Cutter & Buck, Inc. reported that net sales for the fiscal first quarter ended July 31 declined 2.4% to $31.9 million from $32.7 million in the year-ago period. Gross margin expanded 440 basis points to 49.4% from 45.0% in fiscal Q1 last year. Net income tripled to $3.3 million, or 29 cents per share, in the first quarter, versus $1.1 million, 10 cents per share, in the year-ago period.
MANAGEMENT VIEWPOINT:
The first quarter of the fiscal year shows a continuation of recent quarters' results, as we benefit from our ongoing efforts to upgrade business processes. We produced pre-tax income in our ongoing wholesale business of $5.1 million, up from $3.2 million in the first quarter of the prior year (Table B). Our gross margins are up, and our operating expenses are down. Our balance sheet is strong, with inventory levels down $5.2 million and free cash flow up $2.6 million compared to the first quarter of last year. This quarter marks our sixth consecutive quarter of profitability.
We are generally pleased with our financial results for the first quarter of fiscal 2005. Net sales grew in most of our target markets. The exception is our golf market, where we are disappointed with results. To turn this around, we are bringing in a new manager for the golf unit, adding a senior golf merchandiser, reviewing our sales operations and programs, examining our product offerings, increasing our marketing activities, and enhancing our customer service. These initiatives have long lead times, and we expect that it will take time for our efforts to produce favorable results. We continue to see that many upscale golf customers and consumers have strong loyalty to our brand.
During the quarter, the new “Annika by Cutter & Buck” line came to golf shops, and both customers and consumers appear to be receiving it enthusiastically. The new “Integrity Pique” shirt, made with 100% organic cotton, was available toward the end of the quarter, and early indications are that there is a good and growing market for this innovative product, which combines Cutter & Buck's trademark style and comfort with our commitment to social responsibility.
CEO TRANSITION AND SEARCH FOR A NEW CEO
As previously announced, on September 16th Fran Conley will be leaving as Chairman and Chief Executive Officer. Doug Southern will become Chairman of the Board, and Bill Swint will become interim Chief Executive Officer. The transitions are proceeding smoothly and we are pleased that the company has such skilled managers available to keep its momentum going while we search for a permanent CEO.
Doug Southern commented, “The board and employees of Cutter & Buck wish to thank Fran for her years of service on the board of directors, and in particular for her recent role as CEO. She took over during a time of crisis and successfully navigated the company to its current position of strength and profitability.”
“Cutter & Buck's most important current priority,” Southern continued, “is to hire a permanent Chief Executive Officer who is an extraordinary person who can lead and build the company in the future. As previously announced, the company has hired the Russell Reynolds search firm to assist it in this endeavor and we are already reviewing candidates.”
FISCAL YEAR 2005
During this transition period, we intend to move forward firmly on the strategy now in place: to maintain the integrity and upscale positioning of the Cutter & Buck brand while we continue to strengthen the company's foundations. This year's projects are planned to include the installation of new major computer systems and documentation of internal controls to comply with the Sarbanes-Oxley Act of 2002, particularly Section 404. Both of these projects will add operating expenses above those of last year. In addition, we plan to increase our spending on marketing to bring our great brand more effectively to the attention of our customers and consumers.
We continue to be cautious about sales levels. Our markets seem more robust and our brand is strong, but we are not currently anticipating significant growth this year, particularly in light of our recent golf results. We do believe, however, that we are laying a strong foundation for future sales growth.
The levels of sales and gross margins in first quarter should not be taken as predictive of future results. Each of our markets has its own seasonality, and as the mix of sales changes, our seasonality may change. In addition, we are managing the schedule for liquidation of products differently to realize maximum value, which may impact the seasonality of gross margins. For the balance of the year, we currently anticipate that our margins will range between 45% and 48%.
Until the permanent CEO is in place and has had the opportunity to work with the board on charting the company's strategic direction, we plan to maintain our strategic flexibility, and generally to maintain our current direction, cash balances, and capital structure.
Cutter & Buck
Table A: Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended
July 31, July 31,
2004 2003
In thousands, except share & per share amounts
Net sales $31,899 $32,737
Cost of sales 16,147 17,999
Gross profit 15,752 14,738
Operating expenses
Depreciation 766 1,062
Selling, general & administrative 10,013 10,482
Restatement expenses 14 1,672
Total operating expenses 10,793 13,216
Operating income 4,959 1,522
Interest income (expense)
Interest expense (17) (58)
Interest income 104 43
Net interest income (expense) 87 (15)
Income from continuing operations before taxes 5,046 1,507
Income tax expense 1,796 555
Income from continuing operations 3,250 952
Income from discontinued retail operations,
net of tax -- 146
Net income $3,250 $1,098
Diluted earnings per share:
Earnings from continuing operations $0.29 $0.09
Earnings from discontinued retail operations -- $0.01
Net earnings $0.29 $0.10
Shares used in computation of:
Diluted earnings per share 11,347 10,826
Table B: Management Viewpoint of Operations and Reconciliation to GAAP
Numbers Above
To understand the performance of our wholesale business, management
considers it useful to review our operating results excluding costs that are
not elements of running our wholesale business on an ongoing basis, such as
restatement expenses. We adjust our net income calculated in accordance with
generally accepted accounting principles to exclude income and expense items
that are not directly related to our wholesale business, in order to give us
better information regarding the profitability of our wholesale business. We
use this analysis to compare pretax wholesale business income on a quarterly
and year-to-date basis
Quarter Ended July 31,
2004 2003
(in thousands)
Net income as reported $3,250 $1,098
Income from discontinued retail operations -- (146)
Income tax expense 1,796 555
Pre-tax expense of closed European operations 6 40
Restatement expenses 14 1,672
Ongoing wholesale business income before tax $5,066 $3,219
Table C: Summary of Net Sales by Strategic Business Unit
Quarter Ending July 31,
2004 2003 $ change % change
In thousands
Golf $8,827 $11,047 ($2,220) (20.1%)
Corporate 15,143 14,276 867 6.1
Specialty Retail 5,322 5,008 314 6.3
International 685 570 115 20.2
Other 1,922 1,836 86 4.7
Total $31,899 $32,737 ($838) (2.6%)
