Ashworth Sees First Quarter Sales Declines

Ashworth, Inc. reported a 9.8% decline in consolidated net revenues for the fiscal first quarter ended January 31, 2008 to $34.5 million from $38.3 million for the first quarter of 2007. The company reported a consolidated first quarter net loss of $7.4 million, or 50 cents per diluted share, compared to a net loss of $2.4 million, or 17 cents per diluted share, for the same quarter of the prior year. Net revenue for the domestic segment (including Gekko Brands, LLC) decreased 5.8% to $30.1 million from $32.0 million for the same period of the prior year. Net revenue from the international segment (including Ashworth, U.K., Ltd.) decreased 30.1% to $4.4 million from $6.3 million for the same period of the prior year.

In the first quarter of fiscal 2008, the company’s consolidated gross margin decreased 460 basis points to 36.2% as compared to 40.8% in the first quarter of fiscal 2007. The decrease in consolidated gross margin was driven by the deleveraging effects of the decrease in revenue and an increase in product costs not offset by price increases. In addition, as a result of a labor stoppage at a key headwear vendor, the company incurred additional costs to divert the production of its NASCAR products to alternate manufacturing facilities and expedite manufacturing and transportation.

Consolidated selling, general and administrative (“SG&A”) expenses increased 1.3% to $19.4 million for the first quarter of fiscal 2008 as compared to $19.1 million for the first quarter of fiscal 2007. As a percent of net revenues, SG&A expenses were 56.1% for the first quarter of fiscal 2008 as compared to 50.0% for the same period of the prior fiscal year. The expense increase is largely due to increased consulting fees, primarily associated with product design and supplementing the company’s accounting function during the executive transition period, combined with the expense related to the employment and non-compete agreements entered into with the principals of Gekko on June 4, 2007. These increases were partially offset by a decrease in commission expense primarily as a result of the reduction in revenues.

Analysis of First Quarter Fiscal Year 2008 Revenues by Channel

The company’s first quarter fiscal 2008 revenues decreased in all distribution channels except for the company’s domestic golf and Collegiate/Racing distribution channels.

Golf

Total revenues in the domestic golf channel in the first quarter 2008 increased 5.6% to $9.5 million as compared to the same period last year. Revenues from on-course golf retailers increased 8.9% or $578,000 over the prior year, but this increase was partially offset by a decrease of $76,000 in revenues from off-course golf retailers. The company continues to experience significant competitive pressure and market consolidation within the off-course channel of distribution. As part of the company’s effort to restore sales growth, management is implementing new sales management processes in both the on-course and off-course channels of distribution. The company is also establishing a number of new programs with key off-course accounts.

Corporate

Revenues for the corporate distribution channel were $4.1 million in the first quarter 2008, a decrease of 28.8% as compared to the same period last year. The decrease in the corporate channel was driven by certain customer event revenues that occurred in the first quarter of fiscal 2007 that did not reoccur in the first quarter of fiscal 2008, the company’s strategic decision to discontinue sales to certain accounts and a pull-back in corporate spending as a result of uncertain economic conditions. Management is developing plans to address these declines through a retooling of sales programs and account coverage.

Retail

Revenues for the retail distribution channel were $3.1 million in the first quarter 2008, a decrease of 24.1% from the first quarter 2007. This decrease was driven by the consolidation of retail accounts and their associated location closures and a decision by management to exit a number of large accounts. The company is working to open a number of new retail doors through specially tailored assortments and sales programs.

Collegiate/Racing (The Game®/Kudzu®)

First quarter 2008 revenues for Gekko Brands, LLC were $10.9 million, an increase of 4.6% over the first quarter 2007. This increase was primarily driven by improved penetration within the NASCAR channel combined with an additional increase as a result of having exclusive vendor rights for the 50th running of the Daytona 500. These increases were partially offset by a delay in production due to a labor stoppage at a key vendor and the absence in the first quarter of 2008 of certain corporate event revenues that occurred during the first quarter of fiscal 2007.

Company-owned Outlet Stores

Revenues from the company-owned stores were $2.5 million, a decrease of 7.9% as compared to the first quarter 2007. The decrease reflects a generally difficult retail environment as well as increased promotional activity.

International

Revenues from the international segment decreased 30.1% to $4.4 million in the first quarter 2008, a decrease of $1.9 million from the same period last year. Net revenues for Ashworth U.K., Ltd. decreased 45.1% or $2.2 million to $2.6 million for the first quarter of fiscal 2008 from $4.8 million for the same period of the prior fiscal year. The decrease was due to distribution center inefficiencies resulting from the implementation of a new ERP system at the U.K. facility together with changes in sales management. Net revenues for the other international segment increased 19.8% or $287,000 to $1.7 million for the first quarter of fiscal 2008 from $1.4 million for the same period of the prior fiscal year. The increase was primarily due to increased purchases from the vompany’s international distributors and the favorable effect of currency exchange rates, specifically versus the Canadian dollar, when compared to the prior year quarter.

Balance Sheet:

Net accounts receivable decreased 9.1% from the prior year, commensurate with the 9.8% decrease in revenues for the first quarter. Net inventory increased 3.2% to $58.2 million as of January 31, 2008 as compared to $56.4 million as of January 31, 2007 primarily as a result of earlier deliveries of inventory to the company’s U.K. and Canadian operations.

Overview

Allan H. Fletcher, the company’s CEO, commented, “We are continuing to implement plans to improve our operations and cut operating costs. We are establishing channel specific product strategies and sales programs to better serve our customers and improve our profitability. We are encouraged with the improvement in our domestic core golf distribution channel, but a complete turnaround will take more time. I believe the plans we’ve started to implement will, in time, return the Company to sustainable profitability.”