Cutter & Buck Inc. announced results of its fiscal second quarter ended October 31, 2005:
2005 2004
(in millions, except percentage and per share data)
Net Sales $33.7 $35.5
Gross Profit $15.0 $17.1
Gross Margin 44.6% 48.2%
Net Income $0.9 $2.9
Earnings Per Share $0.08 $0.26
For the six months ended October 31, we had the following results:
2005 2004
(in millions, except percentage and per share data)
Net Sales $63.4 $67.4
Gross Profit $29.1 $32.9
Gross Margin 45.8% 48.8%
Net Income $3.0 $6.2
Earnings Per Share $0.26 $0.54
Balance Sheet Summary:
October 31, April 30, October 31,
2005 2005 2004
(in millions)
Cash and Short-Term Investments $40.3 $40.6 $42.6
Accounts Receivable $19.5 $21.8 $19.2
Inventories $25.0 $25.4 $23.6
Working Capital* $65.4 $82.6 $79.3
Shareholders' Equity* $70.7 $87.9 $84.4
* Reflects recognition of the $14.7 million special dividend payable
Sales in the second quarter declined 5.3% year-over-year, driven by decreases in the company's corporate and golf business units. The decline was partially offset by sales increases in the specialty retail and consumer direct business units. “The second quarter was impacted by the same factors that have impacted our previous quarters; that being product design and quality. While our strategic objectives address these issues, as we have said before, we will not see the impact of the changes we have implemented until the second half of this year,” said Tom Wyatt, Chief Executive Officer. “We are transitioning to our new Spring line and new Classics line with updated and technical fabrications and more classic styling and colors. However, sales of our Fall line continued to be impacted by a weak product offering.”
In September, we launched our new consumer catalog and re-designed our web site, which has had a positive impact on sales. This consumer direct initiative not only adds a new channel of distribution to increase sales, but also serves as a strategic branding tool.
Sales in the corporate channel were down during the second quarter as we continued to experience the weakness of our 2005 Classics line. “We continue to receive very positive feedback from our customers on the 2006 Classics line that was launched three months early, in October,” said Wyatt. “We expect to begin seeing the revenue impact of the new introductions in our fourth fiscal quarter.”
Golf sales were down 26.9% for the quarter as compared to the prior year. A portion of the decrease is attributable to the Ryder Cup tournament held last year. The tournament is held once every four years in the United States and as a result of Cutter & Buck's partnership with the PGA, we are the largest apparel provider in terms of sales to the tournament. Excluding the Ryder Cup tournament, golf sales were down approximately 21% driven by the weakness of our Fall Fashion delivery along with the continued softness in the golf industry.
Sales increased 6.4% in the specialty retail channel driven by our Big & Tall customer base and 10.6% in the international channel. Both of these channels are performing well for us and we expect continued growth in these channels in the future.
With the introduction of our consumer catalog, initially mailed in September, we are now breaking out our consumer direct sales (see Table B). The consumer direct channel includes sales from our consumer catalog and web site. “Initial sales from the new catalog are in line with our expectations and the response from both the end consumer and our wholesale customers has been encouraging,” said Wyatt.
During the quarter, the gross margin was 44.6%, a 360 basis point decrease from the second quarter last year. “There were two primary reasons for the decrease in our second quarter margin,” explained Ernie Johnson, Chief Financial Officer. “First, during the quarter, we were selling off our discontinued Classics inventory through our normal selling channels at discounted prices. We introduced our new Classics line earlier than in past years to coincide with the mailing of our new corporate catalog, so we needed to discount our discontinued styles earlier. In prior years, we began discounting our discontinued styles in October with delivery of the new styles in January. This year we began taking markdowns in August based upon the earlier delivery of the new styles in October and November. We expect to liquidate remaining discontinued Classics in January and early fourth quarter.”
“The second cause of the lower margin this quarter is that we increased our inventory reserve by $0.2 million primarily due to the weakness of the Fall Fashion merchandise, particularly in the golf channel. With this increase in the reserve, we believe that our discontinued Classics and Fall Fashion inventories are reflected in the balance sheet at their net realizable value.”
Selling, general and administrative expenses totaled $13.4 million in the second quarter compared to $11.6 million in fiscal 2005. The increase was primarily due to additional marketing and consumer catalog costs. During the quarter, we incurred $1.1 million of expenses associated with the start-up and shipping of the new direct to consumer catalog including front-end costs to facilitate timely mailing in order to take full advantage of the holiday season. In addition, we incurred costs associated with the early release of the annual corporate catalog, which was distributed during the third fiscal quarter in the prior year. We also incurred costs this year that we did not last year associated with corporate governance and other shareholder matters that were initiated by our largest shareholder.
Our balance sheet remains strong, with cash and investments totaling $40.3 million at the end of the quarter and no debt. In November, the special dividend of $14.7 million was paid. During the quarter, we generated $1.4 million in free cash flow (defined as cash provided by operating activities less purchases of fixed assets). Accounts receivable averaged 51 days' sales outstanding during the quarter compared to 48 days for the same period last year.
Inventories were $25.0 million at the end of the quarter compared to $23.6 million at October 31, 2004. During the quarter ended October 31, 2005, inventories decreased $3.7 million or 12.9%. During the same period last year, inventories decreased $2.3 million or 8.9%. “While we remain focused on our inventory levels, we do expect our inventory to seasonally increase during the third quarter as we bring in our new Classics inventory that is available on an 'at once' basis throughout the year. Also during the third quarter, we will be bringing in our Spring Fashion line that primarily ships during the fourth quarter,” said Johnson.
Cutter & Buck announced that its board of directors approved a $0.07 per share quarterly dividend. The quarterly dividend will be payable on January 6, 2006, to shareholders of record on December 22, 2005. In November, we paid a special cash dividend of $1.34 per share totaling $14.7 million.
During the second quarter, we repurchased 275,300 shares of our common stock at an average price of $12.67, for a total cost of $3.5 million. From the inception of our stock repurchase program through the end of October 2005, we have repurchased a total of 652,723 shares of our common stock at an average price of $12.46 for a total of $8.1 million. There is approximately $6.1 million remaining of the $14.2 million share repurchase authorization.
CEO Tom Wyatt concluded, “I remain encouraged by the response to our new product lines, both the Spring line and the new Classics. Our customers have reacted favorably to our new technical fabrications, our new 'Signature Collection' of refined knits, and our return to the quality and styling that Cutter & Buck is known for. In addition, the new consumer catalog is not only a great selling and branding tool, but it is also giving us better insight into the preferences of our end consumer.
“We knew this would be a transition year for us, and as we look to the second half of our fiscal year, our view of the year has not changed from earlier in the year. We continue to expect a modest increase in sales for the year and a moderate decrease in profitability as we continue to invest in initiatives to provide long-term growth. We expect sales growth to initially be driven primarily by our consumer catalog and specialty retail. While some customers that had not bought from us in the last few years have returned to us for Spring, others are waiting to see if we can consistently deliver product at our new level. So, while we continue to receive positive feedback on our new products and expect to see an improving trend, we do not anticipate a large turnaround in one season. We also continue to expect our gross margin will remain in the 44%-48% range and inventories should remain in the $22-$28 million range, with inventories peaking towards the end of the third quarter as we receive our Spring merchandise.
“We remain focused on our strategic plan that was developed to deliver improved product and profitable growth to the company. While 2006 is a challenging year for us, I remain confident we will deliver results that will increase shareholder value over time.”
Table A: Condensed Consolidated Statements of Income (unaudited)
Three Months Ended Six Months Ended
October 31, October 31,
2005 2004 2005 2004
(in thousands)
Net sales $33,669 $35,538 $63,410 $67,437
Cost of sales 18,651 18,399 34,347 34,546
Gross profit 15,018 17,139 29,063 32,891
Operating expenses:
Selling, general and administrative 13,401 11,609 24,317 21,623
Depreciation 750 691 1,416 1,457
Restatement expenses (165) 268 (648) 281
Total operating expenses 13,986 12,568 25,085 23,361
Operating income 1,032 4,571 3,978 9,530
Interest income (expense)
Interest income 345 149 653 253
Interest expense (1) (13) (9) (30)
Net interest income (expense) 344 136 644 223
Pre-tax income 1,376 4,707 4,622 9,753
Income tax expense 485 1,792 1,629 3,588
Net income $891 $2,915 $2,993 $6,165
Table B: Summary of Net Sales by Business Unit
Three Months
Ended Oct. 31, Percent
2005 2004 Decrease Change
(in thousands, except percent change)
Corporate $13,995 $14,559 $(564) (3.9)%
Golf 7,322 10,022 (2,700) (26.9)
Specialty Retail 8,885 8,350 535 6.4
Consumer Direct 1,149 355 794 223.7
International 806 729 77 10.6
Other 1,512 1,523 (11) (0.7)
Total $33,669 $35,538 $(1,869) (5.3)%
