Cutter & Buck CBUK
December 29, 2003 - 1:28am EST by
2003 2004
Price: 8.22 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 90 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Cutter & Buck is a company with a strong brand, business model, management team, balance sheet, and earnings future. CBUK has met many challenges over the last 18 months (some of their own making) and has emerged as a focused company poised to create additional shareholder value. Cutter & Buck designs, sources, and markets upscale sportswear. Most of you will recognize the brand from their well know golf shirts. CBUK is the #2 brand in golf clothing and also has a large business in corporate apparel (think golf shirt with company logos/event promotions). Distributes products to golf shops and specialty retailers, corporations and international distributors and licensees. Know for highest quality. Shareholders getting a very good business with good growth prospects at a very cheap price with cash and BS providing nice downside protection if needed.

First some numbers
Price: $8.22
FD shares out: 11M
Market cap: $90.4M
Cash: $34M
Debt: $0
NEV is $56.4M.

Through 6 months of 2004, pre-tax income is $7.9M. (note: this number excludes one time items and restatement expenses, as presented by company in table B.) Looking at seasonality, looks like April quarter (Q4) is the strongest (or at least as strong as Oct quarter (Q2)) and Q3 (Jan quarter) is by far the weakest. Looking at fiscal 2003, looks like about 53% of sales came in 1H and 47% in 2H. Correlation is not perfect for 2004 as company had retail ops in 2003 that they no longer have, etc., but should be decent proxy. Given that company has been improving cost structure throughout year with benefits lagging, and the fact that the economy is likely getting better (at least not getting worst), and that gross margins look highest in the April quarter, all considered, I don’t think it is a stretch to conservatively model CBUK 2H profits in line with 1H. So CBUK could very well have pretax earning this year of $15.8M or more. Not bad for a company with NEV of $56M. CBUK could earn $1 or more per share in EPS this year from continuing ops. Think I could be conservative as April quarter could be even more profitable than I am assuming.

As for growth, Company expecting sales in 2H to be flat to slightly up (my interpretation of their wording). Should be some pent up demand for CBUK products as economy has been down, and (I assume) some retailers held off on orders last year as CBUK’s financials were in question. (a point that no doubt it’s competitors broadcasted). Any pick-up in the economy should help sales as golf expenditures should increase. Discretionary item. Management has indicated golf should have good growth over next few years. Big opportunity in women’s golf business, and they have new multi year deal with Annika Sorenstam.

While I do not spend a lot of time looking for safety in the balance sheet (liquidation value) of a company that is this strong, the numbers do suggest a nice margin. Current assets less Current Liabilities is roughly $70M and CA minus all liabilities is about $67.5M. (Q2 10Q)

So it appears generally very cheap to me. Also, from cash flow perspective, good business model, manufacturing done by third parties, very little CAPEX. Through 6 months, company spent $646K on CAPEX, plans for $2.5M this year. Credit line actually caps capex at $2.5M in 2004 and 2005.

Now some history
2002: Golf industry struggling given softness in economy. Mid 2002 founders resigned. Board member Fran Conley took over as interim CEO. Found roughly 5% of 2000 sales ($5.8M) were made on consignment, but booked as actual sales. Merch ended up not being sold and returned to company. So they inflated sales. Whole process not disclosed to auditors. SEC investigation begun and delisting threatened. The nice surprise is how quickly management has taken care of it’s problems and gotten the company back focused on making money. Quickly, efficiently, and fairly settled shareholder lawsuits (thanks to investor Whitney Tilson who aided the process as a rational lead plaintiff) for maximum of $4M. Might have to pay another $3M, but only if they can get the money from insurance carrier who is trying to rescind coverage (first $1M in reovery +costs of litigation goes to CBUK, so $4M total liability could actually come down.) SEC investigation is over and the company was not fined.

Management and capital allocation
I’m a big fan of what management has been able to do since assuming leadership. They inherited quite a mess and have quickly cleaned it up and moved the company forward. (While CEO was on the board when the problems occurred, and thus is partly responsible for this mess in the first place, it does appear there was little board could have done in this case as prior management hid what they were doing and it was her investigation that uncovered the problem). CEO and CFO have done a great job. Additionally, the company has closed down European and retail ops, leaving a tighly focused company operating in the wholesale space. April 2003, company was totally out of retail business. In 2002, closed European subsidiary (replaced by licensing relationships) They have carefully cut costs, taken cash out of WC, and are running company to maximize profits not top line growth

Frustration comes from the fact that this company should already have done a large one time dividend or dutch auction. Talked to CFO repeatedly about this issue and it is addressed (with same response) on every conference call. They have the excess cash, they have significant debt capacity combined with an inappropriate cap structure, and the business is not capital intensive. Fact is this company does not need this cash to run and grow organically. Management claims they need the cash for when growth really picks up, but they have a $35M line in place with Wells Fargo for the purpose of financing WC. An inappropriate acquisition is always a risk when a company has this kind of flexibility, but I doubt it will happen in this case. Party line on acquisitions, nothing being ruled out. All that said, I think pressure is mounting on them to do something with the cash, the last earnings call being a good example. From what I have seen, they have done such a good job in other areas that I am willing to be patient on this issue. And of course, if everything were perfect, the stock would not be where it is. Hence the opportunity.

Love a company that attaches letter onto 10K and calls it an annual report, great way to save money.
Annika Sorenstam relationship is a very very valuable asset, they will be coming out with a new line for her soon. New three year agreement in place. New Annika lines at trade shows in Feb.
I don’t pay much attention to this, but will note that CBUK has been mentioned by some as takeover target. See “Mergers and Acquisitions Report” on Sept 15th.
Company is not giving guidance.
Suggest looking at minutes from Q2 earnings and call from December 11. Replay on website.
Trades about 20-25K shares a day.
Done a good job cutting Inv and AR. Probably cut inv down as far as can, and company says inv will be going back up a few million as new inv arrives for upcoming season.

All in all, looks like an attractive opportunity to me.


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