Cutter & Buck Inc.

2701 1st Avenue, Suite 500
Seattle, Washington 98121
U.S.A.
(206) 622-4191
(800) 929-9299
Fax: (206) 448-0589
Web site: http://www.cutterbuck.com

Public Company
Incorporated: 1990 as Jones-Rodolfo Corporation
Employees: 265
Sales: $70.1 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: CBUK
SICs: 2329 Men/Boys’ Clothing, Not Elsewhere Classified

A fast-growing apparel company, Cutter & Buck Inc. is known for its casual golf attire, which consists of woven and knit fabrics featuring embroidered designs. In 1998 the company derived more than half of its revenue from sales at 3,000 golf course pro shops, where the typical Cutter & Buck customer—an affluent 30- to 50-year-old male—visited frequently. The company’s clothing was manufactured under contract in Hong Kong, China, and Thailand. In late 1998 Cutter & Buck opened its first retail store, a 3,400-square-foot clubhouse replica located in Seattle.

Origins

Cutter & Buck’s co-founder, Harvey Jones, grew up in the apparel industry. His family owned a retail apparel business in Spokane, Washington, where Jones divided his time between school and stocking the shelves and sweeping the floor at his family’s store. As an adult, Jones followed his family’s example. He moved to California in 1974 and started making his own apparel, beginning with an initial investment of $7,000. With his modest start-up money, Jones began manufacturing and marketing an apparel label called Sticky Finger Jeans. His next venture involved a second label called San Francisco Riding Gear. By the mid-1980s Jones had departed from the entrepreneurial ranks and joined an apparel design company called UnionBay Sportswear Co., where Jones first met another UnionBay employee, Joey Rodolfo. Jones and Rodolfo forged a partnership, and in early 1987 they began collaborating on starting their own apparel company. After securing financial backing from Taiwanese investors, Jones and Rodolfo were in business, ready to begin manufacturing and marketing a line of men’s and women’s sportswear through their new company, Bench Co. Ltd. Their plan was to manufacture the clothing overseas and ship it back to the United States, where the sportswear would be distributed to department stores and specialty shops. The plan did not fulfill expectations. Jones and Rodolfo were pleased by the results they were achieving, but their investors were not, particularly one Taiwanese investor who owned the majority of Bench. Together, Jones and Rodolfo owned one third of Bench, not enough to exert ultimate control over the company. Said Jones, “Bench’s distribution had expanded to more of a specialty store clientele and had done well, but our Taiwanese partner had some real questions about where the company was going.” By mid-1989, just as Bench was beginning to generate a profit, the relationship between the founders and their foreign investors had become irrevocably divisive. The philosophical disagreement that erupted led to Jones’s and Rodolfo’s departure from the company in July 1989, their bitterness evident. “We were really disillusioned with the fact we were leaving behind a company just kicking into high gear,” Jones lamented.

After leaving Bench, Jones and Rodolfo searched for two months for a new job, exploring several opportunities to work for apparel design companies, but both felt a need to finish what they had started at Bench. In September, the pair decided to start another company together, each adamant that the second venture would be substantially different from the first. Jones and Rodolfo decided that their next company would be smaller than Bench and would target a narrower market base. Instead of marketing men’s and women’s sportswear, the new company would focus on male customers only, specifically 20- to 50-year-old males looking for clothes to wear on the weekend. Of primary importance, however, was avoiding any foreign involvement, both in terms of production and financing. Jones and Rodolfo wanted to keep their manufacturing in the United States and thereby shorten the time between design and production, enabling their company to offer greater flexibility to retailers. They hoped to avoid distributing to major department stores, which preferred to stock discounted merchandise, and instead concentrate on a network of between 250 and 300 specialty shops. With a rough idea of their new venture, Jones and Rodolfo were ready to go forward with their plans, but not until they found a suitable financial backer. The issue of financial support was of paramount importance. After the debacle at Bench, neither of the entrepreneurs wanted any financial help from overseas investors. “We weren’t going to go ahead with the business,” Jones explained, “if we couldn’t get a financial partnership with someone we felt comfortable with.”

Jones and Rodolfo hired a Seattle-based business consultant to help develop the financial model of their new company, which they named Jones-Rodolfo Corp., and began showing their plan to venture capital firms. They found a number of small, local investors willing to support their efforts and had a small amount of their own capital to invest, but the biggest and the most crucial investor was a Seattle-based venture capital firm named Roanoke Capital Ltd. Roanoke, which never disclosed an exact dollar amount of its investment, but reportedly offered between $1 million and $4 million, suited Jones and Rodolfo perfectly as a financial partner. “It’s really nice,” Jones remarked, still bristling from his experience with Taiwanese investors, “that we didn’t have to sell our souls to a foreigner.”

As Jones and Rodolfo searched for the capital to start their company in the fall of 1989, they also devoted time to searching for domestic fabric sources and production facilities to make their inaugural apparel line. Once an agreement was reached with Roanoke, Rodolfo, who held the title of design director, hurried to assemble the company’s first line of clothes. With the help of a corporate design and administrative staff comprising eight individuals, Rodolfo began designing and making a collection of jackets and heavy-knit sportswear for the company’s new label, Cutter & Buck. By early 1990 the company was ready for the Preline fashion show in Seattle, which immediately preceded more prestigious menswear shows in Los Angeles and New York. Using the Preline show as a jumping-off point, Jones-Rodolfo Corp. unveiled the first Cutter & Buck line, showcasing sweatshirts, jackets, and other garments priced between $45 and $150.

After the Preline show, the Cutter & Buck concept underwent a period of refinement, as the label’s “look” took shape. By 1991 the line was predominated by richly colored, knit sweatshirts that evoked an outdoor image or, as fashion observers defined it, a “Pacific Northwest lifestyle” image. Rodolfo claimed that he drew his inspiration from “the early Eddie Bauer look,” citing the name of a Seattle-based clothing manufacturer founded by outdoor enthusiast, Eddie Bauer. In fact, Cutter & Buck sweatshirts were made at a former Eddie Bauer manufacturing site, where they were embellished with embroidery and designs of fishing and hunting themes, intended to be reflective of the Pacific Northwest. The label achieved its widest acceptance away from the mountains and streams of the Pacific Northwest, however. Cutter & Buck found its most receptive audience in the southeastern United States, where the sweatshirts and other garments were most commonly found in small shops. Roughly 75 percent of Jones-Rodolfo Corp.’s merchandise was distributed to small, independent, specialty shops, with the balance retailing in department stores.

Strategic Changes in 1993

By the end of 1991 Jones-Rodolfo Corp. essentially had become the type of company envisioned by Jones and Rodolfo in late 1989. The company’s products were made in the United States, they were sold in the United States, and the company itself was supported by U.S.-based investors. Further, the two founders, to a large extent, had avoided relying on department store sales, generating the bulk of their sales by distributing Cutter & Buck apparel to small specialty shops. All was as it should have been, at least according to the business plan developed in late 1989, except for one crucial aspect—the company’s financial performance. Annual sales, which reached $2.6 million in 1991, were growing slowly. Profits were nonexistent. During the company’s first three years of business, more than $2.3 million in losses were racked up, prompting Jones and Rodolfo to rethink their strategy and make a number of changes. The result was a type of company different from the Jones-Rodolfo Corp. of the early 1990s, as the two founders strayed from their 1989 ideals to make their company a financial success in the 1990s.

Company Perspectives:

Growing from the tradition and heritage of golf, Cutter & Buck is emerging as the premier sportswear line in America today. Our customer is the man or woman who believes that clothing is a reflection of personal style. Our design philosophy combines the inspiration of the golf lifestyle with our Pacific Northwest roots. We feature updated traditional clothing with an outdoor attitude. We are known for our strong clear colors, natural fiber fabrications, attention to detail, innovative trims, and specialized printing and embroidery; these form the Cutter & Buck identity.

The turning point arrived in 1993, the third year of consecutive annual losses for the company. In 1993 Jones and Rodolfo narrowed their distribution of Cutter & Buck apparel to golf course pro shops, which had proved to be highly popular destinations for the company’s target customer. In addition, the founders contravened their earlier resolution to keep production in the United States and began contracting nearly all of their production to Asian manufacturers. The two changes worked wonders, increasing the pace of sales growth and, more encouraging, transforming Jones-Rodolfo Corp. into a profitable enterprise. In 1994 the company reported its first year-end profit, generating $101,000 on sales of $9.9 million. Gradually, as the number of golf pro shops carrying Cutter & Buck apparel increased, the apparel itself—a collection of knit and woven sport shirts, pants, shorts, sweaters, and sweatshirts—began to take on a slightly different look, becoming a label more and more associated with the sport of golfing. By 1995 more than half of the company’s garments sold in golf pro shops were embroidered with the name or the logo of the particular golf course adjoining the pro shop. Overall sales reflected the shift in focus away from specialty stores and toward golf pro shops. In 1995 sales to upscale men’s specialty shops, formerly the company’s mainstay distribution point, remained flat, stagnating at 1994’s level, while sales to department stores plunged, falling from $1 million to $116,000. Total sales, however, were up significantly, increasing from $9.9 million to $13.5 million, which was entirely attributable to the increase in sales coming from golf pro shops.

1995 Public Offering Fuels Expansion

As evidenced by the invigorated financial growth, the company’s Cutter & Buck line, which had been divided into a trendy “Fashion” line and a more traditional “Classic” line, had found its market niche by the mid-1990s. Golf pro shops offered the greatest opportunity for growth, and they were abundant, providing Jones-Rodolfo Corp. with a vast market into which to expand. In 1995, 42 percent of the company’s revenue was derived from sales at 1,200 pro shops, only a fraction of the approximately 13,000 pro shops in the United States. Expanding into these shops was the direction the company was headed, but expansion required capital, so in July 1995, after changing its name to Cutter & Buck Inc., the company filed with the Securities and Exchange Commission for an initial public offering (IPO). In the August 1995 IPO approximately 44 percent of the company’s stock was sold to the public. Roanoke retained 32percent of Cutter & Buck’s stock and Jones and Rodolfo held on to a combined 11 percent. The IPO raised $9.4 million, providing the financial resources to fuel expansion. Of the proceeds, nearly $1 million was set aside to finance expansion into more pro shops, $2 million was earmarked to increase inventories of the Classic line, another $1 million was designated to expand the Fashion line, and an additional $2 million went to pay off debt. The balance was invested for future use.

Following the IPO, Cutter & Buck was geared for expansion on all fronts. As the company prepared for an extraordinarily active 1996 and 1997, it did so without the day-to-day presence of the creative force who had guided Cutter & Buck during its first five years of business. Rodolfo resigned from the company at the end of April 1995, served the next two years as a consultant, and then left the company entirely in 1997 to start his own women’s golf apparel company. Rodolfo’s departure, however, caused little disruption to Cutter & Buck’s progress, as the company began to record strident financial and physical growth in the wake of the 1995 IPO. In 1996 the company opened an in-house embroidery and warehouse facility, increased its presence in pro shops throughout the country, and strengthened its international business. The company had already established distributorships in Japan, Singapore, and Australia, but 1996 saw Cutter& Buck turn its attention in the other direction, toward Europe, where the company’s apparel began appearing in the United Kingdom. The push into the United Kingdom was followed by the formation of a wholly owned subsidiary, Cutter& Buck (Europe) B.V., in Holland to govern the company’s operations on the continent.

By the end of the company’s fiscal year in 1996, sales had swelled to $21.6 million, ten times the total recorded five years earlier, and net income, once a sore spot for the company, had climbed to $1 million. The company was growing robustly after years of modest growth, but in the years ahead the pace of growth would become significantly more prolific. By 1997 selected collections of the company’s apparel were available in approximately 2,300 pro shops scattered throughout the country. By 1998, when sales increased more than 50 percent from the previous year’s total, reaching $70.1 million, 3,000 pro shops carried Cutter & Buck menswear, outerwear, and accessories, leaving 10,000 additional pro shops into which the company potentially could expand. The existence of these untapped markets suggested greater growth for years to come, but as Cutter & Buck neared its tenth anniversary, another avenue of expansion was explored. In October 1998 the company opened its first store, a 3,400-square-foot outlet in Seattle that was designed to replicate a golf clubhouse. Inside, for the first time, the entire Cutter & Buck merchandise line was available to consumers instead of the selected collections available in pro shops. Although no specific plans were announced for additional stores at the time of the Seattle store’s grand opening, the possibility of retail expansion combined with the continued penetration of pro shops throughout the country pointed to a promising future for the company. As Cutter & Buck prepared to move forward with its plans, a 44 percent increase in sales and a 67 percent increase in profits for the first quarter of 1999 provided convincing evidence that the company was destined to become one the industry’s most potent competitors.