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Is the Buyout Offer for K Swiss Inc (KSWS) Fair?

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Mario Gabelli, a famous investment manager, initiated a long position in K Swiss Inc (NASDAQ:KSWS) on Feb. 25, after the company received a buyout offer from E.Land World for $4.75 per share in cash, or $170 million. His move might indicate that he thought a $4.75 per share offer is not enough for K-Swiss.

Previously, he did the same thing about Caribou Coffee when the company was offered $16 per share in cash by Joh. A. Benckiser, as he thought Caribou Coffee was “statistically undervalued even at $16.” Let’s look closely into K-Swiss to determine whether or not the offer reflects the true value of K Swiss Inc (NASDAQ:KSWS).

Business snapshot

K Swiss Inc (NASDAQ:KSWS) is the designer and marketer of different kinds of footwear, apparel and accessories under K-Swiss, its main brand. Since 2008, it has also had Palladium, another footwear brand for adventurers for all terrains. The majority of its revenue, $171 million, or 76.8% of the total revenue, was generated by the K-Swiss brand, while the Palladium brand contributed nearly $51.8 million in revenue in 2012. In terms of the sales channel, both brands sell their main products via wholesalers and distributors, accounting for 72% and 16%, respectively, for the K-Swiss brand and 78% and 16%, respectively, for the Palladium brand.

High SG&A and increasing cash conversion cycle

For the last five years, K-Swiss has consistently generated losses with declining revenue. Revenue has decreased from $340 million to only $223 million while the net loss has fluctuated in the range of $13 million to $64 million. The main reason for these losses are the huge selling, general and administrative expenses (SG&A) of the company. In 2012,SG&A accounted for as much as 48.4% of the total sales.

Thus, K Swiss Inc (NASDAQ:KSWS)’ poor performance resulted from business mismanagement. The deteriorating performance could be easily detected by taking a closer look in the company’s cash conversion cycle (CCC). In 2005, it only took nearly 92 days to collect the cash. However, in 2008 and 2009, the cash conversion cycle shot up to nearly 119 and 145 days, and it kept going up to nearly 199 days in 2012.

Compared to its much larger peers, including Adidas and NIKE, Inc. (NYSE:NKE), investors might be shocked with K-Swiss’ high cash conversion cycle.

CCC (days) 2008 2009 2010 2011 2012
Adidas 103.37 88.5 68.41 72.76 102.79
Nike 91.62 96.79 90.84 83.3 88.74
K Swiss (NASDAQ:KSWS) 118.81 149.66 160.1 162.49 198.62

Nike seems to be the best in terms of converting its sales into cash as it has the lowest CCC. In 2012, its CCC was only 89 days while the CCC of K-Swiss was the highest at 199 days.

Seems like a good deal for E.Land World

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