Retailer Cutter & Buck admits inflating sales figures

Seattle-based sportswear retailer Cutter & Buck became the latest company to fess up to accounting tricks yesterday, admitting it inflated its 2000 sales figures by roughly $5.8 million.

The company's chief financial officer, Steve Lowber, resigned Friday, and Cutter & Buck will restate its financial results for fiscal 2000 and 2001. Former Chief Executive Harvey Jones and President Marty Marks left the company in April, resigning within two weeks of each other.

Although nowhere near the multibillion-dollar accounting fiascos at Enron and WorldCom, Cutter & Buck joins a growing list of companies that have misled investors. The news triggered incredulous reactions during a conference call the company held yesterday.

"I don't think it's something that any outside investor, like myself, could have known," Whitney Tilson of New York-based Tilson Capital Partners said later. "I know how to read financial statements for things like this, and I didn't pick up anything."

The accounting revelations likely won't change the company's net worth or its cumulative sales totals over the past three years, Cutter & Buck said, although each year's sales will be affected.

New Chief Executive Fran Conley, a longtime board member, said she discovered a problem when reviewing documents two weeks ago. In 2000, the company had booked as sales three shipments to distributors worth $5.8 million when most of those goods never were sold. She said she alerted the board's audit committee, which is investigating the matter with her.

"I'm a numbers person, and I just started noticing the sales were made all on the same date, things like that," Conley said.

Cutter & Buck, which designs and markets golf-inspired sportswear, rarely sells to distributors, Conley said. The company sells mainly to golf pro shops, specialty stores and corporations and runs 12 retail stores.

The committee found that when the distributors returned most of the shipments to Cutter & Buck in spring 2001, the company accounted for the returns by spreading them out as lower sales among several business divisions, rather than recognizing the return shipments as a lump sum.

The company did not mention the distributors' returns in its 2001 year-end report, attributing its lower sales to a downturn in the economy.

Conley said the company has talked with the Securities and Exchange Commission and has hired outside lawyers to assist in the internal investigation, which will delay the release of results from the 2002 fiscal year, which ended in April. She said she's received no indication from federal authorities of a criminal inquiry.

The company's auditing firm, Ernst & Young, shouldn't be blamed for missing the padded sales figures in 2000, Conley said, because Cutter & Buck managers went out of their way to circumvent the retailer's standard accounting practices. Stuart Woodhouse, Ernst & Young's coordinating parter for the Cutter & Buck account, declined comment.

Jones, who cofounded the company in 1989, yesterday largely deferred comment to his attorney, Robert Sulkin. But he did say the matter was "being taken out of proportion" and stressed that the episode will not change the financial condition of the company.

Sulkin said Jones "did not order any of the alleged accounting improprieties."

"This is a single incident and is not reflective of how Cutter & Buck was managed under Jones' leadership," Sulkin said.

Calls to Lowber, who joined the company in 1997, and Marks, with the company 11-½ years, were not returned. Sulkin, however, said the incident "does not reflect on (Marks') oversight of financial management."

Investors peppered Conley with frank questions during the conference call.

"How can you be certain that there aren't more serious problems lurking?" Tilson asked.

Conley said she couldn't be certain, but that 10 days of "intensive scouring of the books" since her initial discovery had turned up no further problems.

Another investor said he was "just outrageous that somebody profited at our expense."

"It probably came about because this company had been a stellar growth company for years," Tilson said later. "When growth starts to slow, that's when I find that management will resort to accounting shenanigans to maintain the appearance of growth. All your rewards and incentives are tied to that growth continuing."

The company said the committee believes the overstated 2000 results may have helped some former executives receive pay increases tied to incentives, though it did not cite any specific instances.

Sulkin denied that Jones profited from the incident, saying Jones did not trade any stock during the time frame in question.

"There's no indication that Mr. Jones, or any of the executives, personally enhanced their own pockets," Sulkin said. "This is not a situation like you have at Enron or other companies."

The company released the news shortly after stock markets closed yesterday. In after-hours trading, Cutter & Buck shares sank $1.27, or 32 percent, to $2.75.

Jake Batsell: 206-464-2718 or jbatsell@seattletimes.com