Cutter & Buck Inc. reported that sales for the fiscal first quarter ended July 31 declined 6.8% to $29.7 million from $31.9 million in the year-ago period. Gross margins declined 220 basis points to 47.2% of sales from 49.4% in Q1 last year. Net income fell 36% to $2.1 million , or 18 cents per share, compared to $3.3 million, or 29 cents per share, in fiscal first quarter last year.

Financial Results and Management Viewpoint:
Sales in the first quarter declined 6.8% year-over-year, driven by 9.3% and 10.6% declines in our corporate and golf business units, respectively. “As we discussed last quarter, this fiscal year is going to be a transition year for us as we continue to invest in marketing, information systems, product design and quality, and improving the price-value relationship of our products,” said Tom Wyatt, Chief Executive Officer. “Our product lines had become somewhat stale and that, combined with an increasingly competitive market environment, has led to disappointing sales levels. Since I joined this company late last year, my primary focus — and the focus of the entire Cutter & Buck team — has been to rejuvenate our products, and I believe we are well on our way to doing so. However, our business is characterized by long product cycles so, as we mentioned last quarter, we do not expect to truly see the benefits of these improvements until the fourth quarter of this year when we ship the majority of our spring product.”

Sales in the corporate channel were down for the second quarter in a row, following the launch of our annual corporate catalog early this year. “As we analyze the sales in the corporate channel and have discussions with our customers, it has become clear to us that the calendar year 2005 product line was not as strong as in past years and did not include enough new styles or technical fabrications to drive sales increases in this channel,” commented Wyatt. “We believe we have addressed this issue with our 2006 'classics' product line — the first developed under my leadership — which we are launching three months earlier than in prior years, in October 2005. The new line will not only include far more new styles and technical pieces than in previous years, but there is also an emphasis on women's companion pieces to our strong men's line. We believe the quality and variety of the women's line will give us a competitive advantage in the corporate channel. Customer reaction to previews of the new line has been very positive,” Wyatt continued.

While golf sales were down 10.6%, over half of the decrease was due to sales last year associated with the Ryder Cup tournament that is held in the United States only once every four years. Excluding the Ryder Cup sales, golf sales decreased 4.8% during the quarter, a significant improvement in our recent trends (golf sales down 17.1% last quarter and 12.5% for all of last fiscal year).

Sales increased 2.9% in the specialty retail channel and 9.2% in the international channel. Both of these channels are performing well for us and we expect strong growth in these channels in the future.

Gross margin for the quarter was 47.2%, a decrease of 220 basis points from the prior year. 130 basis points of this decline is attributable to a $390,000 increase to our inventory reserve on discontinued classics, which reflects the unusually large number of discontinued styles in the classics line, as we prepare to launch our significantly improved 2006 classics line that begins shipping in October. The remaining decrease in gross margin is due to the mix of sales among the sales channels and selective discounts to remain competitive in the marketplace.

Operating expenses excluding restatement costs increased 7.4% over last year as we invested in our marketing, product development and systems. During the quarter we also began to incur expenses related to the production of our new consumer catalog and upgrading our website at www.cutterbuck.com. Consumers began receiving catalogs and the website was re-launched earlier this month. Our professional fees increased primarily due to Sarbanes-Oxley compliance costs.

Our balance sheet remains strong, with cash and investments totaling $43.1 million at the end of the quarter and no debt. We generated $4.2 million in free cash flow (defined as cash provided by operating activities less purchases of fixed assets) during the quarter. Accounts receivable averaged 61 days' sales outstanding during the quarter compared to 58 days for the same period last year.

Inventories were $28.7 million at the end of the quarter, compared to $25.9 million at July 31, 2004. “Inventory levels are somewhat higher than where we would like them to be, primarily for two reasons,” said Ernie Johnson, Chief Financial Officer. “First, sales in the corporate channel were lower than expected. Second, we had to bring some inventory in early to support our specialty department store and direct to consumer businesses. Compared to last year when inventories increased $4.0 million during the first quarter, this year inventories increased just $3.3 million with lower than expected sales. Looking to the balance of the year, we will be building inventory to support the early launch of the 2006 corporate catalog and we will need to stock the increased number of fresh, new products Tom and the rest of the Cutter & Buck team have developed. Therefore, we anticipate that inventory will remain somewhat above historical levels for the next two quarters, but expect inventory to return to seasonally normal levels by the end of this fiscal year.”

Three-Year Strategic Plan Announced

In late July, Tom Wyatt introduced the company's three-year strategic plan to the entire organization. Key initiatives in the strategic plan include:

  • Upgrading the quality and design of the product offering
  • Increasing the number of corporate companion pieces
  • Launching the consumer catalog and improved web site
  • Increasing our brand presence through advertising and tour player sponsorships
  • Expanding our penetration in golf and specialty department stores
  • Increasing our investment in marketing, product design and systems to support growth
  • Growing licensing revenue through both international and domestic partnerships

“Our associates are excited and focused on executing the strategic plan and returning Cutter & Buck to top line growth,” said Wyatt.

Dividend and Stock Repurchase Programs

Cutter & Buck announced that its board of directors approved a $0.07 per share quarterly dividend. As previously disclosed, the board has approved a special cash dividend of approximately $15 million, equal to $1.34 per share and also increased the company's remaining share repurchase authorization to $10 million as of July 6, 2005 for a total of $14.2 million authorized since the inception of the repurchase plan.

The quarterly dividend of $0.07 a share will be payable on October 12, 2005 to shareholders of record on September 28, 2005. The payment of the special dividend is subject to shareholder approval of stock plan amendments that will allow certain adjustments to employee stock-based compensation awards to offset the impact of this dividend. If shareholders approve these amendments at the annual meeting, the special dividend will be payable on November 16, 2005 to shareholders of record on November 2, 2005.

During the first quarter, we repurchased 105,000 shares of our common stock at an average price of $12.47, for a total cost of $1.3 million. From the inception of our stock repurchase program through the end of July 2005, we have repurchased a total of 377,000 shares of our common stock at an average price of $12.31. Since the end of the quarter, the company has purchased another 58,000 shares at an average price of $13.29, representing an additional expenditure of $771,000. In total, we have spent $5.4 million repurchasing shares, leaving $8.8 million remaining of the $14.2 million share repurchase authorization.

Condensed Consolidated Statements of Income (unaudited)

                                                       Three Months Ended
                                                    July 31,       July 31,
                                                      2005           2004
    (in thousands, except share and per
     share amounts)
    Net sales                                        $29,741        $31,899
    Cost of sales                                     15,696         16,147
    Gross profit                                      14,045         15,752

    Operating expenses:
      Selling, general and administrative             10,916         10,013
      Depreciation                                       666            766
      Restatement expenses                             (483)             14
      Total operating expenses                        11,099         10,793
    Operating income                                   2,946          4,959

    Interest income (expense)
      Interest income                                    308            104
      Interest expense                                   (8)           (17)
      Net interest income (expense)                      300             87
    Pre-tax income                                     3,246          5,046
    Income tax expense                                 1,144          1,796
    Net income                                        $2,102         $3,250