my first question, just to be clear, on the change in backlog as it relates to the second quarter. I just wanted to make sure I am clear about this and George, you had indicated as the quarter progressed the past month and a half or so of the second quarter, you’ve just not seen as much of a booking process.

I’m just curious, has there been, what drove the improvements and why do you see a slowdown? Is it either because retailers are looking more on an at once basis for the products or cancellations, I’m just curious about the swing?

George Powlick

I can tell you, at least geographically, but it was a domestic that was leading the upsurge and it is the domestic that has flattened out.

Steven B. Nichols

You know, Chris, one or two retailers placing nice orders early on could look like will have a great booking quarter and then two or three other retailers don’t respond after a cut off date and things get bad.

Our backlog relative to where it has been in years past is relatively small and if a retailer came in and gave us a good order early on and things look great, but it was not a projectable statistic.

Bottom line is the brand is suffering. We’ve got to do some dramatic things. It sounds crazy. We spent two years figuring out the California Sports Company so how can that be. It’s so simple. Well sometimes the simple things take a while but we’re very committed to this. The company was founded in Van Nuys, California. It then moved to Pacoima, California and it lived in Chatsworth, California and now it lives in Westlake Village all surrounding greater Los Angeles.

The products everyone that works here, every shoe that has ever been created at K-Swiss literally has been designed in California and we are excited about this California positioning and lifestyle in California.

They’re even more excited in Asia and they are even more excited in Europe because California is kind of a mystical land that everyone would love to be there and lived there and lifestyle there. No one wakes up in the morning anywhere in the world and says, Gee, I would like to be Japanese and live in Tokyo. They’d love to be blond hair, beautiful women, on the surf and on the beach in California.

So, there is a mystical lifestyle and we think we could capture it. One of the reasons we think we can make this claim is it is true. It passes the smell test and the taste test and everything else.

Our white Classic shoe is the ultimate wear with a pair of board shorts California shoe and it has been for more than 40 years. The derivatives and innovations of that shoe have kept the company growing and going and I think it’s really, we’ve got great products. These Tubes are terrific, blades which will become very big part of our business, should be very, very important.

Tubes and blades are perfect for training and running and tennis. So we have sports that we committed to and the ribbon that ties it all together is the California Sports Company. I think we can pull it off. We will invest the largest percentage of our revenues on marketing that we ever had in the history of the company but it still will take a year or two for it to bite and dig in.

So, I think we’ve finally have product and marketing lined up in my head and now got to get it lined up in the heads of the consumers. That will be the challenge.

Christopher Svezia - Susquehanna Financial Group

Steve, based on observation, when you talk about obviously what’s going on with running and Tubes, but when you think about that core Classic business and obviously that you are optimistic about the second half in terms of what the technical element of your business could be even though it’s small, I’d like your thoughts on the Classic business. You’ve gone through a lot. You have the re-mastered Classic come out. You’ve seen a lot of transition of Classic business. I’m curious how you think about that business in the second half as it pertains to your improvement in revenue forecast?

Steven B. Nichols

So, they are our great athletic companies that are known for really being involved in sports and you know their names, probably only 10% of their products are really used for the sport that they are intended.

So our goal is to grow our positioning and tennis and running so that the multiplier and the multiplier could be nine times the size, transizes in to lifestyle. So the more successful we are with performance running shops and running shoes, the more successful these selling running silhouette at sports and family stores. And this is the formula the rest of the world has used for 30 years or longer and that’s the formula that were embracing.

So, how do we sell more Classics? We get a better reputation with tennis and running and triathletes, as we’ve seen as a better brand that has its performance act together and roughly nine times the leverage of performance translates into everyday footwear.

Christopher Svezia - Susquehanna Financial Group

Two quick follow-up questions. I guess, for George, when you think about gross margin trends, just so I understand this, you are talking about 40%. How should we think about that through the year? Do you see an improving trend as you move into the back half of the year? Is it sub 40 in the first half and above 40 in the second half?

George Powlick

Were doing pretty much straight the whole every quarter, Chris.

Christopher Svezia - Susquehanna Financial Group

Okay.

George Powlick

We think the improvement will start right in the first quarter.

Christopher Svezia - Susquehanna Financial Group

Okay. And then, when you think about spending and the SG&A spending and the increase? How much of that is attributable to Palladium and what you’re doing there because I assume you’re spending close to an excess of revenues. I was curious what the year-over-year increase and how much of that is Palladium specific?

Steven B. Nichols

You know, about 10% of our total spend will go to Palladium and one of the things that George mentioned was that the budget based on this very, very large percentage spend, is not locked in. If we see things are really happening and working correctly, were overspending to begin with. We might double overspend or some kind of factor like that and George is very careful about that.

So we have, our plan for Palladium is to run the business in 2010 at deficit to over market to establish the brand and if that starts working, we might even get more aggressive. If Blades or Tubes or new Classics, if we feel that we struck a little vain that is producing gold for us, we might become even more aggressive.

So, we’re very fortunate. When you talk about margins, for more than a decade, we’ve had the highest margins of any athletic shoe company in the industry and the reason was certain of the principles that we were always adhere to. If we can get the job done with three shoes instead of seven, we’ll do it three which will leave less odds and ends, will continue shoes longer than most other people, our distribution we shy away from people that only promote price which allows the retailers to make money on our shoes and carry our shoes longer.

We do all those things correctly you can’t really do it when your brand is weak. The first thing we have to do is get our brand is strong. Once our brand is strong, we have two decades of proving we know how to make money. We just don’t know how to make money when the brand is sinking and we had to get the brand back. Once that comes back on everything am should fall into place.

Christopher Svezia - Susquehanna Financial Group

Okay. All right. Thank you and good luck.

Steven B. Nichols

Thank you. We need it.

Operator

Thank you. Our next question coming from the line of Mimi Bartow from Telsey Advisory Group. Please proceed with your question.

Mimi Bartow - Telsey Advisory Group

Hi. Good morning. Just a follow-up first on the gross margin question, I know you commented on due to less closeouts. How should we be thinking about, then, inventory as we move to the next couple quarters? How much is still left on the books that maybe on the books that would be going into those channels?

George Powlick

Not a lot. So, I would say inventory is, at this revenue level are going to remain relatively constant to where they are now.

Mimi Bartow - Telsey Advisory Group

Okay. And then just thinking about, you talked about the SG&A spend and some of the flexibility there. Could you give us a sense of maybe lead time or how we should think about that on a complexion from a quarterly perspective?

George Powlick

I’m not sure I follow the question, Mimi.

Mimi Bartow - Telsey Advisory Group

Just in terms of the spend, I mean, how shall be thinking about that. Are you spending for the third quarter today or are you spending for the second quarter? At what point are you locked in the spend and where does the flexibility lie in terms of marketing?

George Powlick

Right now we are projecting major increases in Q1 and Q2, plus 20%, 25% in both of those for total SG&A and almost there for Q3 and kind of flat for Q4. So we’ve got play of time to come up with things for Q3 and Q4.

Mimi Bartow - Telsey Advisory Group

Okay. Great. And then, just any update on the miSOUL and what you’re seeing in terms of that new technology?

Steven B. Nichols

Yeah. miSOUL has done exactly what wanted it to do. Got people talking about us, it won some awards. First generation is still out there. We are working on second-generation. But we don’t think miSOUL will be huge blockbuster in terms of sales. Two other products we have, one is called Tubes has the possibility of becoming a company equal in size almost to K-Swiss itself where it is and this next concept called Blades. Both Tubes and Blades are external, easily visible technologies, while miSOUL is inside the shoe and miSOUL requires some specialty understanding and fitting. So we think miSOUL is really made for the small specialty running shops where Blades and Tubes can sell anywhere generically.

Mimi Bartow - Telsey Advisory Group

Great. Thank you.

Steven B. Nichols

You’re welcome.

Operator

Thank you. Our next question coming from the line of Mike Cancelleri from Mont Pelerin Capital. Please proceed with your question.

Michael A. Cancelleri - Mont Pelerin Capital

Thank you. From what has happened over the last six weeks from the plus 14th to the down 8th, what leads you guys to confidence the back half of the year where you are going to see an increase in some of the trends?

Was it something that you saw in the last six weeks that was from a single retailer or kind of a one-time event? I’m just trying to calibrate the outlook based on the current trends and how we get to those numbers for the back half of the year?

Steven B. Nichols

Basically, we are betting on the comp. We are betting that what we are going to accomplish in our marketing starting in March. So the little end of Q1 then we will be aggressive in Q2 and that’s compared to where we were dark. We weren’t on television a year ago. So our marketing spend will be so much more dramatic as this year unfolds.

The reason we can’t, if it works, the reason we can’t predict a great year in 2010 is that if it works, they’ll start realizing this in July and August at which time they can only order shoes in big quantities for 2011.

But that will be okay, if the small amount of shoes we will have in the marketplace aren’t sufficient to meet the demand we’ve created that would set the table for 2011. So, just the spend that we’re going to put in, even if we’re wrong, we should still do better than we did last year and if we’re right, we should really do better but we will not be able to respond with big quantities of shoes. Does that make sense?

Michael A. Cancelleri - Mont Pelerin Capital

Yeah. That’s helpful. Who are you guys targeting with the Tubes brand? What are some of the end markets that you initially introduced it into and then do the Foot Locker’s of the world, the core shoes sellers, is that the ultimate goal…

Steven B. Nichols

Yeah.

Michael A. Cancelleri - Mont Pelerin Capital

… as the Lifestyle brand progresses here?

Steven B. Nichols

So the beauty of Tubes is that it is a $75 retailer and men’s and women’s and goes all the way down to babies sizes. Tubes has been compared to Nike Shocks and other products that are externally visible. If you’ve ever seen that Tubes product, you put it on and people know exactly, what the heck is that thing.

So it’s priced as much as $50, I’m sorry, $30 or more last than the Nike product. They’ve sold up to $120. I think they’ve slipped back, maybe they’re closer to $100 today. At $75, there’s terrific value in this and we think that this could sell great at Dick’s and nice orders headed into Dick’s for back-to-school. Foot Locker will have Tubes in for this back-to-school, small quantities but last year it was zero. We think pretty much everyone of our retailers can easily sell these Tubes.

We’re also doing some great work with exercise and workout, gyms and the trainers at these gyms doing classes and everything, they’re really loving the shoe. The shoe have some unique properties in that the back of the shoe the Tubes is asymmetrical meaning that the inside is very hard and supportive so it stops you from pronating while the outside collapses and absorbs shock and then the front part, the forepart of the Tubes, the Tubes are not attached. They kind of float next to each other so you can take the shoe and almost roll it up into a ball in the forepart, so you have the back you have the support of orthopedic shoe and in the front you had the feeling of walking in a bedroom slipper and it’s just a terrific training shoe. And it’s been adopted by trainers.

And the reason that we like Tubes is it’s affordable. Everybody, it’s not priced insane. It works all the way down the infants. They look cool once they are accepted as being cool and it really works. The second you put them on you say, wow, this feels great.

So, one of our bets for the second half of 2010 is we will make Tubes successful. There will not be enough Tubes around in 2011. The retailers will catch up.

Michael A. Cancelleri - Mont Pelerin Capital

And have you added any personnel as you change over to this California lifestyle brand, California Sports Company? Have there been any additions to personnel that you need to bring in…

Steven B. Nichols

Yes.

Michael A. Cancelleri - Mont Pelerin Capital

… to adjust that thinking?

Steven B. Nichols

Good question. Yes. There clearly is, but we’ve also taken advantage of becoming more lean and fit. So we have brought in people to handle events and athletes. So we have somebody whose job right at the moment full-time is on the LA Marathon and get everything done for that.

We’ve moved up to participating sponsor, presenting sponsor, plus we’re manufacturing LA Marathon footwear and apparel, when the LA Marathon ends, were doing an event called Escape from Alcatraz which is a triathlon event. We have somebody just handling these big-time events. That’s a new hire.

Along the way, we’ve reduced a multiple of that in other areas. We’re starting to invest further in our running. We now have, I believe, about 50 pure running accounts in southeastern United States. So we hired a tech rep. This person is not in sales to these running stores. His job is to go in there, create events, weekend runs, make sure that the staff in these stores are trained with the features and benefits of our shoes.

So are starting to change over and acquire people for the specialty businesses. As we get more athletes, we need people to manage them and make sure they are supplied with the correct shoes and apparel no matter where they are in the world.

We will be doing 31 or 32 Ironman events and that means a store pulls up a one of these Ironman advance and we literally sell footwear and apparel at these events and that requires staff. Net-net with all the ads, our head count is still down. So we’re just getting efficient and moving our personnel expenses equal to the size of our business.

Michael A. Cancelleri - Mont Pelerin Capital

Okay. Thank you very much.

Steven B. Nichols

You’re welcome.

Operator

Thank you. Our next question is a follow-up question from the line of Sam Poser from Sterne Agee. Please proceed with your question.

Sam Poser - Sterne, Agee & Leach

I just wanted to make sure that, I just wanted to understand, George, in the backlog, can you, of the dollar backlog can you give us the dollar amount that was Palladium?

George Powlick

Sure.

Sam Poser - Sterne, Agee & Leach

Palladium.

George Powlick

Yeah. Palladium’s backlog, total backlog is $10,113,000 at December 31, 09 and $9,349,000 at December 31, 08.

Michael A. Cancelleri - Mont Pelerin Capital

But that mix is totally different now, much different now as far as the type of product. Is that correct?

George Powlick

Not totally. It’s gaining different. Not totally.

Sam Poser - Sterne, Agee & Leach

Okay. Cool. All right. Thank you. Thank you again.

George Powlick

Bye.

Operator

Thank you. Mr. Nichols, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Steven B. Nichols

Thank you for your participation today and your continued interest in K-Swiss. Bye-bye.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day.