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Golfsmith International Holdings, Inc. (NASDAQ:GOLF)

Q1 2010 Earnings Call Transcript

May 5, 2010 9:00 am ET

Executives

Jean Fontana – IR, ICR, Inc.

Martin Hanaka – Chairman and CEO

Sue Gove – EVP, COO and CFO

Analysts

Hayley Wolff – Rochdale Securities

Jennifer [ph] – Lazard Capital Markets

Casey Alexander – Gilford Securities

Harold Citron – Creditntell

Operator

Good day everyone and welcome to the Golfsmith International Holdings, Inc. first quarter 2010 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. Please go ahead, ma’am.

Jean Fontana

Thank you. Good morning, everyone, Thank you for joining us today to discuss Golfsmith’s first quarter fiscal 2010 results. As a reminder, our presentation includes and responses 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 which 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, fiscal 2009, filed with the SEC. We issued a press release this morning. If you have not received a copy, you can find it on our Web site or by calling Investor Relations at 203-682-8200.

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

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

Martin Hanaka

Thank you and good morning everyone. It is a pleasure to be with you to share our results. Also joining Sue and myself in Austin, Texas is Janette Ramirez, our VP, Controller.

The industry continued to shrink albeit at a slower rate. There is some economic factors but we see that beginning to stabilize. It's more about the conditions. I think the first indicator is rounds played in this quarter; January was down roughly 19%; February, 22%; March was just down 4% as we were in the last couple of days. So year-to-date, rounds played are down an aggregate of 12.4%, but down 5% in the last six months. So the overall conditions haven't been the best.

Our sales in January and February were down low single digits. I guess the best way to describe it is a seesaw pattern. We came back in March with a slight increase and then up only down 1% for the quarter, and April is slightly better than our Q1 results. Weather certainly was a factor in what is a seasonally sensitive business. And as we came out of February, understanding that March was as big as January and February combined, we thought we had a shot up on the quarter out and almost dead.

When you look at it by markets, again, if you benchmark against rounds played, we have the same pattern. There is a gap, our results are better market to market and a lot of this depends on where you have stores, and let’s think about Texas where we have a number of stores, rounds played have been now 25% year-to-date but recently showing promise for us.

Retail clubs was above company average, consumables was down 6%, soft lines was up strong double digits and the mix now has moved from about 15% of our total to almost 18% of our total in the store and tennis was down about 10%.

In terms of our margins, we see the positive effect of soft line is occurring and our proprietary business has moved from 8.6% of our total to 9.3%, and that is very promising particularly because those results do not include MacGregor, which just launched on March 31.

When we compare ourselves to Golf Datatech, we see that our market shares continue to improve. In fact, in terms of units, we were 9% better in unit share and in terms of dollars we were 7.3% better; so roughly 7% to 9% delta in our favor. We think this is due in large part to our promotions, our Win with Phil effort, and particularly our Play Better Custom Fit Guarantee, we’ve seen a nice lift as a result of that.

We have a backlog of some $2 million as I sit here today as we built up our business and have decided to extend this through Memorial Day. So Q1, I guess, in a word is about stability as goes club, so goes Golfsmith. And so while we are not thrilled with the results, we think they are solid. We would like you to know we are healthy right now, we are liquid, we are current in inventory, we are taking share, we believe we are headed in the right direction, especially retail and our Web business, and see some improvement in catalog which has continued as we get into the second quarter.

I'm going to turn over to Sue now and then I will close with a few forward-looking remarks. Sue?

Sue Gove

Okay. Thanks, Marty. Good morning everyone. As Marty mentioned, the first quarter net revenues were down 1% in comp-store sales, $67.6 million compared to $68.8 million, 1.7% decrease overall in revenues and additionally a 13.5% decline in revenues in our direct-to-consumer channel.

Sales were negatively impacted by the cold and wet weather condition during the first quarter of 2010 relative to the same period last year. In addition, as Marty mentioned, rounds played for the quarter ended April 3 were down 12.4% according to Golf Datatech.

However, we are encouraged that consumers are responding very favorably to the new product launches that rolled out throughout the first quarter and the successful marketing efforts we put in place to enhance our brand and drive traffic.

An example of this is our Custom Club Play Better Guarantee program, which significantly increased the sale of custom clubs in the first quarter of this year.

Gross margin for the first quarter increased 60 basis points to 33.7% as compared to 33.1% for the same period last year. The gross margin improvement consisted of 70 basis point increase associated with less promotion in the current year quarter and a 30 basis point increase due to improved physical inventory result as compared to the prior-year first quarter.

These increases were partially offset by a 40 basis point decrease in vendor allowances associated with a reduction of cost of sales this year compared to last year. The vendor allowances were shifted to SG&A to offset specific advertising costs.

SG&A expenses were relatively flat at $27.9 million in the first quarter compared to $28 million in the same quarter last year. As a percentage of net revenue, SG&A increased 41.2% in the current quarter compared to 40.7% in the prior year. In absolute dollars, SG&A decreased $100,000 due to $400,000 expense incurred in the current year related to new stores, offset by a non-recurring charge of $500,000 for severance to our former CFO last year.

Store pre-opening and closing expenses were $250,000 in the first quarter of 2010, compared to $150,000 in the first quarter last year. The increase in store pre-opening and closing was due to store openings in Overland Park, Kansas and Brea, California in April 2010. During the first quarter of 2009, we opened Palm Desert, California and also relocated our Troy, Michigan store.

We ended the quarter with an operating loss of $5.3 million for the first quarter of fiscal 2010 compared to an operating loss of $5.4 million for the first quarter of fiscal 2009. During each of the three-month period ended April 3, 2010 and April 4, 2009, we recorded approximately $700,000 of income tax benefit on pretax loss of $5.5 million and $5.8 million respectively.

Income tax expense for the period deferred from the amount which would have been recorded using the US statutory rate of 34% due to changes in our valuation allowance.

Net loss totaled $4.8 million, or $0.30 per share in the current quarter compared with a net loss of $5.1 million or $0.32 per share in the three months ended April 4, 2009. As of April 3 this year, total inventories decreased $6.7 million to $87.8 million as compared to $94.1 million at the end of Q1 ‘09.

We had $42.8 million of outstanding borrowings under our credit facility and borrowing availability of $24.5 million. This compares to $45.2 million of outstanding borrowings under the credit facility and $16.4 million of borrowing availability at the same time last there.

To comment on a few of our strategic initiatives. First of all to improve retail, as we said, we are seeing increased traffic in our stores and we are taking proactive steps to increase our conversion rate at our stores through improved selling techniques and better tracking of metrics.

Second initiative, new store growth as previously mentioned Overland Park, Kansas; Brea, California opened in April and Brookfield, Wisconsin will open later in May. We are also very excited about opening in these two new markets for Golfsmith and providing our superior assortment, service and customer experience to these markets.

Third, operational excellence; we continue to take cost out of the business through our competitive building process improvement processes. We also recently reorganized our merchandising area to more appropriately streamline our store allocation and replenishment function to ensure the right product is in the right store at the right time.

Marty also commented on the gross margin improvements that we are seeing and the proprietary mix penetration shift up, which is also aligned with our strategic plan. So with all of that we remain optimistic about our ability to execute our plan with these strategic initiatives in place.

Marty now has a few additional comments.

Martin Hanaka

Great. Thank you, Sue. There are few factors that we are thinking about as we go into our holiday selling season because it is Christmas in the golf industry. NGF says rounds played essentially will be flat. There'll be some seasonal correction depend on where you’re living, but overall we are looking not for growth in rounds played.

Our marketing spend is going to be flattish to up slightly. We are seeing a number of competitors have steeply accelerated their spending. We don't intend to do that. It's kind of like Sue mentioned on the margins, we’re really trying to build our margins. So you're not going to see us live with any discounting.

As earlier said, this could be a market share gain and at Golfsmith we have to continue to differentiate without discounting. That's our approach to the business. We are specialist, we are the leaders in the off-course space where people come to us, they want to get custom fit. So they can play better. So you will see us doing things, so a customer always will get something extra at Golfsmith. But we are not going to live through discounting or not going to spend frivolously.

Having said that May is free golf month at Golfsmith; we are giving away 50,000 rounds of golf with the $99 purchase. We’ve partnered [ph] over 70 courses and we think that’s a catalyst that will get people next reason to pass the competition. And in June, we’ve got something very special plan for Father's Day, again without discounting and without crazy spending.

Having said that, there are a number of things that are factors we have to consider in June. Last year, if you remember, there were a lot of free club giveaways. Fortunately, we are in the midst of a strong Iron year and our Play Better Guarantee is helping us take share there. And we think hopefully that could be a watch for us going forward.

With those comments, we would like to open up the floor to questions.

Question-and-Answer Session

Operator

(Operator instructions) And we will take our first question from Hayley Wolff with Rochdale Securities.

Hayley Wolff – Rochdale Securities

Hi, guys.

Martin Hanaka

Hi, Hayley.

Sue Gove

Hello.

Hayley Wolff – Rochdale Securities

I just had a couple of questions. First, private label’s influence on gross margins in the quarter.

Martin Hanaka

We haven’t calculated that. But it has essentially been very important for us. I don’t have a number to give you, though, Hayley.

Hayley Wolff – Rochdale Securities

And then, how has the MacGregor launch gone so far?

Martin Hanaka

It’s gone fine. In fact, every week we see unit increases. In fact last week’s units were double the week prior. So it’s got legs and we feel very good about it. The quality is phenomenal. It’s being made in the same factories as some of the best premium OEM brands that are out there.

Hayley Wolff – Rochdale Securities

The price is fairly expensive. I mean, what’s the selling proposition on that?

Martin Hanaka

Yes, there is probably – if you just look at Irons, the selling proposition is to be $100 below the comparable product from an OEM. And then they have promotion. The launch give you gift card if you brought ours. So besides the $100 delta you got something extra in the way of a gift card. That was for the launch. There are other promotions coming up as you go through the summer and you will see us be active. But this is good product. We just sit and swap the MacGregor label on some basic product as you see some other stores. Ours is good product and we want to maintain its quality, value proposition. So we will promote it.

Hayley Wolff – Rochdale Securities

Okay. And then in terms of April, you are kind of careful in parsing your words. I am just trying to understand is April – March, it sounds like it had to be up.

Martin Hanaka

We are happy with April.

Hayley Wolff – Rochdale Securities

Is April better than March or April better than the first quarter?

Martin Hanaka

Yes, we are very happy with April.

Hayley Wolff – Rochdale Securities

Okay.

Martin Hanaka

Yes.

Hayley Wolff – Rochdale Securities

And then in terms of thinking about a transition of positive comps, last year you had a lot of discounting. So this year, theoretically we should get more 249, 299 and then – plus Iron sales that should drive ASPs higher. How do we think about relative to units and then relative to comp-store growth in your big order?

Martin Hanaka

Yes. The big category that’s at risk is drivers because that was where you had Free Fairways, Free Hybrids, free everything going on. I don’t think anything else in any other category is so substantial that we can’t overcome it. In fact, there is lots of stuff going on with balls and wedges and bags and shoes. I mean, we are very active there. The big one is can we overcome the drivers into the year ago. Callaway, as you know, had some special offers and tailor-made.

But, yes, we think at those more popular price points, hopefully we can overcome it. But if not we believe this great Iron year could washout the effect of it.

Hayley Wolff – Rochdale Securities

Do you expect the driver category to be down – it could be down in units this year?

Martin Hanaka

I expect it will be down in units, yes.

Hayley Wolff – Rochdale Securities

Okay. All right. Thanks a lot, guys.

Sue Gove

Thank you.

Operator

(Operator instructions) And we will take our next question from Todd Slater with Lazard Capital Markets.

Jennifer – Lazard Capital Markets

Jennifer [ph] for Todd. Just had a question, it’s good to see that you are going to be less promotional but could you talk a little bit about the competitive environment and what’s going on there?

Martin Hanaka

Yes. The competitive environment is inconsistent market to market. We have some places where we’ve seen some real heavy increase in marketing spend that we would think would be unaffordable for our business. But we haven’t seen across the board discounting anywhere. There are pockets where you’ve got a strong local person doing something unusual, but overall that’s a very rational marketplace.

Jennifer – Lazard Capital Markets

Thanks. Are you a little worried about lowering your marketing spend given increases from competitors in some areas?

Martin Hanaka

We are not going to lower our spend. As I said, it’s flattish to up slightly. But we will be very competitive, still better buying and better planning, better circulation, I think we will be stronger than we were a year ago for sure.

Jennifer – Lazard Capital Markets

Okay, great. Thanks. Good luck.

Martin Hanaka

Thank you.

Operator

And moving on, we will take our next question from Casey Alexander with Gilford Securities.

Casey Alexander – Gilford Securities

Good morning.

Martin Hanaka

Good morning.

Casey Alexander – Gilford Securities

First of all, I think you guys have done a very good job managing through this cycle that we’ve been through. I mean there is a lot of people who wondered whether or not you guys would make it. I think you’ve really done a good job managing the balance sheet. Now Marty, when you say that you almost pull the quarter out, I am not sure I understand what that means. What would pulling the quarter out have looked like?

Martin Hanaka

In terms of comp sales, if we had had better sales to offset the decreases we had in January, February due to weather and rounds played being down, we thought we would pull out the quarter in terms of comp sale. That’s it, pure and simple.

Casey Alexander – Gilford Securities

Okay. Across the breadth of the domestic market here, how many competitive door closings do you think there have been since last year?

Martin Hanaka

We were trying to calculate that and we gave the longitude number that’s somewhat outdated now. NGF usually publishes that number and hasn’t that I’ve seen. So if you recall, the last two, three years it was down 22%. We thought that trend will continue, maybe not at the same rate. But I would guess there will be a 10% or 12% door closing factor this year. So 1,250 – there used to be 1,800 five years ago, 1,250, it will be 1,100 doors I guess at the end of the year, and that’s a guess. But it is a positive factor. I just don’t have the actual data.

Casey Alexander – Gilford Securities

All right. So you have a 1,100 doors closing –

Martin Hanaka

150 roughly, 125, 150 closing; 1,100 remaining.

Casey Alexander – Gilford Securities

Okay, right. All right. So on that basis though, you would have to say that you are gaining share just from competitive door closings?

Martin Hanaka

Depending where they are. A recent closing was in St. Louis where Discount Golf closed 15 doors. We weren’t in any of those markets. So the answer is that’s not definite. The other one is if you look at rounds played, New England was up 32% for last period. And we have zero stores there. So even where it’s growing we don’t necessarily have stores. So, today, the exact science.

Casey Alexander – Gilford Securities

I can appreciate that. I believe that your release said that you felt like you took share from the competition as a result of the Callaway Driver promotion related to the Masters.

Martin Hanaka

We did. We are really pleased with that results. Yes.

Casey Alexander – Gilford Securities

Okay. Without some of these factors, do you have any sort of modeling as to where do you think same-store sales would have been without some of those tailwinds?

Martin Hanaka

No. We don’t have a model on that. It would be conjecture. I am sorry.

Casey Alexander – Gilford Securities

Okay. (inaudible) promotion if I calculate it right was about 1.5 drivers per store per day. And this is right in the middle of the key point of the selling season, right around the Masters when everybody is getting cranked up. What would you normally expect to do per store per day?

Martin Hanaka

We don’t calculate that. And if we do, we wouldn’t share it for competitive reasons. But again we believe that it’s not necessary to discount great new product which is what we are all about. We are into selling third generation product at $100, $150 price points. We do, we have those price points, but we want to sell new stuff to people. So these promotions are important to establish us as the doors that have innovative product all the time.

Casey Alexander – Gilford Securities

All right. Okay. Thank you.

Martin Hanaka

Thank you.

Operator

We will take our next question from Harold Citron with Creditntell.

Harold Citron – Creditntell

Good morning, gentlemen. Quick question regarding the marketing spend. You’ve mentioned in general some competitors are “ramping up” and in your mind too early. Do you have any names for who do you think?

Martin Hanaka

I wouldn’t share that. But I would say it’s too early to guess they’ve ramped up their spending. We have a business plan, we are going to make our plan. We will stick to it. And it’s for competitive spending at a healthy level, but not be really rapidly spending more. As we said last quarter, we are carefully moving off. The key is careful. We are not out of this yet. We don’t see rounds played going up. We don’t see big demand. The economy is still lag in a number of ways. So we are just – so we are going to make money this quarter and next quarter. We don’t want to through the baby out to hit an artificial comp at this juncture.

Harold Citron – Creditntell

Sounds good. Few questions. Are you looking at any sort of forecast to a point where you do see rounds going up, whether it’s either later this year or 2012, 2013?

Martin Hanaka

I can’t forecast that. NGF does a lot of work on that. I think certainly it’s stabilized and you will see slight increases, flattish. It’s not going to be robust growth at any time. But we think this summer the people are going to get on play. They love the game, they want to play their game, I think there has been pent-up demand in equipment and rounds played. People had cabin fever. You could see it; it’s started to move in April. So yes, we think as we get through the summer barring some unusual event, I see people really getting out there and playing the game they love.

Harold Citron – Creditntell

Sounds good. Last quick question, I came on to the call a minute late. You mentioned with the drivers. Did you give out a percentage of sales that the drivers –

Martin Hanaka

No. We did not.

Harold Citron – Creditntell

Okay. Well, thanks again. And good luck with the year.

Martin Hanaka

Thank you, very much.

Operator

And we have a follow-up question from Hayley Wolff with Rochdale Securities.

Hayley Wolff – Rochdale Securities

Hi, there.

Martin Hanaka

Yes.

Hayley Wolff – Rochdale Securities

Can you comment on where you are in terms renegotiating the credit line and then sort of any incremental SG&A savings that we can look for the remainder of this year?

Martin Hanaka

Sure, I’ll let Sue handle both of those and while you are off the line Hayley Sue has calculated – the proprietary impact on our total margin was 20 basis points in the quarter.

Hayley Wolff – Rochdale Securities

Okay.

Martin Hanaka

Sue, do you want to talk about –

Sue Gove

So, Hayley, your first question was about the line of credit and our line of credit matures in June of 2011. So we are in conversation with a number of banks and really getting a feel for the market and understanding pricing, just overall market sensitivity. So right now we are staying very close to it, but are not doing anything immediately. Again, feel like we’ve got lots of options.

And on the expense side, in terms of cost take out, we have a plan for the year that has still cost take out coming. We’ve laid that out in the plan. I believe what we communicated in the past is that it’s an excess of $1.5 million for this year. And we continue to accelerate that number. So we continue to identify new opportunities and ways that we can improve processes, improve our cost structure.

Hayley Wolff – Rochdale Securities

And then, for the year should we think of interest expenses getting a little bit higher in the second quarter and then dropping back down?

Sue Gove

Higher than LY [ph], no. Again –

Hayley Wolff – Rochdale Securities

Higher than first quarter.

Sue Gove

In the first quarter? Well, the first quarter, yes. Again, there was a rate adjustment that was affected in the first quarter as well. So it will be slightly improved to last year. Again, assuming that LIBOR remains in the area that it is because again our borrowings will continue as we projected to remain favorable through the end of the year.

Hayley Wolff – Rochdale Securities

Okay. And then one last question. You set out some three-year targets for EBITDA. How are you guys relative those in terms of comfort level?

Martin Hanaka

Well, it’s just one quarter. So if you ask this in July, we could give you a lot better indication. But we believe those are very reachable and we are not adjusting our plan for this year, that’s for sure.

Hayley Wolff – Rochdale Securities

Okay. All right, thanks a lot.

Martin Hanaka

Thank you.

Operator

And Mr. Hanaka, with no further questions in the queue I would like to turn the conference back over to you for any additional or closing remarks.

Martin Hanaka

No. Thank you very much. We appreciate everyone’s time and interest today and (inaudible) in Q2. Thank you.

Operator

Again that does conclude today’s conference, and we thank you for your participation.

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