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Acquisition Opens New Avenues for Ashworth

While sales of golf equipment and the growth of the sport itself remains flat, Carlsbad-based Ashworth Inc. bucked the trend last year, turning in record numbers and capitalizing on a strategy of diversifying its product line and distribution channels.

In July, Ashworth, a designer and maker of golf apparel, acquired Gekko Brands LLC, an Alabama maker of two brands of headwear, for $23 million in cash. The purchase doubled Ashworth’s distribution channels to six and will add about $30 million annually in revenues.

“We’ve very pleased with the acquisition,” said Ashworth Chief Executive Randall Herell. “They’ve met their plans, and they’re off to a great start in 2005.”

Gekko makes sport hats under the brands Game and Kudzu. The company has about 40 employees, all of whom were retained following the sale.

Ashworth now employs some 390 people, with 150 working in Carlsbad and another 150 working at its new distribution center in Oceanside.

Herell said the decision to acquire Gekko and diversify its product line began in 2001 as it became clear the company’s existing golf channels could provide limited growth potential.

“We were looking for additional brands, not just to grow our business, but to leverage our existing channel relationships,” he said.

With the Gekko deal, Ashworth apparel can be sold through additional distribution channels.

The Game’s hats are sold through an existing network of 1,000 colleges and universities, in resorts, and through sporting goods retailers. The Kudzu brand of hats is sold through NASCAR customers, and outdoor/hunting and fishing distributors.

Ian Corydon, an analyst for B. Riley & Co. who tracks the company, said the acquisition is apparently working well.

“It gives them a couple of new brands they can sell, and gives them a few new distribution channels,” said Corydon, who owns Ashworth shares and whose firm is a market maker for the stock.

For its 2004 fiscal year ended Oct. 31, Ashworth reported net income of $8.2 million on revenues of $173.1 million, compared with the prior fiscal year when it had net income of $7.3 million on revenues of $149.4 million.

That kind of growth has spurred action on the stock and boosted it from a low of $7.55 in June to a high at Dec. 30 of $11.20. As of Jan. 4, it stood at $10.56 on Nasdaq.

Last month, Herell forecasted revenue growth for 2005 to increase by at least 20 percent and finish between $207 million and $215 million.

Besides the acquisition of Gekko, Herrel credits its partnership with Carlsbad’s Callaway Golf Co., producing the golf club maker’s shirts and other apparel, as also generating nice profits.

Ashworth won the licensing contract after Callaway, also based in Carlsbad, decided it wanted to put its brand apparel in multiple department stores, not just Nordstrom as it previously did. Last year, sales derived from the Callaway agreement came to $39 million, up 27 percent from the prior fiscal year.

Herell said although the popularity of golf appears to be waning as far as rounds played, golf viewership on television is way up.

“More new players are entering the market, and younger players are coming in, but there are fewer rounds played because golf requires five hours to play,” he said.

Because of the emergence of Tiger Woods as a superstar transcending golf, the amount of coverage for some tournaments is far above what it used to be, and that’s helping Ashworth, Herell said.

Ashworth has other reasons for optimism. Last year, it settled a longstanding shareholders lawsuit for $15 million. The 1999 suit alleged that Ashworth executives made false and misleading statements or omissions concerning product demand, and that two former executives engaged in insider trading.

Herell declined to reveal how much the plaintiffs’ law firm, San Diego’s Milberg Weiss Bershad Hynes & Lerach (which has since split up, with Lerach being lead partner for the separate firm), originally requested in negotiations. The company paid $3 million, and the firm’s insurance carrier paid the remainder of the sum.

Looking ahead, Herell said the biggest challenge Ashworth faces is continuing to innovate and come up with new and better products. That may occur by making another strategic acquisition this year, he said.

As Ashworth grows, so should employment, though it’s not expected to come at a great clip. The company has six openings in Carlsbad in positions ranging from sales representatives to management, a few jobs in Alabama, and several jobs in its London office. It also operates a corporate office in Montreal.


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