2002: Business - Cutter & Buffeted

This has not been the best of times for apparel maker Cutter & Buck.

First, Harvey Jones, founder and CEO of the fast-growing Seattle-based company, resigned last spring. The resignation of president and chief operating officer Marty Marks quickly followed. Shortly thereafter, Cutter & Buck posted dismal numbers for the fiscal year ending April 30, and a business that had net income of $10.6 million in 2000 ($3.7 million in 2001) suddenly was faced with 2002 losses of $10.8 million.

Then, there was the mid-August emergence of an accounting problem and the revelation that Cutter & Buck executives had “inappropriately recorded” $5.8 million in sales during fiscal 2000. That is a scarlet letter in these testy times, and chief financial officer Stephen Lowber resigned as company officials tried to assure investors that there was no “reason to believe that (Cutter & Buck’s) current net worth will be affected, or that there will be any change in the company’s total sales for the past three years.” But that didn’t prevent the stock from sinking below the $3-per-share mark, a 52-week low. (The high was $7.87 on April 19, just before Jones resigned.)

The company also said it planned to restate its audited financial statements for the fiscal years ending April 2001 and 2002. That prompted NASDAQ to write a letter informing Cutter & Buck that it was in violation of Rule 4310(c) (14), which requires the company to maintain at least three years of audited financial statements. Continuation of that violation could lead to delisting of its securities.

Cutter & Buck is indeed struggling, but industry watchers do not believe the company is in dire trouble. At least not yet. Current CEO Fran Conley, a longtime board member and venture capitalist who replaced Jones last spring, has dealt quickly with the accounting problems and taken a number of steps to repair the balance sheet and revive the business.

Questions remain, however, about whether those steps will be effective. Some on Wall Street wonder if Cutter & Buck, which is still regarded as a strong brand, soon might find itself as the object of possible suitors.

“Following Cutter & Buck this past year has been like watching Joe Frazier fighting George Foreman,” says Casey Alexander, special situations analyst for Gilford Securities in New York.

“The company keeps running into right hooks and getting knocked down. And with its stock as low as it is, I would be worried about someone buying up shares at very low prices.”

Much of the worry surrounding Cutter & Buck began surfacing with the sudden executive changes last spring. Although Alexander said it can be healthy when an entrepreneur-founder voluntarily leaves a business that has grown rapidly and turns it over to professional managers, those sorts of moves still create turmoil, and so do subpar financial results.

Industry observers point to several reasons why the company started to sputter operationally. It grew too quickly, they say, more than quadrupling in size from 1997 to 2001 as it enticed customers with its casual, colorful and relaxed look. At the same time, Cutter & Buck began expanding into footwear and opening retail stores, not all of which prospered. Those moves sapped revenues, as did an attempt to sell products on its own in Europe. In addition, inventories soared above $50 million, and the company fell victim to a common problem among clothing makers: Consumers get fickle after a spell and start to seek different styles and labels.

“Then both the corporate business and golf business got hurt by the economic downturn of the past year and the issues that cropped up after 9/11,” said Jan Beemer, a former Cutter &Buck executive who now is vice president of sales for rival apparel maker Tehama. “Those are the company’s two main divisions, and the bottom fell out of both at the same time.”

Paul Bourgeois is head of Cutter & Buck’s golf division. He acknowledges that there is work to be done over the coming months.

“Return to profitability for fiscal 2003 is our mantra, and that’s what we are working toward,” Bourgeois said. “Yes, our sales have flattened, but we feel our market share has grown. And the industry is still coming to us. We are the No. 1 branded supplier to Pebble Beach and also to KSL (the company that owns Doral and PGA West among other resorts). And we are doing a number of things to improve our bottom line, from getting out of footwear and the dressier portion of our women’s line to signing up a European distributor and cutting our inventories in half. We also wrote down the assets of some of our under-performing retail stores, and will probably exit up to three of them.

“The idea is refocus on what we do best. Our core businesses are where we have the core competencies to succeed.”

Industry watchers believe that Cutter & Buck has the brand name to prosper as well, especially if it can build its presence in the general retail market outside its established - and struggling - golf and corporate businesses. It also must make greater inroads in Europe, which accounted for only $9 million of sales the past fiscal year.

“There are opportunities there that may well pan out,” Alexander said.

But if the company’s stock price doesn’t improve, the biggest opportunity may exist for elements outside the company who want to make some moves of their own.



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