Despite my prognostication that golf clothing maker Cutter & Buck (Nasdaq: CBUK) might surprise analysts and investors with a better-than-expected quarterly report, it ultimately shanked the quarter.
Admittedly, the company's third quarter was up against some tough comparisons year over year, with the company having cleared out a ton of discontinued merchandise last year, boosting sales above normal trends at the expense of margins. In addition to skewed comparable numbers, it had to contend with yet another uninspiring year for the golf industry, which sapped sales 3% to $30.3 million for the quarter. It wasn't alone, though; competitor and industry leader Ashworth (Nasdaq: ASHW) also experienced steep sales declines during its most recent quarter.
Revenue was down across many segments, including an 11% drop in corporate sales, the company's largest revenue contributor. The two exceptions are its direct-to-consumer distribution channel, where the increase was 45%, and the international and licensing segment, which was up 38%. Management did tout its 60-basis-point improvement in gross margins, thanks to lower sales from discontinued merchandise.
Cutter & Buck had particularly nasty results in specialty retail, its second-largest segment, where sales fell by 12% in the quarter. While sales from college athletic teams and professional sports customers increased, the company experienced customer cancellations and requested delays in merchandise shipped to its largest big-and-tall customer, Casual Male Retail Group (Nasdaq: CMRG). Casual Male has sued Cutter & Buck for improperly using a former employee who now works for the golf retailer.
The problem with Casual Male could get deeper, though, if Cutter & Buck can't successfully defend itself. Casual Male has charged that besides the company hiring away an employee who had a non-compete agreement, the employee also misappropriated Casual Male proprietary information. As a result, Casual Male is seeking not only monetary compensation, but also may seek a permanent injunction on Cutter & Buck's consumer catalog and online website. While that would seem somewhat excessive, a preliminary or partial restriction would hurt Cutter & Buck's business and could lead to high payments to settle the matter. So the company doesn't expect an end to its woes, certainly not while the litigation drags on.
Of course, I'm expecting Cutter & Buck to issue the obligatory press release declaring that the charges are without merit, and that it will defend itself "vigorously." And often, these things get settled before going too far in the justice system. Still, legal issues can ruin customer relations, and they could prove costly to Cutter & Buck in the long run.
I might have had irrational exuberance before, but you can now color me cynically pessimistic for the foreseeable future.
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Fool contributor Rich Duprey owns shares of Casual Male but does not own any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
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