Ashworth Switches to Q2 Net Income Despite Sales Decline

Ashworth, Inc. reported a consolidated net revenue decline of 3.4% for the fiscal second quarter ended April 30, 2008 to $57.8 million from $59.9 million last year. The company reported consolidated second quarter net income of $0.9 million, or 6 cents per diluted share, compared to a net loss of $2.5 million, or 17 cents per diluted share, for the same quarter of the prior year. In the second quarter of fiscal 2007, the company recorded a tax charge of $2.9 million or 20 cents per diluted share to establish a valuation allowance against deferred tax assets.

“During the past few months we have faced difficult retail markets as well as a deteriorating economy, but we have taken steps designed to improve the Company’s operational efficiency and inventory productivity over time and we are optimistic about the future of Ashworth.”

Summary of Second Quarter Results:

In the second quarter of fiscal 2008, the company’s consolidated gross margin increased 340 basis points to 42.2% as compared to 38.8% in the second quarter of fiscal 2007. The increase in consolidated gross margins was due to an improved gross margin in the company’s Domestic segment driven by a higher average selling price as compared to the same period of the prior year as well as a reduction in overhead expenses.

Consolidated selling, general and administrative (“SG&A”) expenses increased 4.3% to $22.8 million for the second quarter of fiscal 2008 as compared to $21.8 million for the second quarter of fiscal 2007. As a percent of net revenues, SG&A expenses were 39.4% for the second quarter of fiscal 2008 as compared to 36.5% for the same period of the prior fiscal year. The increase is largely due to increased consulting fees, primarily associated with athlete endorsements, design consultants and the consulting agreement for the services of our CEO. Also contributing was an increase in royalties due to a higher concentration of revenues from licensed products, an increase in commissions due to a higher concentration of revenues from independent sales representatives and the expense related to the employment and non-compete agreements entered into with the principals of Gekko on June 4, 2007. The increases were partially offset by a decrease in salaries and wages, primarily performance based bonuses.

Revenues by Channel/Segment:

Golf

Total revenues in the domestic golf channel in the second quarter increased 2.3% to $22.3 million from $21.8 million for same period last year. This is the third consecutive quarter in which revenues in the golf channel have increased. The increase in the second quarter was primarily driven by higher revenues from on-course golf retailers, partially off-set by lower revenues from off-course and off-price golf retailers over the comparable prior year quarter. The company continues to experience competitive pressure and the effects of market consolidation in off-course specialty golf retail. 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.

Corporate

Revenues for the corporate distribution channel were $5.4 million for the second quarter of fiscal 2008, a decrease of 18.1% as compared to the same period last year. The decrease in sales primarily resulted from certain customer events that occurred in the prior year quarter that did not recur in the comparable 2008 quarter and the company’s strategic decision to discontinue sales to certain accounts. In the past the company has experienced missed sales opportunities in this channel due to out-of-stock positions in selected styles. The company believes that the narrowing of Corporate assortments will improve its inventory productivity and customer in-stock position.

Retail

Revenues for the retail distribution channel were $3.1 million for the second quarter of fiscal 2008, a decrease of 52.0% from the second quarter of fiscal 2007. The retail channel experienced a decline in the second quarter primarily due to account consolidation in the channel as well as a decision by the management team to strategically exit a number 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.

Collegiate/Racing (The Game®/Kudzu®)

Second quarter of fiscal 2008 revenues for Gekko Brands, LLC were $11.8 million, an increase of 20.0% over the second quarter of fiscal 2007. This increase was primarily driven by improved penetration within its 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 the absence in the second quarter of 2008 of certain corporate event revenues that occurred during the second quarter of fiscal 2007 and a decline in the Outdoor Direct catalog sales.

Company-owned Outlet Stores

Revenues from the company-owned stores were $2.2 million for the second quarter of fiscal 2008, a decrease of 14.2% from the second quarter of fiscal 2007. The decrease was largely due to the difficult retail environment.

International

International revenues (including Ashworth U.K. Ltd.) increased 2.9% to $13.1 million for the second quarter of fiscal 2008, an increase of $0.4 million over the same period last year. The increase is largely due to the timing of the shipment of certain orders which were delayed from the first quarter to the second quarter due to first quarter distribution center inefficiencies resulting from the implementation of a new ERP system at the U.K. facility as well as the favorable effect of currency exchange rates.

Balance Sheet:

Net accounts receivable decreased 3.7% to $44.2 million from $45.9 million in the prior year, commensurate with the 3.4% decrease in revenues for the second quarter. Net inventory decreased 1.4% to $52.4 million as of April 30, 2008 as compared to $53.1 million for the same period last year.

Income Taxes:

The effective tax rate for the income tax provision for the three months ended April 30, 2008 and 2007 was 32% and 518%, respectively. The decrease in the effective rate for the current period as compared to the same period of the prior fiscal year is primarily due to discrete one-time charges in the second quarter of the prior fiscal year of $1.3 million to establish a valuation allowance against non-originating deferred tax assets and a $1.6 million valuation allowance against originating deductible temporary differences.