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Inventory Liquidatoions Plunge Ashworth Into 4Q Red Ink

DECEMBER 23, 2005 -- Consolidated 4Q05 net revenue of Ashworth increased 14.5% to $55.3 million. However, inventory liquidations ate into proitability. The company lost $2.2 million vs a 4Q05 profit of $1.9 million. Net revenue for the domestic segment increased 16.5% to $47.9 million. Net revenue from the international segment increased 3.7% to $7.4 million.

The company's operating margin suffered a loss of 5.4% in 4Q05 as compared to a profit of 7.3% in the same period last year. The decline was largely driven by lower gross margins as well as higher SG&A. Gross margins and earnings were adversely impacted by lower than anticipated sales of full-margin products and by the decision to reduce aggressively the excess inventory built up in 3Q. During 4Q, Ashworth continued the aggressive sales programs initiated in 3Q to address the impact of product which failed to appeal to its target market.

Continued efforts to document various internal controls to address Sarbanes-Oxley Section 404 requirements also added significantly to the higher SG&A expenses and lower operating margin level. In addition, SG&A expenses were higher due to the expansion of the Ashworth-owned outlet stores. Finally, the SG&A expenses were impacted by several costs associated with management realignment and personnel reductions to improve product, financial and operational performance in '06.

FY consolidated net revenue increased 18.3% to $204.8 million. Net revenue for the domestic segment increased 19.0% to $171.9 million. Net revenue from the international segment increased 14.6% to $32.9 million.

The consolidated FY net loss was $700,000 compared to consolidated net income of $8.2 million. In 2Q04, Ashworth sold its DC and recorded a pre-tax gain on disposal of fixed assets of $1.6 million. Additionally, during 3Q04, Ashworth incurred a $3.0 million pre-tax charge related to a settlement to conclude a securities class action lawsuit. Without these events, Ashworth would have reported FY04 consolidated net income of $9.1 million.

Ashworth's operating margin decreased to 0.7% in FY05 as compared 9.5% in FY04. The decline was driven by lower gross margins as well as higher SG&A expenses. Gross margins and earnings were adversely impacted by lower than anticipated sales of full-margin products and the company's decision to reduce the excess inventory. Primary drivers of the higher SG&A included 12 versus four months of expenses from Gekko, the net addition of five new outlet stores, higher sales promotions expense, EDC variable cost overruns, and expenses associated with the documentation of various internal controls to address Sarbanes-Oxley Section 404 requirements.

Ashworth affirmed its previously stated consolidated revenue guidance for FY06 of approximately $210 to $220 million vs the $205 million for FY05. The company expects to achieve its FY06 goals primarily by 1) reducing the need for higher markdown allowances with the introduction of better designed product lines, 2) reducing lower margin sales which resulted from 4Q05 inventory reduction efforts, 3) realizing planned efficiencies at its U.S. EDC, 4) lowering sales and promotional expenses, 5) reducing Sarbanes-Oxley Section 404 compliance expenses in its second year of Sarbanes-Oxley Section 404 implementation, and 6) the reduction of payroll expenses.


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Categories
Sporting goods industry
Profits
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Inventory
Costs

Companies
Ashworth Inc.
3Q Inc.

Concepts
net revenue
net income
excess inventory
operating margin
outlet stores

People
Sarbanes-Oxley





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