2005: Business - Ailing Ashworth weighs sale, other options

Buffeted by declining profit margins, operational problems and shareholder unrest, Ashworth Inc. announced it has hired a financial adviser to help explore the sale of the company or other strategic alternatives.

Ashworth also stated it expects to report a fourth-quarter loss of as much as $2.4 million, or 17 cents per share. That follows a loss of $3.4 million, or 24 cents per share, in the third quarter.

The Carlsbad, Calif., apparel maker has hired Houlihan Lokey Howard & Zukin, an investment bank, to explore strategic alternatives, according to a news release the company issued Nov. 29. It said Ashworth will “evaluate a wide range of strategies and alternatives to increase shareholder value. No assurance can be given, however, that any transaction will be entered into or consummated.”

According to the release, Ashworth will report fourth-quarter sales of approximately $55 million, up 15 percent from the same period a year ago, when it announces its results on Dec. 15. But the company reported that gross margins and earnings were hammered by weak sales and aggressive pricing used to reduce excess inventories, which had risen 26 percent, or $12.5 million, in the third quarter.

The company said selling, general and administrative expenses have risen because of “increased selling and promotional costs” and compliance costs associated with Sarbanes-Oxley accounting requirements. Those expenses also rose because of “several costs associated with management changes and personnel reductions.”

“Unfortunately, with all the underperformance they’ve had, it kind of put them in the position where this was something they really had to do,” said Ian Corydon, an analyst who covers Ashworth at B. Riley & Co.

This has been a difficult year for one of the golf industry’s dominant apparel brands. On June 1, three members of Ashworth’s board of directors abruptly resigned, followed on July 7 by the resignation of Terence Tsang, the company’s long-time chief financial officer.

Ashworth’s new Carlsbad distribution center also has been plagued by operational problems, which accounted for approximately $1 million of the decrease in the company’s third-quarter gross margin.

When the company reported its disappointing third-quarter results on Sept. 1, some investors directed pointed criticisms at Randy Herrel, Ashworth’s chief executive.

Then on Nov. 4, Discovery Equity Partners, a small-cap investment fund that controls 7.2 percent of Ashworth’s shares, sent a letter to Herrel urging that he hire an investment banking firm to help find a buyer for the company.

In that letter, Daniel J. Donoghue and Michael R. Murphy, managing members of the Chicago-based fund, said they saw an “erosion in confidence in management” and expressed frustration with the company’s lagging share price.

“There were some questions of the ability of the board and management team to (build) this company into a large, true, global powerhouse,” Murphy said. “You cannot stand still in anything in the business world today. And there’s too much value in the Ashworth brand to allow it to sit in the status quo and not expand further.”

Corydon agrees with that assessment.

“It’s still the No. 1 brand in golf apparel,” he said. “And customers are really not aware of the problems they’ve had. I think there are a lot of folks out there interested in buying Ashworth.”

Donoghue and Murphy said they had talked with investors who hold nearly 40 percent of Ashworth’s shares, and those investors wanted to see the company “sold promptly.” Their letter suggested that “the most promising suitors” would be Fortune Brands, K2, Liz Claiborne, Oxford Industries and Columbia Sportswear. Donoghue and Murphy said they had held preliminary discussions with some of those companies.

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