Early shipments hound Cutter & Buck
But it wasn’t the first time the Seattle sportswear retailer’s shipping and accounting practices have been called into question. Shortly before co-founder Joey Rodolfo left in 1997, he accused the company of shipping orders months before customers were expecting them, a method of prematurely booking sales.
Some customers and former employees say early shipments persisted for years after Rodolfo raised the issue. And late last week, Chief Executive Fran Conley said an internal investigation has found that early shipments were “more extensive than I had known” and may force the company to further restate sales figures.
Shipping and booking orders ahead of schedule to meet short-term sales goals — a practice sometimes called channel stuffing — is not, by definition, illegal. But by essentially borrowing from future sales to claim bigger current sales and profit, it can be used to boost a company’s bottom line and create a misleading appearance of growth for investors. If federal authorities find that a company shipped products early to inflate short-term sales results, it can land executives in hot water.
Cutter & Buck dismissed Rodolfo’s claims after an investigation in 1997, and the company made no direct mention of early shipments two weeks ago. However, the company told investors it is still investigating and may need to revise sales entries “which more properly should have been reported in later periods.”
Conley said that while the latest investigation is not complete, she believes early shipments from recent years “could be material enough” to restate more sales figures, but she said it likely would affect less than 5 percent of overall sales. For a company that reported more than $150 million in sales for each of the past three years, that could mean restating millions in sales. Conley said she doesn’t think the restatements will affect the company’s net worth or cumulative sales figures.
As a star apparel retailer for the golf industry in the late 1990s, Cutter & Buck faced intense pressure to keep growing and to meet ambitious sales and profit targets that would please Wall Street. Former sales representatives say that drove the company to keep shipping goods months early to make quarterly goals.
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Tucker was fired by Cutter & Buck in May 1998 and said he later settled with the company after his lawyer said he would sue for wrongful termination. When he left, his territory covered 18 states.
He said he repeatedly complained to managers about early shipments. His customers in Florida, Georgia and the Carolinas received shipments of fleece garments from Cutter & Buck in May, he said, despite having ordered them for fall.
“My customers were raising hell with me, saying, ‘What are you doing shipping me fleece in May, when it’s 90-some degrees outside?’(” Tucker said.
Managing seasonal work
Many apparel retailers, including Cutter & Buck, record revenue when products are shipped. In the apparel industry, shipping goods early can help a company better manage seasonal work flow, open up storage space, and give customers more flexibility, assuming they’re willing to take early delivery in exchange for extended payment terms.
But aggressively pushing shipments out the door may indicate channel stuffing, which has drawn heightened scrutiny from federal regulators in recent years.
Last year, the Securities and Exchange Commission (SEC) sued Sunbeam, the Florida-based maker of household products, accusing the company of channel stuffing in the late 1990s. The SEC claims Sunbeam, which restated six quarters of earnings in 1998, routinely shipped goods ahead of schedule to inflate sales.
The classic version of channel stuffing involves shipping goods ahead of schedule to distributors, or “stuffing the distribution channel.” But in recent years the term has been used in other industries to describe the general practice of borrowing from future sales to claim better current results.
Shipping early can turn into an addiction: Once you start borrowing from future sales, it’s hard to stop because you’ll probably need to do the same thing three months later to make the next quarterly goal.
Harvey Jones, Cutter & Buck’s co-founder and former chief executive who abruptly quit in April, said the company sometimes sent a small percentage of shipments early to ease the labor crunch caused by seasonal increases in orders. But those shipments required customers’ approval, Jones said, and the policy allowing them was approved by auditors Ernst & Young and the company’s audit committee.
“In all cases these shipments are true sales in every sense of the word,” said Jones, also speaking on behalf of former President Marty Marks, who resigned two weeks after Jones.
If the company is restating sales results based on early shipments, Jones said, “then apparently these guidelines have been changed after my departure.”
“It’s clear that the great majority of our customers have been pleased with our shipping policies,” he said. “I stand by the integrity of our practices and am proud of the wonderful brand that we built over the last 12 years.”
Looking at financial statements alone, it is virtually impossible to prove channel stuffing. But two accounting experts said Cutter & Buck’s recent statements show troubling patterns.
Jay Taparia, principal at Sanskar Investments in Chicago and a lecturer for the University of Illinois at Chicago Department of Finance, said that for most of 2000, Cutter & Buck’s accounts receivable — the money customers owe the company — grew much faster than net sales. That, he said, implies accelerating shipments to boost quarterly results.
Terry Shevlin, an accounting professor at the University of Washington Business School, said a comparison of quarterly earnings statements in the late 1990s and 2000 suggests the company was giving its customers increasingly lenient payment terms, meaning it took longer for the company to collect from customers.
Conley said the company plans to restate financial results for the past three fiscal years by mid-September. The company has informed the SEC of its internal inquiry, but Conley said she has not heard that the agency is investigating.
The SEC does not discuss whether it is investigating a company, but a spokesman said the commission has not filed any civil or administrative actions against Cutter & Buck.
Early deliveries returned
Conley announced Aug. 12 that the company had prematurely booked the $5.8(million in sales. When distributors returned the unsold items in spring 2001, Cutter & Buck accounted for them by showing lower sales in several business lines.
In the same announcement, the company said Chief Financial Officer Steve Lowber had resigned. Lowber was out of town last week and could not be reached, his attorney said.
The inflated sales in 2000 may have helped former executives receive higher pay tied to financial incentives, the company said.
Robert Sulkin, who also represents Marks, has said Jones “did not order any improper accounting” and that there is no evidence that any of the executives directly profited from the overstated results.
“Harvey feels confident that his reputation will remain intact and is cooperating fully with whatever investigation may ensue,” Sulkin said.
Conley had faced accounting questions before. On Feb. 26, 1997, Rodolfo, who had fallen out with company executives, sent a letter to the board of directors saying customers were complaining about receiving shipments much earlier than scheduled.
A director whose venture-capital fund provided Cutter & Buck with most of its startup money, Conley headed an internal committee to investigate Rodolfo’s claims. The committee — which enlisted the Seattle law firm of Lane Powell Spears Lubersky and Ernst & Young to help — said it found no basis for Rodolfo’s charges. Directors voted 5-1 to consider them groundless.
Rodolfo cast the sole dissenting vote, but when he left the company weeks later, he signed an exit package that included a clause saying he accepted the committee’s findings.
His allegations surfaced again last year in King County Superior Court. Rodolfo sued Cutter & Buck for preventing him from taking a job at Eddie Bauer.
He testified that more than a year after the company’s initial public offering in August 1995, he received “numerous phone calls from customers saying, you know, ‘Why, since the company has gone public, why is the company now starting to ship merchandise ahead of schedule?’(” Company lawyers argued that Rodolfo made the allegations to try to get a more lucrative severance package.
The claims were ruled to be outside the trial’s scope. Rodolfo lost and owes Cutter & Buck more than $180,000 in legal fees.
As Rodolfo’s allegations faded, Cutter & Buck emerged as one of the most popular brands in golf wear in the late 1990s. Year after year, sales and earnings rose, and the company topped $100(million in sales in fiscal 1999 and reported a record $10.6(million profit in fiscal 2000. Meanwhile, customers and former sales reps said the early shipments continued.
‘Really wasn’t the season’
“It was very frustrating at times,” said Russ Luedloff, former head golf pro of Whitmoor Country Club in St. Charles, Mo., who said he received early shipments from Cutter & Buck from 1997 to 2000. “A lot of times you would get your items you ordered for summer — like shorts — in March, when it really wasn’t the season for some of the items.”
Several former sales reps who declined to be named publicly said their customers became upset after repeated early shipments. They said they pleaded with executives to stop unwanted early shipments at a June 2000 sales meeting in Seattle.
Some customers said they’ve never had a problem with the company’s shipping practices, and others said they appreciate having the option to receive shipments early. Some said they were offered extended payment terms if they accepted early deliveries.
Dean Russell, golf pro at Bellingham Golf and Country Club, said spring weather can be so unpredictable that it is sometimes better to get spring shipments in February rather than April. And the company has always asked if it could ship early, Russell said.
“I’ve had nothing but a positive relationship with them,” Russell said.
But even if customers agree to delivery now and payment later, the practice still risks misleading investors, accounting experts said.
“It’s using the rules to maximize the appearance of shareholder value,” investment adviser Taparia said. “If you’re booking (sales) ahead of time and you’re looking for growth, then where is the growth for the future?”
First annual loss
For the past year and a half, the golf industry has been struggling. Cutter & Buck’s profit shrank to $3.7 million in fiscal 2001, and earlier this summer it reported its first annual loss — $10.8 million — as a public company.
Company officials have said the recent economic downturn has led to a sharp decline in demand, leaving the company with swollen inventories and lower sales and profit. It has resorted to steep discounts — some goods were sold at Costco Wholesale stores.
The company, which employed about 700 people last summer, has since laid off dozens, but it won’t say how many. It also has announced restructuring charges to abandon excess warehouse space and several unprofitable lines.
In a June conference call with investors and analysts, Conley said the company had “tried to expand too fast.”
“I think you have a company that was pushing very, very hard for sales,” she said earlier this month.
Some customers and former employees suspect that years of borrowing from future sales is at least partly to blame for the company’s predicament. But a merchandise manager at another country club in the Midwest said shipping goods early is common in the golf-apparel industry.
“It’s still wrong, even if the whole world is doing it,” she said.
Jake Batsell: 206-464-2718 or jbatsell@seattletimes.com