2004: Back in black, C&B survives ‘perfect storm’

By John Steinbreder

During the late 1990s, Cutter & Buck was as dependable as its lead endorser, Annika Sorenstam, when she holds a final-round lead.

The Seattle apparel company, founded in 1990, had quickly become a staple in pro shops and specialty stores, where its distribution was among the broadest in the golf industry. And its revenues and earnings were growing rapidly and reliably, making it one of Wall Street’s favorite golf stocks.

Then the bottom fell out. Cutter & Buck, the company that could do no wrong, suddenly couldn’t do anything right. From misguided moves into footwear and company-owned stores to, most damaging, an accounting scandal, Cutter & Buck was buffeted by what a rival describes as a “perfect storm” of problems. Whispers of a fire sale or even the company’s demise were prevalent.

“But neither of those happened,” reminds Jim McGehee, Cutter & Buck’s executive vice president.

Recent financial reports indicate the company is back from the brink. Through the first nine months of its fiscal year, Cutter & Buck reported net income of $2.3 million on sales of $90 million compared with a loss of $11 million on sales of $95.4 million during the same period a year ago. The hard-earned profitability came despite still being saddled with $4.5 million to settle shareholder lawsuits and a Securities and Exchange Commission investigation. Its share price, which had fallen below $3, has climbed above $10 – still less than half its late-1990s highs, but headed in the right direction. The stock was made more attractive by last month’s announcement that the company will spend $6 million to repurchase shares and pay a dividend of 5 cents per share.

The company also has high hopes for its new “Annika by Cutter & Buck” collection, scheduled for a late June release. This is the first apparel line on which the company has collaborated with Sorenstam, who was re-signed to a three-year endorsement contract.

“This is a classic turnaround story, and Cutter & Buck has done exactly what needs to be done in any turnaround situation,” says Casey Alexander, special situations analyst for Gilford Securities in New York. “The company stopped doing things that were not part of its core business and got back to basics.”

When its business was booming, few companies did the basics – designing, marketing and selling sportswear to golf shops – better than Cutter & Buck. From 1997 to 2001, sales nearly quadrupled, peaking at $172.9 million, as the bright and casual styling of its products scored with consumers.

But the company made several missteps – expanding into footwear, opening retail stores and selling products on its own in Europe. Cutter & Buck also disclosed in August 2002 that $5.8 million worth of products had been booked as revenue in 2000 but were later returned unsold by three distributors. Four months earlier, company founder and chief executive Harvey Jones had resigned, followed 10 days later by president Marty Marks. Other executives followed them out the door, including former chief financial officer Stephen Lowber, who last year pleaded guilty to felony wire fraud for knowingly sending fraudlent sales data to the SEC.

Compounding problems was the post-9/11 travel slump, which depressed Cutter & Buck’s lucrative corporate and resort business.

“We had acquired a lot of excess baggage as we grew so rapidly, and we began doing a lot of things that in the end did not make money for us,” McGehee says. “The key was stopping all that and going back to our core, our wholesale apparel business.”

Cutter & Buck turned over its European business to distributors, and got out of footwear, where it was outgunned by market leaders FootJoy, Adidas and Nike. It reduced overhead as well as the number of styles and colors it offered in its apparel lines as it closed its retail stores. It agreed to pay as much as $7 million to settle a number of securities lawsuits that were filed in the wake of the accounting imbroglio, and it emerged from SEC investigations with no additional fines or monetary penalties.

“We have cash in the bank, we have virtually no debt, we have returned the company to profitability and we have stopped participating with divisions, products or processes that did not produce results,” McGehee says.

“Now, we are focused on moving forward.”

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