Cutter & Buck Inc. fiscal third quarter sales decreased 3.2% to $30.3 million compared to 31.2 million during the third quarter last year. Net income was $300,000, a decline of 40% compared to $500,000 last year. The third quarter is seasonally low in terms of sales revenue and until last year, historically a net loss, making it difficult to discern trends from the financial results. Results were in line with anticipated performance for the quarter and the company continues to be pleased with year-to-date results which include sales increases in every channel and net income up $1.4 million or 39% over the first nine months of last year.
“The small decrease in sales was mostly offset by improved gross margins and good expense control during the third quarter,” said Ernie Johnson, Chief Executive Officer. “We remain focused on executing and enhancing our business plan which drove our sales growth for the previous four quarters.” As we said last quarter, we did not expect the rate of sales increases to continue at the same pace in the latter half of this year. We are now comparing current results to the third quarter last year which included significant sales of marked down, discontinued core styles as well as the initial launch of our new product strategy. Third quarter sales increases in our consumer direct channel showed us that our end consumers continue to respond favorably to our products.
“Our corporate business unit had third quarter sales of $12.9 million, an 11.1% decrease compared to the same period in the prior year. “As we noted last quarter, our corporate sales in the third quarter of last year were somewhat inflated due to the sales of a relatively large quantity of discontinued Classics product that were sold at a discount in order to minimize what we ultimately had to liquidate,” said Johnson. “The amount of discontinued product available this year was significantly less than last year.” During the first three quarters of the fiscal year, corporate sales were up 1.6%.
Golf sales were $4.8 million during the third quarter, a $0.2 decrease compared to the same period in the prior year primarily related to the discontinued product sold in the prior year. “The response to our golf line continues to be positive. We received very favorable comments from customers about our Cutter & Buck, Annika and CBUK lines at the PGA show in January,” said Kaia Akre, President. “We continue to have a strong presence at professional tournaments, thereby supporting our brand strength in this channel.” Golf sales were up modestly for the nine month period ending January 31, 2007.
Specialty retail sales decreased approximately 11.9% to $5.2 million during the third quarter compared to the same period in the prior year. Sales to our collegiate and professional sports customers continued to grow while sales to our specialty store customers declined. The major contributing factor to the decline in Specialty Retail sales during the quarter was related to cancellations and customer requested delayed shipments from our largest big and tall customer. The company does not anticipate substantial improvement in its relationship with this customer due to pending litigation. The company is exploring other sales alternatives for its big and tall products which are not currently represented in the company's catalog. Big and tall sales in the direct to consumer business unit that includes the company's catalog accounted for less than 4% of that business unit's total sales during the third quarter. For the first nine months of the fiscal year, sales in our specialty retail channel increased $1.8 million or 8.7% over the same nine-month period in the previous year.
Sales in our consumer direct business unit of $3.5 million increased approximately $1.1 million or 46.2% during the quarter compared to the same period in the prior year. “We are very pleased with the increase in consumer demand for our product,” said Akre. “Our consumer direct channel represents a valuable opportunity to get direct feedback from our end consumers. We can track sales trends and performance of key styles to assist us in the development of all our product lines.” Fiscal year-to-date sales in the consumer direct business unit were $8.0 million, a $3.9 million increase over the same period in the previous year. This year-to-date increase in sales is primarily attributable to the new consumer catalog that was launched in September 2005.
Third quarter sales were up $0.3 million in our international & licensing business unit and up $0.2 million in our other business unit compared to the same period in the prior year.
Gross margin was 44.6% during the quarter and 46.0% for the nine-month period ended January 31, 2007. These margin increases from the previous year are primarily due to lower sales of discontinued product this year. We continue to expect our gross margin to remain in the 44%-48% range.
Selling, general and administrative expenses in the third quarter of fiscal 2007 were consistent with the third quarter of fiscal 2006, totaling $12.7 million in the current fiscal quarter compared to $12.6 million in fiscal 2006. “We were pleased to keep expenses in line with the prior year given the investments in our infrastructure we have made over the last year,” said Michael Gats, Chief Financial Officer. Year-to-date, selling, general and administrative expenses were $39.2 million, up $2.0 million over the prior year, primarily due to increased costs associated with our growing catalog operations as well as expenses related to incentive compensation.
Net in
come for the third quarter was $0.3 million or $0.03 per diluted share, compared to $0.5 million, or $0.04 per diluted share, in the same period last year. For the nine month period ended January 31, 2007, net income was $4.8 million or $0.45 per diluted share; in the previous year, net income was $3.5 million or $0.31 per diluted share.
Our balance sheet remains strong with cash and short-term investments of $23.6 million as of the end of the quarter and no debt. During the first nine months of the fiscal year, we generated $5.3 million of free cash flow (defined as net cash provided by operating activities less purchases of furniture and equipment). Accounts receivable decreased $2.4 million compared to the same quarter last year resulting in our days sales decreasing from 56 days last year to 54 days this year. As anticipated, our inventory balance increased over the third quarter balance last year as we continued to increase our core inventory. Days sales in inventory increased from 138 days during the third quarter last year to 165 days this year. We anticipate inventory to begin to decline towards historical levels in future quarters.
Quarterly Dividend Announced
Cutter & Buck announced that its board of directors approved a $0.07 per share quarterly dividend payable on April 9, 2007, to shareholders of record March 23, 2007.
Final Comments
CEO Ernie Johnson concluded, “For the first nine months of this fiscal year, our sales were up 8.3% and every business unit experienced a sales increase over the prior year. While we experienced a decrease in third quarter sales compared to last year, the decrease reflects a higher than usual amount of discontinued product sold during the same period last year. We remain focused on our strategic plan that includes providing high quality, innovative products to our customers. We believe that will continue to provide long-term profitable growth to the company.”
For the quarter ended January 31, we had the following results:
2007 2006
(in millions, except percentage and
per share data)
Net sales $30.3 $31.2
Gross profit $13.5 $13.8
Gross margin 44.6% 44.1%
Net income $0.3 $0.5
Diluted earnings per share $0.03 $0.04
For the nine months ended January 31, we had the following results:
2007 2006
(in millions, except percentage and
per share data)
Net sales $102.5 $94.7
Gross profit $47.1 $42.8
Gross margin 46.0% 45.3%
Net income $4.8 $3.5
Diluted earnings per share $0.45 $0.31
Balance Sheet Summary:
January 31, April 30, January 31,
2007 2006 2006
(in millions)
Cash and short-term investments $23.6 $20.1 $21.6
Accounts receivable $16.2 $23.0 $18.6
Inventories $31.3 $25.7 $27.8
Working capital $64.7 $61.9 $62.4
Shareholders' equity $70.3 $67.0 $67.4
