Ashworth, Inc.'s second quarter ended April 30, 2007 consolidated net revenue decreased 9.3% to $59.9 million as compared to $66.0 million for the second quarter of 2006. The Company reported consolidated second quarter net loss of $2.5 million, or 17 cents per diluted share, compared to net income of $4.7 million, or 32 cents per diluted share, for the same quarter of the prior year.
Peter M. Weil, Chief Executive Officer of Ashworth, said, “Throughout the second quarter, we continued to execute on the strategic initiatives our Board and management team identified during the second half of 2006. While we continue to face challenges, we believe the initiatives being implemented will help better position the Company for sustainable and profitable growth.”
“Despite the challenges in the second quarter, we are excited about the future of Ashworth. We have taken a number of steps that are designed to build a more efficient and effective organization, including the recently announced personnel changes.”
In the second quarter, the Company recorded a tax charge of $2.9 million or $0.20 per diluted share to establish a valuation allowance against deferred tax assets. Net revenue for the domestic segment (including Gekko Brands, LLC) decreased 10.7% to $47.2 million from $52.8 million for the same period of the prior year. Net revenue from the international segment (including Ashworth, U.K., LTD.) decreased 3.7% to $12.7 million from $13.2 million for the same period of the prior year.
In the second quarter of fiscal 2007, the Company's consolidated gross margin decreased 650 basis points to 38.8% as compared to 45.3% in the second quarter of fiscal 2006. The decrease in margins was due to the costs associated with the underutilization of the Company's Embroidery and Distribution Center's (EDC) embroidery capacity. This is a direct result of lower sales associated with the Company's domestic golf channel as well as higher markdown and other allowances granted to customers in the domestic golf, retail and corporate channels as compared to the same period of the prior year.
Consolidated selling, general and administrative (“SG&A”) expenses increased 1.5% to $21.8 million for the second quarter of fiscal 2007 as compared to $21.5 million for the second quarter of fiscal 2006. As a percent of net revenues, SG&A expenses were 36.5% for the second quarter of fiscal 2007 as compared to 32.6% for the same period of the prior fiscal year. The increase in SG&A expenses was primarily due to the effect of the addition of four new outlet stores during the second half of fiscal 2006. These increases were partially offset with reductions in legal and consulting fees associated with the Company's 2006 annual meeting of shareholders and strategic alternatives process, as well as a reduction in costs related to the Company's compliance with Sarbanes-Oxley and its annual audit.
Revenues by Channel/Segment:
Total revenues in the domestic golf channel in the second quarter declined 21.9% to $21.8 million as compared to the same period last year.
Sales in the golf distribution channel for the second quarter were affected by continuing competitive pressure, market consolidation in specialty golf retail and an overall softness in the golf market. The Company believes the repositioning of its green grass sales management team, together with other brand development initiatives implemented during the past few months will help to improve sales in the golf channel.
Revenues for the corporate distribution channel were $6.6 million, a decrease of 10.2% as compared to the same period last year. The decrease in sales resulted primarily from missed sales opportunities due to out of stock positions in selected styles. The Company believes that the narrowing of Corporate assortments and the use of its new data warehouse technology will improve its inventory productivity and customer in-stock position.
Revenues for the retail distribution channel were $6.4 million, a decrease of 8.5% from second quarter 2006. The retail channel experienced a decline in the second quarter primarily due to account consolidation in the channel as well as a reduction of underperforming doors. The Company will seek to continue to improve its brand positioning by focusing on premium retail accounts and doors within the channel.
Second quarter revenues for Gekko Brands, LLC were $9.8 million, an increase of 20.8% over the second quarter 2006. The increase was primarily due to higher revenues in the collegiate bookstore channel driven by higher apparel sales, higher sales to Game Select Dealers and higher event sales such as the Kentucky Derby. Revenues from the NASCAR/racing channel and the outdoors channel also increased as compared to the second quarter of fiscal 2006.
Revenues from the Company-owned stores were $2.6 million, an increase of 3.3% over second quarter 2006. Since the second quarter of 2006, the Company added four new outlet stores bringing the Company's total number of outlet stores to 18. The new outlet stores contributed $0.6 million in sales in the second quarter of fiscal 2007 while sales on a comparative store basis were down 16.9%. Much of the decline was due to reduced foot traffic in the outlet stores resulting from colder weather.
Revenues from the international segment decreased 3.7% to $12.7 million, a decrease of $0.5 million over the same period last year. Revenues were slightly lower in both Europe and Canada.
Net accounts receivable decreased 9.6% from the prior year, commensurate with the 9.3% decrease in revenues for the second quarter. Net inventory remained flat at $53.1 million as of April 30, 2007 as compared with the same period last year.
On June 15, 2007, the Company obtained a written waiver of the fixed charge coverage ratio and minimum tangible net worth covenant requirements from its lenders for the period ended April 30, 2007 and therefore as a result have reclassified the long-term portion of the credit facility as current.
During the financial close for the quarter ended April 30, 2007, the Company performed its quarterly assessment of its net deferred tax assets in accordance with Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes (“SFAS 109”). SFAS 109 limits the ability to use future taxable income to support the realization of deferred tax assets when a company has experienced recent losses even if the future taxable income is supported by detailed forecasts and projections. As a result of the quarterly assessment, the Company recorded a tax charge in the second quarter of 2007 of $2.9 million or $0.20 per diluted share to establish a valuation allowance against deferred tax assets.
The Company is continuing to evaluate various options for its EDC including, among others: developing a joint venture to better utilize available embroidery capacity; and selling the EDC and utilizing external distribution providers and contract embroiderers. The Company is evaluating all available options and noted that there is no guarantee that any agreement will be reached as a result of this process.
In addition to adding a new Chief Financial Officer at the end of March 2007, the Company announced a series of personnel changes on May 23, 2007, including the return of Eddie Fadel as President. Mr. Fadel will oversee all of Ashworth's sales, customer service and sourcing and will have shared responsibility for design with John Ashworth. In addition, on April 19, 2007 the Company announced that Eric Salus has joined the Company's Board of Directors and will stand for election at the Company's 2007 Annual Meeting of Stockholders. Mr. Salus has also entered into an agreement with The Company to provide certain consulting services to assist Management as it strives to improve operating results. The Company is pleased to have Messrs. Fadel and Salus as part of the team – they each possess deep knowledge of the retail space and have more than 60 years of combined experience.
Ashworth also recently announced that, as part of its ongoing cost reduction initiatives and in an effort to streamline the Company, 16 staff positions have been eliminated. The Company implemented this workforce reduction to better align its cost structure with its core business strategy.
ASHWORTH, INC.
Consolidated Statements of Income
Second Quarter and Six Months ended April 30, 2007 and 2006
(Unaudited)
Summary of Results of
Operations
2007 2006
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SECOND QUARTER
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Net Revenue $59,864,000 $66,020,000
Cost of Sales 36,623,000 36,137,000
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Gross Profit 23,241,000 29,883,000
Selling, General and Administrative
Expenses 21,841,000 21,510,000
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Income from Operations 1,400,000 8,373,000
Other Income (Expense):
Interest Income 21,000 9,000
Interest Expense (771,000) (722,000)
Other Income (Expense), net (44,000) 131,000
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Total Other Expense, net (794,000) (582,000)
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Income Before Provision for Income Taxes 606,000 7,791,000
Provision for Income Taxes 3,139,000 (3,116,000)
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Net Income ($2,533,000) $4,675,000
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Income Per Share - BASIC ($0.17) $0.32
Weighted Average Common Shares Outstanding 14,520,000 14,404,000
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Income Per Share - DILUTED ($0.17) $0.32
Adjusted Weighted Average Shares and
Assumed Conversions 14,520,000 14,560,000
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