Golfing clothier and Motley Fool Hidden Gems "Tiny Gem" designee Cutter & Buck (NASDAQ:CBUK) reports its fiscal first quarter 2007 earnings tomorrow morning. For the first time in 18 months, analysts are expecting the firm to report an improvement in earnings versus the year-ago quarter.

What analysts say:

  • Buy, sell, or waffle? Two analysts still follow Cutter, but -- in contrast to six months ago, when verdicts were split -- both now say it's time to buy.
  • Revenues. The average of their two forecasts calls for about an 8.5% rise in quarterly sales to $32.2 million.
  • Earnings. And a penny's improvement in profits to $0.19 per share.

What management says:
As we've previously discussed, Cutter spent much of last year cleaning out and selling off stale inventories to make room for new clothing lines. The spate of discounting had two effects, both reported in the company's fiscal 2006 results: annual sales increased year over year (up 4%) for the first time in five years, and profits plunged 26%. (The profits picture could have been worse, though. In the second half of the year, sales of the new clothing lines began to take off -- and generated improved profits to boot.) The company is having the most success with its corporate clothing lines, which grew their sales both in the fourth quarter and for the year overall. Meanwhile, the golf business remains tough, with sales falling in both periods.

The shining light of the business, however, is its new direct-to-consumer unit (also its smallest by sales), which posted triple-digit sales gains for both the quarter and the year. Put it all together, and Cutter predicts that in fiscal 2007, overall sales will grow "modestly," gross margins will remain in the 44% to 48% range, and profits will improve year over year for the second year in a row.

What management does:
Evidence of the turnaround is also, well, evident, in Cutter's margin trends. Rolling gross margins continue their year-long slide, but remain within Cutter's targeted range. Meanwhile, rolling operating margins have improved for two quarters running, and net margins also seem to be inching back up.

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All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Turning from accounting profits to actual cash profits, Cutter continues to do its investors right by providing a clear picture of its free cash flow situation, and it doesn't hurt that the picture is much prettier than six months ago. Cutter generated $1.9 million in free cash flow last quarter, versus negative free cash flow in the previous fiscal year's fourth quarter. We also saw improvement for the year, as free cash flow came in at $7.3 million -- in contrast to fiscal 2005's $5.5 million.

It's always a bit dicey to "annualize" a single quarter's free cash flow to figure where a company is heading. Still, it's worth mentioning that if Cutter can match last quarter's results for all four quarters of fiscal 2007, it would be on track to edge out last year's free cash flow profitability, and generate $7.6 million worth of green. We'll pay close attention to tomorrow's cash flow statement (which Cutter, unlike so many of its rivals, produces without fail) to see how closely the company's hewing to that projection.


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How accurate have our forecasts of Cutter been in the past? Judge for yourself:

Fool contributor Rich Smith does not own shares of any company named above.