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On June 6st, Bill Simpson wrote an analysis of Golfsmith International (NASDAQ:GOLF). GOLF shares priced at $11.50 a share on June 15th. The text of Mr. Simpson's original writeup follows:

Golfsmith International plans on offering 6 million shares at a range of $14-$16. Merrill Lynch and JP Morgan are lead underwriting the deal. Post-offering GOLF will have approximately 16 million shares outstanding for a market cap of $240 million at $15. IPO proceeds are being used to pay down debt. Atlantic Equity Partners will own 58% of GOLF post-IPO. AEP purchased GOLF in 2002 from the company founders.

From the prospectus: 'Golfsmith is the nation’s largest specialty retailer of golf equipment, apparel and accessories based on sales.'

Founded in 1967 GOLF operates 55 stores, and also sells through catalogs and the website www.golfsmith.com. GOLF has opened 3 stores in the 2nd quarter of '06. Much like the large sporting goods stores, GOLF's 15,000-20,000 square foot stores attempt to provide an activity based experience in their stores which includes indoor hitting areas and on-site golf instruction. GOLF also sells tennis equipment in the majority of their stores and owns 6 Don Sherwood Golf & Tennis stores.

Golf clubs account for 45-50% of annual revenues. 70% of revenues are derived from retail stores, the bulk of the remainder from online and catalog sales. Note that GOLF is seeing a stronger decrease in their catalog sales then they're seeing growth in their online sales.

The sport of golfing grew immensely in popularity from 1970 through 2000. This decade however, the number of rounds of golf played in the US annually has plateaued and remains stagnant. What has grown though are the number of merchants selling golf equipment and attire.

This GOLF IPO is pretty much a carbon copy of the GGXY IPO. GGXY priced at $14 a share and is currently trading around $17 a share. Much like the GGXY offering, GOLF is a pretty straightforward, simple IPO --- They sell golf equipment and apparel through retail stores and the future strategy is to open more stores and gain a larger share of the golf market.

Competition is tough in this space. Along with other specialty golf shops GOLF must compete with the large sporting goods chains such as Dicks/Big Five/Modell's as well as broad based retailers Wal-Mart/Target and online sellers Amazon & Ebay. Oh yes, on-course pro-shops are another competitor of retailers such as GOLF/GGXY. The specialty golf retailers attempt to differentiate themselves by offering expertise that the non-specialty locations cannot provide. This is where the on-site golf instruction and indoor hitting areas come into play. Still, though, it is a very competitive space and GOLF is selling exactly the same branded equipment and apparel as all the others. Exactly the same stuff as less then 15% of all sales are from GOLF's own proprietary line of products. Largest proprietary brand is Lynx.

GOLF leases all of their store locations -- they do not own the property underneath their stores. Currently stores are scattered across the major population centers of the US, including 7 in the NYC and SF area and 6 in Los Angeles.

As noted above, Atlantic Equity Partners purchased GOLF in 2002 and since taking control has made expansion a priority. In the past 4 years, GOLF's store base has grown from 26 to the current 55. GOLF plans to continue their aggressive expansion after coming public. Plans are in place to open between seven and nine additional new stores in 2006 and between 14 and 16 new stores in 2007.

Financials

Negligible cash on hand post-offering, $22 million in debt.

4 1/2 X's book value at $15.

Sales per square foot have grown approximately 10% each of the past 2 years. Same store sales growth has been rather sluggish at 0/7% for 2004 and 2.6% for 2005.

Overall revenues have grown at a moderate pace the past 3 years as number of retail stores has grown. Top-line was up 15% to $296 million in 2004 and increased 10% in 2005 $324 million. Gross margins have remained consistent in the 35% range. Operating expenses have been slowly creeping up the past 3 years from 29% in 2003, to 30% in 2004 to 31% in 2005. Not drastic but I'd prefer to see operating expenses declining as a % of revenues as those revenues grow.

Net margins have been 1.5% in 2004 and 2 1/2% in 2005. GOLF earned 50 cents a share in 2005. Note as always this includes removing pre-ipo charges and debt servicing on debt paid off on offering. At $15, GOLF will be trading 30 X's trailing earnings.

With their aggressive store opening plan in 2006, GOLF should be able to grow revenue another 10%-15% in 2006. I think margins will be in the 2% - 2 1/2% ballpark for 2006, quite similar to '05. GOLF has not really been able to establish any economies of scale, I just don't see them able to ramp net revenues quickly going forward. The bottom line should grow pretty much in line with top-line revenue growth. This means that GOLF will probably grow the bottom line 15% of so in '06 to $0.55 - $0.60 cents a share. At a $15 pricing then, GOLF will be trading 25 X's 2006 earnings.

A glance at how GOLF compares with GGXY

GGXY - Golf Galaxy. $186 million market cap at $17 currently trading 1 X's trailing revenues. 3 1/4 X's book with no debt. Trading 25 X's 2006 earnings with a 30% expected growth in revenues.

GOLF, Golfsmith. $240 million market cap at $15. At $15 would be trading 0.8 X's trailing revenues and 4 1/2 X's book value. At $15, 25 X's estimated 2006 earnings with 10-15% expected revenue growth.

Conclusion

I wasn't thrilled with GGXY when it debuted and I'm just not enamored with GOLF either. GGXY has done okay. It did quite well in the market move up October through May as investors seemed to mistakenly think it was another CTRN/ZUMZ/VLCM etc... It wasn't and GGXY lowered forecasts last quarter. All in all though it has done okay and I'd expect similar from GOLF.

I'm just not thrilled with this space though. Golf retailing really has been a flat segment the past 5 years, but competition has grown swiftly. You've got an ever increasing number of well funded and popular competitors going after a segment pie that hasn't grown much overall.

GOLF, much like GGXY in my opinion, just doesn't have enough to differentiate themselves to really outgrow that competition. Plus, recently the hugely successful general sporting goods retailer, Dick’s Sporting Goods, announced the opening of golf specialty stores. I would be willing to wager that in the metro areas in which DKS attaches a golf specialty store to their existing stores, both GGXY/GOLF will see same store sales weakness. DKS is just one of a slew going after the same pie, and these smaller specialty players like GGXY/GOLF really have their work cut out for them.

I think GOLF will do okay in a decent economic climate as new stores drive solid 10-15% annual earnings increases. I think though that a GGXY/GOLF will really struggle in a stagnant or slowing economy and witness significant same store sales slowdowns. Those 2% - 2 1/2% margins could easily disappear if the overal segment pie shrinks at all.

Decent IPO, I simply do not like the heavy competition coming from many angles, all of whom are selling the same products as GOLF. Not nuts about the margins here, margins indicative of a tough competitive landscape. I'm passing here.

Source: An In-Depth Look at Golfsmith International's IPO (GOLF)