Golfsmith International Holdings Inc. (NASDAQ:GOLF)
Q4 2008 Earnings Call
March 3, 2009 4:30 pm ET
Joseph Teklits – Integrated Corporate Relation
Martin Hanaka – Chairman and Chief Executive Officer
Sue Gove – Chief Operating Officer
Scott Wood – General Counsel
Janette Ramirez – Controller
Virginia Bunte – Chief Financial Officer
Hayley Wolff – Rochdale Securities
Todd Slater – Lazard Capital Markets
Welcome to the Golfsmith International Holdings LLC fourth quarter 2008 earnings conference call. Today’s call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Joe Teklits of Integrated Corporate Relations.
Thank you for joining us today to discuss Golfsmith’s fourth quarter fiscal 2008 results. Before we begin the call, I would like to review our Safe Harbor statement. Our presentation includes and our response to various questions may include forward-looking statements about the company's financial results and about future plans and objectives.
Any such statements are subject to risks and uncertainties and could cause the actual results and implementation of the company's plans and operations to vary materially. These risks are discussed in the company's annual report on Form 10-K for fiscal 2008 filed with the Securities and Exchange Commission. We issued our press release at the close of the market today. If you did not receive a copy, you can find one on our website or by calling our Investor Relations at 203-682-8200.
On our call today we have with us Golfsmith's Chairman and CEI Martin Hanaka, and Chief Operating Officer Sue Gove. And with that, I’ll turn it over to Marty.
Also joining Sue and I in Austin is Ginger Bunte, she is our departing CFO and today is officially her last day and we want to thank her for all of her diligence and hard work and contribution over the years. Thank you, Ginger.
As you may know, Sue is going to replace her as Interim CFO and additionally we have with us Scott Wood our General Counsel, and also Janette Ramirez our Controller. After my opening remarks, Sue will give you a detailed financial review and discuss some significant operating improvements in our company. And of course all of us will be available for questions at the conclusion.
While I think our team did a great job reacting as quickly as possible to the new consumer trends that took place the second half of the year, the challenging economic environment continued to create significant pressure throughout 2008, and of course accelerated in the fourth quarter. We expect in our planning for continued pressure at least through the first half of 2009.
Our focus in the coming year, like that of several other specialty retailers, will be on maintaining our strong cash position by planning continued reduced capital expenditures, carefully managing expenses and controlling inventory levels until we see signs of recovery in consumer spending GDP and overall consumer spending.
As we stated in the recent past, we have several initiatives in place to improve operating efficiencies and increase store productivity and Sue, again, will provide you an update on our progress later in the call. We will also continue to do what we can to drive sales to an improved in-store experience, optimize merchandising assortments and a targeted advertising program.
To briefly review our financial results, revenues declined 14.1% to $67.8 million in the fourth quarter of 2008 as compared to $79 million last year. Our net loss totaled $6.5 million or $0.40 per diluted share. This compares to a net loss of $3.7 million or $0.23 per share, excluding the $43 million non-cash asset impairment charge incurred in last year’s fourth quarter. We ended the year with a healthy liquidity position and a borrowing base equal to that of last year despite the difficult environment.
Store traffic was down sharply during the fourth quarter and buying patterns signaled that consumers continue to be very cautious in their spending, particularly big tickets. For example, while we were getting a higher than normal conversion rate during the holiday season reflecting that customers were coming in the store to buy, customers were clearly spending less by purchasing lower priced items, a definite move to value. Both average order value and transactions were equally off.
From a competitor’s standpoint, there was a tremendous amount of promotional activity in the fourth quarter as compared to the prior year. Much of the promotional activity began as early as October and continued throughout the holiday season with a variety of promotions.
We were more promotional as well with two major marketing pieces that we had not done in the previous year, a direct mail piece and a freestanding insert, again, over and above prior year. In addition, we offered discounts in the web throughout the holiday season.
However on the positive side of all this, is that hoping this discounting is a reality that smaller and less well capitalized competitors will not survive this downturn leaving us hopefully in a better position as we come out the other side of this great recession.
In terms of product categories, we saw a slowdown in the club business and did not get the benefit that we hoped to capture from the new product launches that were pulled forward. However, the custom club business was a bright spot within this category.
Reduced pricing on drivers also impacted sales and created some pressure on our proprietary business. We also saw softness in our apparel and accessories business during the quarter, which led to heavy increases in clearance activity for apparel, which have continued through February.
Looking ahead, we are making every effort to keep the customer engaged by enhancing a strong selling culture and an educational interactive environment for our guests. Additionally, we are seeing various stimulus programs from our vendors as they try to provide customers with value added offers, which we hope will drive business this spring.
We are also shifting our marketing spend more from direct towards retail, which we are finding to be a more effective use of our marketing dollars. We have reduced our marketing expenditure in terms of our catalog circulation with two books schedule for the first quarter down from three in last year’s Q1.
Golfsmith also continues to receive high marks at our mystery shops reflecting improvement in our service levels with current scores in the 80s after staring in the mid-70s based on third party shopping of our service in our stores so we’re pleased with our progress there.
Turning to real estate, we opened a new store in Palm Desert, California in the middle of January 2009 a 37,000 square foot box. Our big box forma has proven to be successful and we are very excited about the prospects for this store. We have two relocations this spring, one in Houston and one in Michigan scheduled to take place in April and the first of May. We remain very selective in our real estate and began lease negotiations with our landlords on current leases.
We also continue to make enhancements to our e-commerce site and are very pleased with the results. Our internet business offers highly attracted EBITDA returns and we continue to view this as an important part of our growth strategy.
In response to the environment, we are taking a microscope to our operating expenses and maintaining strict inventory discipline. We are focused on everything from contract renegotiations to labor scheduling to distribution efficiencies and basically are leaving no stone unturned. We are also taking a closer look at our merchandise assortments by looking at SKU counts, assortment mix and markdown optimization.
We not only want to manage our business for the near-term challenges, but for the long-term growth as we are confident that we have an opportunity to pick up meaningful market share as regional players exit the business and the economy improve.
Golfsmith is also a well recognized retail brand with an excellent and differentiated assortment of premium brands and proprietary labels that provide a superior guest experience. And because of this, we believe we will sustain our position as an industry leader throughout this difficult period.
So with that overview, I’d like to turn it over to Sue who will go through the numbers in much more detail.
I will first review the financials and then provide an update on some of the key initiatives we have in place that should benefit us in 2009. As Marty mentioned, for the fourth quarter of fiscal 2008, we reported net revenues of $68 million compared with $79 million for the fourth quarter of fiscal 2007. Net revenues reflect a 17.3% decrease in comparable store sales and a 23.1% decrease in net revenues from our direct channel.
Comparable store sales continue to be challenging in the current economic environment. We experienced a decrease of 19% in November and December after a decrease of 12.7% in October. Gross margins for the fourth quarter was 30.7% compared to 34.9% for the same period last year.
During the fourth quarter, we recorded a $2.2 million reclassification adjustment as a result of an analysis of advertising costs related to co-op ad spending. This resulted in a 320 basis point year-over-year increase in cost of goods sold and an equivalent reduction in SG&A. The balance of the gross margin decline was primarily the result of an unfavorable mix shift, along with some incremental promotional activity.
Operating expense dollars decreased 9% to $27.5 million from $30.2 million in the same period last year, excluding the $43 million non-cash impairment charge related to goodwill recorded in the fourth quarter of 2007. The decrease in operating expenses resulted from lower marketing spend in the direct to consumer channel, lower wages and related benefits at retail, and reduced store opening cost. These improvements were in addition to the reclassification adjustment previously mentioned.
Also in the fourth quarter of fiscal 2008 in connection with our review of long-lived assets for impairment, we recorded a charge of approximately $300,000 related to the impairment of leasehold improvement at one store. We do not, however, have any current plans to close this store in connection with this impairment charge.
As a percentage of sales, operating expenses rose by 230 basis points for the fourth quarter to 40.5% of net revenue as compared to 38.2% in the fourth quarter of 2007, excluding the $43 million non-cash impairment charge. Excluding last year's fourth quarter charge, this year's fourth quarter operating loss totaled $6.6 million versus last year's loss of $2.6 million.
Our net loss in this year's quarter totaled $6.5 million or $0.40 per share. This compares to a net loss of $3.7 million or $0.23 per share, excluding the one-time charge. For the fiscal year 2008, we reported net revenues of $378.8 million compared with $388.2 million for fiscal 2007. Net revenues reflect a 6.3% decrease in comparable store sales and a 13.1% decrease in revenues from the company's direct channel.
Total net revenues represent 53 weeks for 2008 compared to 52 weeks in 2007. Comparable store sales are calculated on a 52-week basis in both fiscal years. The company reported a net loss for fiscal 2008 of $0.5 million or a loss per share of $0.03.
Results include a $1.8 million charge for CEO severance and related costs or $0.11 per share incurred in the first quarter of fiscal 2008. This compares to net income of $2.2 million or $0.14 per diluted share in 2007, excluding the $43 million non-cash goodwill impairment charge.
As of January 3, 2009, total inventory was $90.5 million compared to $98.5 million on December 29, 2007. Average store inventory declined approximately 8%. Accounts payable at the end of the year totaled $34.9 million compared to $49 million at the end of fiscal 2007 due to lower inventory levels, as we took in fewer receipts, particularly in the fourth quarter of 2008 and the impact of timing of payments associated with the 53rd week in fiscal 2008.
Our $51.7 million line of credit was reclassified out of current liability for the current and prior year reflecting the maturity date of June 2011. Just to echo Marty's comments, we're running our business under the assumption that the economic environment will remain challenging through at least the first half of 2009.
That said we are doing what we can to drive sales and gain market share, while taking an extensive look at our organization to see where we can drive out costs, create greater efficiencies, and build a stronger infrastructure. We've talked about three areas in which we are looking to drive near-term profitability and improved cash flow.
First, we're looking to make several operational improvements that are expected to result in significant cost savings. Beginning with distribution center efficiency, we are shifting to a better mix of part time workers in our DC where we previously employed only full time workers. We also renegotiated freight contracts through a competitive bid process and we've improved processes.
These three initiatives combined will create approximately $700,000 in savings in 2009. We also initiated a zero-based budgeting model for 2009 challenging everyone to justify expenses across the board, which we expect to yield about $400,000 in savings. We eliminated non-essential overhead positions and broadened responsibilities, particularly at the middle management level, which will save another $900,000.
The renegotiation of several contracts, including legal, energy, and insurance, should result in about $500,000 in cost savings. We also engaged an outside firm to drive our lease renegotiations with landlords, and while it's premature to quantify, we do expect additional occupancy cost savings to stem from this initiative.
The second area of focus related to operating margin growth is at the store level. We expect to benefit from improved labor utilization, markdown optimization, which represents a significant opportunity in 2009, and merchandising initiatives that include SKU count reduction in selected categories and a greater focus on top selling brands.
We also continue to employ climate-based merchandising as we tailor our assortments to each market. In addition, we've made improvements in inventory management and have already achieved an 8% reduction in inventory levels per store. We expect an additional 5% reduction in inventory at the end of 2009 as we institute additional inventory discipline.
Third, we're focused on store productivity. We have worked to enhance our selling culture, which we view as a critical point of differentiation for us, by conducting training programs for our employees to ensure that they're educated on the product and have the knowledge to provide an exceptional store experience for our guests. We also look to refine our store model to optimize layout and enhance visual merchandising, and will invest where needed in top performing stores.
Through store profiling, we have identified several additional opportunities for improvements and plan to roll these changes out in the spring. While top line growth will likely remain challenging in 2009, the initiatives that we have begun to implement will, not only create cost savings and strengthen our infrastructure, but also help to drive the revenue side of the business by positioning us to gain market share when the consumer returns and if some regional players are consolidated.
Now turning to our outlook, we expect negative comp trends to continue through the first half of fiscal 2009. As we noted in our press release, for 2009, we expect sales to decline in the mid to high single-digit range with sales down in the double-digit range in the first half of the year. We expect slight improvements in gross margin aided by reduced cost and careful management of inventory.
This concludes our prepared remarks and we would now like to open up the call for questions.
(Operator Instructions) Your first question comes from Hayley Wolff – Rochdale Securities
Hayley Wolff – Rochdale Securities
I've a couple of questions for you. First, in terms of the first half versus second half outlook, it's always said that Father's Day is the golf industries Christmas, so I'm trying to understand what's the potential that the golf season is just a bust given how it overlays with the economy.
The second question is can you give a little more detail on traffic versus average ticket, and then give us some color of what you've seen January and February?
When we started the plan off, we didn't think there'd be much improvement in the first quarter from Q4 in terms of sales. We thought there would be some improvement as we cycle through this. I guess we're 16 months into this thing depending how you count, and we just felt there'd be some improvement in Q2.
Boy, I really wish I knew what the consumer was going to do, but to answer your last question, at the same time I would tell you we've seen some mitigation of the losses, so our decreases are diminishing. So, is it a trend? We're not too sure. January and February are low-volume months, March will be more telling and it builds from there.
But if the current trend continues, we're comfortable we'll make our numbers and beat them, and we're running slightly ahead of our profit plans for the first couple of months of the year. In terms of traffic and AOV, they were both down about the same amount. We had less people coming in the store and they're buying less.
In fact, our average order dropped below $100, which is unusual for us. Again, that showed that people were moving to value and they stopped buying the big tickets. Our compass category has been Pro-line clubs. So, that's it in a nutshell.
Hayley Wolff – Rochdale Securities
What about in the Southern markets?
If you looked at the markets they fall into three groups, those groups that were down by zero to ten and those markets that were down in the mid-teens, the low teens and then a couple of markets that were up more than the average, just two of those. So, there's one at each, so if you looked across the board, you wouldn't say there was a pattern. It's not about weather. Somewhat about competition, but this was across the board.
Hayley Wolff – Rochdale Securities
Just two more questions. First, can you just give a little more detail on SKU count, what categories you're looking to clean up? And then second, just walking into your stores, it looks like there's a little more of a private label initiative on accessories.
We actually have gone through every single assortment and we do it in-store and we’ve done product line reviews and we take every assortment and we break it down into four quadrants, A is everywhere then B, C, D and then there’s some seasonality and some geographic that influences what SKUs everybody gets.
We basically look at the productivity on moving 26-week basis and we’ve got a lot of SKUs out that just don’t produce. And so that’s something we’ve done across the board. And it’s not any single category. Every category kind of gets the same treatment.
But what we’ve done recently on top of that is we’ve looked at the productivity of the whole box in terms of square footage and tried to come up with what we’ll call a DDP, a direct departmental profitability, that takes into account, not only sales per square foot, but your gym ROI a rent factor, a payroll factor, an inventory carrying cost factor.
We’ve kind of looked at which businesses really work for us and it kind of leaves us to the answer there are a couple of businesses that we could do with less resources and without tipping our hand strategically, we’re making those changes but we can’t tell you which categories. Just be confident we are going to get the box to be an optimal box in terms of productivity.
In terms of private label, we made that change a year ago and we’re all private label. If you go through some of the consumable accessories tees and ball markers and brushes and on and on you’re going to find it all under our own private label. It was a terrific move. David Lowe runs that for us. He’s done a terrific job with his team and we’re real proud of it and we’re trying to keep it in balance.
It’s a category where brands really don’t matter that much. So in those areas where it’s kind of invisible we’ve introduced private label.
Your next question comes from Todd Slater – Lazard Capital Markets.
Todd Slater – Lazard Capital Markets
Could you just talk a little bit about any structural changes that you see taking shape in the market in terms of consolidation be it the institutional guys or independents or you hear anything on the PGA side and what would happen if there were some stores closed in some of your markets? What kind of a benefit do you think that might be?
And then secondly, I guess with the stock at these levels, would you guys expect to see or consider management buying shares at these prices?
I would say in terms of the second question, there have been a number of management members and board members who were buying stock up until our window closed in mid-December. This is our practice. It will probably be open for a couple weeks this quarter and then will close again because we’re so close to the end of Q1. But I think you’ll see that management has been pretty active in buying shares at good pricing.
In terms of the first question, we think that there could be a real benefit in terms of the industry structure due to this recession. We don’t really like to talk about competition, but it is a fact that PGA closed its big store in Buck Head and one of their stores is being cut in half. We understand there are a couple others that they’d like to exit. So perhaps that will happen, and if it does, that really puts us in a good position.
Todd Slater – Lazard Capital Markets
What’s the store that’s cut in half?
The Kennesaw and Gold’s Gym is taking half their box. We know that our big competitor on the west coast, which is known as World Wide Golf and operates under three different brands, has just closed a couple of stores and one in the desert and that’s a good fact. We know a store in Carolina, which was a major independent, has closed its doors in the fall, Carolina Custom Golf. We know a competitor up in the Virginia area and Maryland area closed, Mammoth Golf.
So if you looked at it, I think there’s been net about 76 closings up through October/November and we think there will be more to follow. So if there’s good news the people that get through to the other side and are healthy, I think, can take advantage of a structural change in this industry and we believe that we’ll be one of those companies.
Todd Slater – Lazard Capital Markets
One more quick question, if you could just quantify for us the extra week.
What the extra week was in terms of volume was roughly 4 million.
Todd Slater – Lazard Capital Markets
And what do you think net to the bottom line?
I don’t think that we’ve actually quantified it, but again I don’t think that it is material. Because, again, it’s during the January period, which is where our operating costs are at more of an average level and that volume is at a low level of volume. So just off of the top of my head I would say that it was probably not a profit week.
Just a footnote on that, it was just about four and the margins were the lowest week margins of the period. We go into our sale and clearance mode and our margins were like 300 basis points below prior year that week as we liquidated inventory, particularly in apparel.
And when the business really got soft in October, our weeks of supply and apparel really built and we took aggressive action to try to get as much as we could for it as soon as we could and we paid a price for it in December and that last week was clearly our lowest margin week of the period.
There are no more questions in the queue at this time. Mr. Hanaka, I would like to turn the call back over to you for any additional or closing remarks.
As we said in the last call, we were going to play defense and that involved expense controls and inventory management and capital expenditure control and proving our guest first, and while redundant it is still true. We are still on defense. Cash preservation is the mantra around here and, as we invest in better marketing spend we think that we can gain market share in this very difficult environment. We appreciate your time and attention, thank you very much.
That does conclude today’s conference. We appreciate your participation and you may disconnect at this time.
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