Ashworth, Inc. saw net revenue for the company’s fiscal second quarter increase 2.1% to $66.0 million from $64.7 million for the same period last year. The company reported second quarter net income of $4.7 million, or 32 cents per diluted share, down slightly form $4.8 million, or 34 cents per diluted share, for the same quarter of the prior year. Net revenue for the domestic segment increased 1.9% to $52.8 million from $51.9 million for the same period of the prior year. Net revenue from the international segment increased 3.0% to $13.2 million from $12.8 million for the same period of the prior year.
In the second quarter of fiscal 2006, the company’s gross margin was 45.3%, which remains in line with historical levels for the second consecutive quarter, as compared to 43.4% in the second quarter of 2005. This gross margin improvement was driven primarily by an increase in sales of full margin products and improved direct labor efficiencies at the company’s domestic EDC.
Included in the SG&A expenses for the second quarter of fiscal 2006 are pre-tax charges of approximately $0.8 million, primarily consulting and legal expenses associated with the now-resolved issues relating to the company’s 2006 Annual Meeting of Stockholders, the ongoing exploration of strategic alternatives and stock option expenses. These special SG&A expenses, on an after tax basis, equate to a 3 cents per diluted share reduction in earnings for the second quarter.
Profit Improvement Initiatives
“We are pleased with the significantly improved operational and financial results across our organization,” stated Randall L. Herrel, Sr., Chairman and Chief Executive Officer. “Over the first two quarters of fiscal 2006, we have achieved solid results and returned Ashworth to historical levels of profitability. These results demonstrate the continued positive and prompt impact of the many actions we have taken since we implemented the initial phase of our profit improvement initiatives. These included increased efficiency at the EDC, lower retail markdowns as compared to the second half of fiscal 2005, improved gross margin management and enhanced domestic inventory management. And while we are pleased that our first half results reflect the success of these initiatives, there is still more work to be done. To that end, we have already implemented additional profit improvement initiatives to further complete our operational and financial turnaround. These additional initiatives include improving sales in our core green grass golf channel, continuing to focus on product innovation and further strengthening our global supply chain processes.
“We took these actions to support our multi-brand, multi-channel business, generate acceptable returns in all of our channels, and enhance value for our stockholders. We remain committed to continuing to take the necessary steps to drive growth, improve returns in our channels, and build upon this positive momentum.”
Domestic Golf Channel:
Total revenues in the domestic golf channel in the second quarter 2006 decreased to $27.9 million, or 9.0%, from the same period last year. Management believes that the overall softness in the traditional green grass channels adversely affected the company’s sales in the first half of fiscal 2006. The company has seen growth in its technical product lines, which has partially offset the decline in sales of the company’s more traditional all-cotton product lines, and believes that its more balanced product offering positions it for future growth in this channel. The company noted that growth in this channel is one of its key additional profit improvement initiatives.
International Channel:
Revenues from the international distribution channel were $13.2 million, an increase of 3.0% over the same period last year. Revenues were primarily driven by growth in the company’s European subsidiary which is attributable to growth in Callaway Golf apparel, the Women’s product line and the international corporate channel.
Corporate Channel:
Revenues for the corporate distribution channel were $7.3 million, an increase of 20.8% over the same period last year. Driven by the success of new growth strategies, the corporate channel’s second quarter results represent the fourth consecutive quarter of strong double digit growth. With this significant growth rate, Management believes that the company is continuing to gain market share in the channel. The positive results reflect growth in the Ashworth and Callaway Golf apparel brands, as well as the launch of Ashworth’s AWS collection into the corporate channel.
Retail Channel:
Revenues for the retail distribution channel were $7.0 million, an increase of 22.2% over the same period last year. The retail channel experienced significant growth in both brands in the second quarter of 2006 primarily resulting from new initiatives, including a new merchandising strategy and improved product mix. The company’s shift in its merchandising to focus more on classic key items and less on fashion merchandise, along with the introduction of technical performance products, has resulted in improved sell-through and significantly lower markdowns as compared to the second half of fiscal 2005, as well as a strong order backlog for the balance of the 2006 season.
Ashworth East:
Second quarter revenues for Ashworth East were $8.1 million, an increase of 2.7% over the same period last year. Revenues for The Game, the company’s brand in the collegiate bookstore channel, increased 12.5% primarily due to cross selling of Ashworth apparel into the collegiate/bookstore channel as well as the direct import headwear program. Sales of the company’s brand in the NASCAR/racing channel decreased 32.0%, primarily due to the sale of one major customer to an acquiring company. The company believes, however, that sales in the NASCAR/racing channel in the second half of fiscal 2006 will be up based on pre-book order trends from that acquiring company. All other sales increased 33.7 % primarily as a result of being the exclusive on-site event merchandiser for the 2006 Kentucky Derby.
Company-Owned Outlet Stores:
Revenues from the company-owned outlet stores were $2.5 million, an increase of 63.9% over the same period last year. Since the second quarter of 2005, the company added a net of six new outlet stores (eight outlet openings, two outlet closings) bringing the company’s total number of outlet stores to 14. The new outlet stores net of closings contributed $0.9 million in sales in the second quarter of fiscal 2006 while sales on a comparative store basis increased 8.2% as compared to last year’s second quarter.
Embroidery and Distribution Center (EDC):
The company’s EDC business continues to meet operating direct labor efficiency targets. The EDC performed efficiently, especially during the company’s peak processing second quarter which has historically been the most challenging. Positive results for the EDC were driven by efficiency measures that focused on direct labor utilization. As a result of the improved efficiency, the company has been able to better serve customers, provide quicker turnaround to the company’s corporate and golf customers for their at-once needs, improve the quality of the company’s embroidery operations, reduce customer returns for processing defects, achieve higher customer satisfaction, provide additional capacity for improved economies of scale, and support the company’s multi-brand, multi-channel growth strategy. The company also noted that labor overtime at the EDC continues to trend favorably and is significantly below last year’s levels.
Balance Sheet:
The company’s Balance Sheet, which was a key area of focus in the initial phase of the profit improvement initiatives, continued to show improvement in the second quarter of fiscal 2006 primarily due to a focus on inventory and accounts receivable initiatives.
As a result of the company’s implementation of multiple inventory and supply chain initiatives, overall net inventory decreased 1.5% to $53.1 million as of April 30, 2006 as compared to $53.9 million as of April 30, 2005, while sales grew 2.1% for the second quarter of fiscal 2006 as compared to the same period last year. Overall net inventory for the second quarter of fiscal 2006 also decreased 14.0%, or $8.6 million, from the first quarter of fiscal 2006. Domestic net inventory, excluding Ashworth East, decreased 15.7% from the second quarter of 2005. All other inventory grew 39.5% to $19.3 million as of April 30, 2006 as compared to $13.8 million as of April 30, 2005 to support third quarter fiscal 2006 sales initiatives.
Net accounts receivable decreased 3.2% to $50.7 million at April 30, 2006 as compared to $52.4 million at April 30, 2005, while revenues increased 2.1% for the second quarter. This resulted in an improvement in the DSOs to 70 days in the second quarter of fiscal 2006 from 74 days in the same period last year.
FY 2006 Guidance
The company reaffirmed its previously stated consolidated revenue guidance for fiscal 2006 of approximately $210 to $220 million. Based on current trends, the company also reaffirmed its guidance for consolidated net earnings for fiscal 2006 of 48 cents to 56 cents per diluted share. Management noted that this guidance is dependent upon achieving traditional in-season order trends. The guidance could also be adversely impacted by higher than expected expenses to be incurred in implementing initiatives to improve sales growth in the company’s green grass distribution channel and the ongoing exploration of strategic alternatives.
Agreement with The Knightspoint Group
As previously announced, on May 5, 2006, Ashworth and The Knightspoint Group reached an agreement relating to Ashworth’s 2006 Annual Meeting of Stockholders. Under the terms of the agreement, the company appointed two of Knightspoint’s proposed candidates, David M. Meyer, Managing Member of Knightspoint Partners LLC, and Peter M. Weil, Partner of Lighthouse Retail Group LLC, as new independent directors to Ashworth’s Board of Directors, effective May 8, 2006. Mr. Meyer and Mr. Weil will be included in the company’s proxy statement as candidates for election at the 2006 Annual Meeting. In addition, a third independent director, to be mutually agreed upon by Knightspoint and the company, will be added to the Board as soon as practicable. Additional terms of the agreement are available in the company’s Form 8-K that was filed with the Securities and Exchange Commission on May 9, 2006.
As part of the agreement, Knightspoint withdrew its proposed Bylaws amendments and its nomination of candidates for election to the Board and has agreed to vote its shares in favor of all of the Board’s nominees. Ashworth’s 2006 Annual Meeting of Stockholders has been scheduled for July 17, 2006.
Also as part of the agreement, the company’s Board of Directors established a new Special Committee of five directors to oversee the company’s ongoing exploration of a range of strategic alternatives to enhance stockholder value, including a possible sale of the Company. The Special Committee is comprised of Mr. Meyer, Mr. Weil, Mr. Herrel, Mr. James Hayes and Mr. Stephen Carpenter. The company continues to note that there can be no assurance that any transaction or other corporate action will result from this effort.
Summary
Mr. Herrel concluded, “We are pleased that our results for the first half of 2006 reflect the continued success of our profit improvement initiatives. We have brought operations more in line with historical levels, consistently grown sales in five of six distribution channels, returned gross margins to historical levels and settled the proxy contest. We have also worked diligently on our exploration of strategic alternatives.
“Our Board and Management are committed to building upon this positive momentum and generating improvements across our distribution channels. We remain focused on implementing additional initiatives to improve sales growth in our core green grass golf distribution channel and continuing to provide innovative product to our customers. Our Board and Management believe that Ashworth is well-positioned for continued profitable growth and value creation and we believe that continued execution of Ashworth’s initiatives will generate positive returns for all of our stockholders,” concluded Mr. Herrel.
ASHWORTH, INC.
Consolidated Statements of Income
Second Quarter and Six Months ended April 30, 2006 and 2005
(Unaudited)
Summary of Results of
Operations
2006 2005
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SECOND QUARTER
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Net Revenue $66,020,000 $64,668,000
Cost of Sales 36,137,000 36,585,000
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Gross Profit 29,883,000 28,083,000
Selling, General and Administrative
Expenses 21,510,000 19,303,000
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Income from Operations 8,373,000 8,780,000
Other Income (Expense):
Interest Income 9,000 14,000
Interest Expense (722,000) (576,000)
Other Income (Expense), net 131,000 (200,000)
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Total Other Expense, net (582,000) (762,000)
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Income Before Provision for Income Taxes 7,791,000 8,018,000
Provision for Income Taxes (3,116,000) (3,207,000)
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Net Income $4,675,000 $4,811,000
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Income Per Share - BASIC $0.32 $0.35
Weighted Average Common Shares Outstanding 14,404,000 13,813,000
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Income Per Share - DILUTED $0.32 $0.34
Adjusted Weighted Average Shares and
Assumed Conversions 14,560,000 14,271,000
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