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Golfsmith International Holdings, Inc. (NASDAQ:GOLF)

Q1 2009 Earnings Call Transcript

May 6, 2009 9:00 am ET

Executives

Jean Fontana – Investor Relations, ICR

Martin Hanaka – CEO and Chairman

Sue Gove – EVP and COO

Analysts

Derek Leckow – Barrington Research

Hayley Wolff – Rochdale Securities

Operator

Good day everyone and welcome to the Golfsmith International Holdings LLC first quarter 2009 earnings conference call. Today’s call is being recorded. For opening remarks and introductions, I would like to turn the call over to Jean Fontana of ICR. Please go ahead Ms. Fontana.

Jean Fontana

Thank you. Good morning everyone. Thank you for joining us today to discuss Golfsmith’s first quarter fiscal 2009 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 SEC. We issued our press release this morning. If you did not receive a copy, you can find one on our Web site or by calling Investor Relations at 203-632-8200.

Presenting on our call today we have Golfsmith's Chairman and CEO, Martin Hanaka, and Chief Operating Officer and Chief Financial Officer, Sue Gove.

And with that, I’ll turn the call over to Marty.

Martin Hanaka

Thank you. Good morning all. We appreciate your interest and time today. With Sue and myself today, and we have also Scott Wood, our General Counsel; and Janette Ramirez, our Controller. After my opening remarks, Sue will provide a detailed financial review and then discuss the important progress we’ve made and operating improvements at Golfsmith. Naturally, Q&A will follow.

While the current recession, some say the Great Recession, continue to pressure all retail, consumer, discretionary categories, golf certainly is no exception. We did experience top line pressure, although we fared better than planned. We have seen some stabilization and are also encouraged by the OEM efforts to stimulate golf and drive traffic.

Additionally, we’ve been able to cut costs, reduce inventory levels, and manage cash quite effectively. We are very proud of our Q1 balance sheet. In fact, our liquidity position reflects $16.4 million of available borrowings at the end of Q1 as compared to just $2 million last year. Great job by all at the company.

While comp sales dropped 11.7%, this was due to a slight decrease in transactions, but a larger drop in AOV or average order value. The consumer is spending less, particularly on Iron Set and other big ticket categories. Our conversion has actually improved nicely which is very rewarding giving our Guest-First commitment and investments. In fact, at store manager, bonus criteria this year is based on Guest-First, first time ever at Golfsmith.

Our net loss totaled $5.1 million, or $0.32 per share and this compares to $5.4 million or $0.34 per share in 2008. In terms of top line, February and March were better than January, which continued our Q4 trend. Our toughest markets were aligned directly with the national economic pattern. Our average order value patterns were consistent across all three channels.

OEMs have been very aggressive in seeking share and we’ve seen over 25-plus vendor promotions consistently over the last 60 days. We expect this to continue through the summer. We’ve also seen some solid new product launches. The TaylorMade R9 has become the number one selling driver, the new Pro V1 golf ball, TaylorMade Burner Irons, and the Callaway Diablo family. Clubmaking remains challenged continuing a several year trend. Heads will now just be carried in 30 stores.

Our margins reflect a higher than normal purest [ph] level of inventory and lower than planned margin in apparel. Our weak supply, now under control and we were basically just 20 basis points off of our control margin plan even given those circumstances.

Our team opened a new Xtreme format store of 37,000 square feet in Palm Desert in January, and we also just relocated two stores in April in Troy, Michigan as well as The Woodlands in Houston, Texas, both are also large format boxes.

Sue will provide a good deal of color on real estate renegotiations and other costs takeout initiatives in a moment.

(inaudible) a difficult top line marketplace has caused us to manage costs, cash, and inventory. We are in a market share gain and have implemented a number of non-discounting initiatives. These have really differentiated Golfsmith, such as Go Sergio, whereby having won the Masters, their purchase would have been free only at Golfsmith. We also did 30% more on trade-ins, something many of our competitors don’t do. And we just launched last week 20,000 free rounds of golf with your $125 purchase at Golfsmith and there are some more to follow. We think these differentiated and give people a reason to pass the competition.

Inventory again is clean and we are very good meaningful open to buy. And we continue to remain a prompt payer in our space. Importantly, we see structural changes occurring in the off-course golf universe. According to NGF, at the end of 2008, the national change had 6% fewer doors. The regional change had 6% fewer doors. The mom and pops had 16% fewer doors, or a net change of 12% fewer doors than in the end of the prior year, which means the structural change will only continue in 2009, and healthy companies like Golfsmith can take advantage of that opportunity.

Finally, we’ve made some changes in our clubmaking and overall catalog marketing strategy. We mailed two versus three books for Clubmaker, continuing that trend and reduced page count as well. In fact, our annual book was 164 pages versus 220, and given the industry trend we think that is appropriate. We also mailed one fewer consumer catalog in the quarter with a reduction in circulation. But most importantly we are reinvesting those dollars with positive results and payback into our retail channel and Web marketing initiatives. This is a path we will continue throughout 2009.

Now, I would like to turn it over to Sue Gove. Sue?

Sue Gove

Thanks, Marty. Good morning everyone. As Marty mentioned, the first quarter of fiscal 2009, we reported net revenues of $68.8 million compared with $79.2 million for the first quarter of 2008. The 13.2% decrease in total revenues was due to a 24.8% decline in net revenues from our direct to consumer channel and a decrease of 11.7% in comparable store sales.

Sales continue to be pressured by the recession; however, consumers are responding to the increase in value based promotions, the leading manufacturers introduced during the first quarter of this year.

Gross margin for the first quarter was 33.1% as compared to 34.3% for the same period last year or a decrease of 120 basis points. Gross margin declined 40 basis points due to price reductions designed to drive sales of certain items and higher seasonal markdown, 20 basis points due to the price repositioning of used clubs and 80 basis points resulting from a change in estimate related to the classification of vendor income earned from cooperative vendor programs that was implemented in the fourth quarter of last year. These reductions were partially offset by an increase of 20 basis points in gross margin due to the renegotiation of freight contract and lower distribution center expenses.

SG&A expense declined 14% to $27.8 million in the first quarter of 2009 compared to $32.3 million in the same quarter of last year. As a percentage of sales, SG&A declined 40 basis points in the current year quarter to 40.4% of net revenue compared to 40.8% of net revenues in the first quarter of 2008. The decrease in SG&A was due to a 50 basis point reduction in advertising as a result of a change in our marketing strategy and 100 basis point decrease due to the change in estimate related to vendor funding programs as previously discussed.

SG&A, this year’s first quarter also included $500,000 non-recurring charge for severance associated with the departure of the company’s former CFO, while last year’s first quarter included $1.8 million non-recurring charge related to the departure of the company’s former CEO and other organizational changes. The one-time charges represented a net reduction to SG&A of 160 basis points this year. These variances were partially offset by an increase in the fixed costs raised as a percentage of sales resulting from the sales decrease.

Store pre-opening and closing expenses were $348,000 in the first quarter of fiscal 2009 as compared to $28,000 in the first quarter of 2008. The increase in store pre-opening and closing expense was due to the opening of our Palm Desert, California store in January 2009, and the relocation of our Troy, Michigan store in April 2009. Whereas in the first quarter of 2008, there was no new store openings and only minimal costs incurred due to the closing of two stores due to expiring leases.

We ended the quarter with an operating loss of $5.4 million for the first quarter of fiscal 2009 compared to a loss of $5.2 million for the first quarter of fiscal 2008. During each of the three month periods ended April 4, 2009 and March 29, 2008, we recorded approximately $700,000 of income tax benefit on pretax loss of approximately $5.8 million and $6.2 million, respectively. Net loss totaled $5.1 million or $0.32 per share based on 16 million fully diluted weighted average shares outstanding. This compares with a net loss of $5.4 million or $0.34 per share based on 15.8 million fully diluted weighted average shares outstanding in the three months ended March 29, 2008.

As of April 4, 2009, total inventory was down 6.3% to $94.1 million as compared to $100.5 million at the end of Q1 of ‘08.

Accounts payable at the end of the first quarter totaled $55.1 million compared to $40.9 million at the end of the first quarter of fiscal 2008 due entirely to buying closer to need and due to extended vendor payment terms negotiated last fall as part of an initiative to revamp our vendor terms and conditions.

As of April 4, 2009, we had $45.2 million of outstanding borrowings under our credit facility, and borrowing availability, as Marty commented, of $16.4 million. This compares to $65.4 million of outstanding borrowings under our credit facility, and $2.2 million of borrowing availability at March 29, 2008.

I would like to briefly update you on our progress on the various initiatives we outlined on our previous call. First, we made several operational improvements that have and are expected to continue to result in significant cost savings in the future. An example is the renegotiation of freight costs that led to reduced shipping fees in the first quarter of this year.

Our zero-based budgeting model for 2009 yielded about $300,000 in savings for the first quarter. The renegotiation of several contracts is now complete including professional services, energy and insurance, which will result in about $500,000 in cost savings in fiscal 2009. We also engaged an outside firm to drive our lease renegotiation with landlords. And while it is premature to quantify totally, we are seeing additional occupancy cost savings from this initiative.

The second area of focus related to operating margin growth is at the store level. We’ve seen benefits from improved labor utilization, markdown utilization, and merchandising initiatives that include SKU count reduction in selected categories and a greater focus on top selling brands. In addition, we made improvements in inventory management. We expect an overall 5% reduction in inventory at the end of 2009 as we institute additional inventory discipline.

Third, we are 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 are 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 second and third quarters of this year.

This concludes our prepared remarks and we would now like to open the call for questions.

Operator?

Question-and-Answer Session

Operator

(Operator instructions) We will take our first question from Derek Leckow with Barrington Research.

Derek Leckow – Barrington Research

Thank you. Good morning

Martin Hanaka

Good morning.

Derek Leckow – Barrington Research

I just had a question on direct business being down 24.8%. I understand you guys did reduce circulation. Is the percentage decrease in costs in the direct business about the same?

Martin Hanaka

No, our cost savings is greater than that, and the reinvestment in retail paid off and into the Web, search engine, key word purchases and so forth. So if you look at our business, Derek, 79% of it has basically been retail. Retail has been getting just a little over 50% of the spent. We feel our share of voice in many markets, and in certain times of the year it’s been inadequate. And when we spend more we look really hard at clubmaking and catalog and the returns there and it’s a better decision for us to reinvest. So we would expect to continue this throughout the year. We are managing it closely. But our inspection of our first quarter results says this is the right path to follow.

Derek Leckow – Barrington Research

What I was trying to get at was when you’ve reduced the catalog spend, there is probably a corresponding impact on store comps because you are shipping catalogs to people presumably who are also near a store. And so I am trying to gauge, is this the new level of sales within the direct channel? Is this kind of what you are thinking it will remain or –?

Martin Hanaka

No. We don’t think it will necessarily remain at this level because we still are mailing into the catalog markets, which are not a complete overlap with our retail trade areas. So it’s not a 100% overlap. There are many markets where done [ph] catalog where there are no retail stores. We are going to keep communicating with those guests all throughout the year. And the retail guests who may have got the catalog are definitely going to be getting some type of mail or communication from us. In fact, over the course of the year, we expect that we will increase our retail circulation, let’s put it that way, by 50%.

Derek Leckow – Barrington Research

So that circulation goes up quite a bit –

Martin Hanaka

It goes up quite a bit.

Derek Leckow – Barrington Research

I noticed you are not shipping out those – many of those huge catalogs. I mean at least around the office here kind of pulling my people I work with, they didn’t get their huge Golfsmith catalog. I think that’s probably part of the reason we see the cost decline, right? Shipping as many of those big books out.

Martin Hanaka

Yes, what you mentioned was a 220 page book mailed, it’s actually in Q2. And this year it was an 84 page book.

Derek Leckow – Barrington Research

Okay, very good. Then if I could just switch over to the balance sheet here for a second. You said you had – you’ve renegotiated some vendor payment terms. And I wondered if you could elaborate on that as it relates to your payables, which had risen, but I wonder if some of that might be timing here because you have such a huge quarter coming up, and is that a timing function or is that more of the renegotiation of the vendor terms?

Martin Hanaka

Well, basically we have spoken with each of our vendors as we do every year, and last year made it a priority to look for extended dating where it made sense. We have gotten meaningful changes in a lot of vendors that are annual. We also have a couple of window that are seasonal where we also have additional dating. And then finally, we’ve had a number of power buyers. We’ve had power buyers with six months dating where vendors are trying to move inventory. We’ve been selective on that but that gives us a chance to sell it before we have to pay the bill. And that’s what you are seeing in that number. I just want to reiterate it again, we are the promptest payer in the business, we have been and we will continue to be. So that’s a real number based on a lot of hard work by a lot people in securing these terms.

Derek Leckow – Barrington Research

Is that something you think will repeat again next year in going forward or is it something that’s sort of a one-time in nature because –

Martin Hanaka

This is a path we are on. It will repeat. We expect to enhance it as we get into next year’s negotiations, which will take place in September, October, November.

Derek Leckow – Barrington Research

All right, great. Well, thanks a lot and good luck with your peak season here.

Martin Hanaka

Thank you very much.

Operator

Moving to our next question from Hayley Wolff with Rochdale Securities.

Hayley Wolff – Rochdale Securities

Hello.

Martin Hanaka

Good morning.

Hayley Wolff – Rochdale Securities

Can you give a little color on what you are seeing in the month of April and May, since we are getting into the prime golf season.

Martin Hanaka

Yes, we see that the pattern from first quarter is slightly improving. Again, some of the times we’re still negative of course in our comps. But we feel good. We feel we are in a good place right now. A part of it is you know I think the golf industry has recognized that we are competing in discretionary space. So it is not just about playing golf, it’s about taking business from other industries. And what you are seeing is our vendors become very aggressive. In fact today, as of this morning, we had 32 different vendor promotions out there. For getting our 20,000 free license, if you had a free 6-Iron you can get free sport shoes. There are five different free Fairway Wood offers of one shade [ph] perform or another. You get to golf with a Pro. The sport devil [ph] offers. There’s three buy-two-get-one free offers. By the way these are margin neutral for us. There’s 50% trade-in bonus and there are two, four, six, eight, it’s like a dozen free items with a purchase out there. So, I think what’s happening is everybody is trying to go after the business, take share and that’s driving traffic. If you have been today (inaudible) pulling the margin line and I think it’s going to lead for us. We are on plan, basically – and the bottom line is we are on plan.

Hayley Wolff – Rochdale Securities

How are these promos affect your average ticket or your same store sales in the second quarter?

Martin Hanaka

Again, we are on plan. So in the aggregate we feel okay. When I readily [ph] selling these items as add-ons, absolutely, I like that to get that extra sale. And in normal times I think the promos go away in normal times. We get to add to the ticket and double the average order value. But now we are fighting for every dollar we can get we are supporting all these promotions as best we can.

Hayley Wolff – Rochdale Securities

But it sounds like the comp turns are maybe better than you thought coming into the beginning of the year?

Martin Hanaka

Again, slightly better, but we are on plan. And as you know, June is the big month for us. Every week it’s bigger, and June we have the biggest week of the year and the third biggest week of the year. So, it’s all about bad day and biggest peak.

Sue Gove

In first quarter, we did exceed our plans somewhat or slightly better than planned.

Hayley Wolff – Rochdale Securities

All right. It seemed like it. Can you talk about – given all the discounting that’s gone on, what kind of conditioning are we going to see with the consumer in terms of their appetite to buy $500 drivers next year. I know the R9s premium price is selling well. But just in general do you think it’s going to become greatly difficult to get a guide of buying (inaudible) driver?

Martin Hanaka

I think it all depends on what happens with the economy. Our driver business by the way is very good. And the problem is that in the Iron Sets with regard to big ticket and our average order value there is off about 10%. So selling same kind of units you get a 10% decrease. But I’d expect that golf will ultimately rebound when the economy rebounds. And once you see some GDP growth I think you are going to see two or three months later that the consumption will increase and then I think the vendors will lean off of these promotions. And we can get back to a normal environment. And that happens, I think there is going to be a lot furbish [ph] in the game. I think the structural change is some that can only continue because there were 298 closings last year. It netted 197 because there were some openings. I don’t think there are lot of openings this year. So, this is natural effect, this recession is putting a lot of people out of business. We are getting calls every other day for regional business, it’s for sale, looking for cash, closing a couple doors. So I think those who get through this are going to get an opportunity to prosper.

Hayley Wolff – Rochdale Securities

Do you have corresponding square footage data to the number of doors that closed?

Martin Hanaka

I don’t. This is not NGF, and frankly what they do is they have the complete database and they contact each and every golf course at retail every single year. So, it’s done one at a time. I don’t know if they’ve ever aggregated the square footage.

Hayley Wolff – Rochdale Securities

Okay, thanks a lot.

Martin Hanaka

Thank you.

Operator

At this time, it does conclude the question and answer session today. I would like to turn the conference back over you for any additional closing remarks.

Martin Hanaka

No, we have no further comments. Thank you again for you time, interest, and attention today. We look forward to continue our plan in the second quarter. Thank you.

Operator

That does conclude today’s conference. Thank you for joining and have a good day.

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Source: Golfsmith International Holdings, Inc. Q1 2009 Earnings Call Transcript

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