Don't Be Alarmed by Golfsmith Cutting Costs

With 74 retail stores in 19 states and 30 markets, Golfsmith (GOLF-OLD) is the largest of the golf retailers. Originally starting out as a mail-order company, its seamless transition to e-commerce in 1997 has allowed it to gain and keep market share. The Golfsmith website is easy to use and offers deals that keep golfers coming back.

Good deals aside, the recession has hit leisure activities especially hard given the scant discretionary capital consumers have at their disposal. As mentioned in the October 27th quarterly report:

For the eight months ended August 2010 golf rounds played decreased 3.6% as compared to the same period in the prior year.

In order to combat the recession and keep out of the red numbers, GS has cut 30 million from its cost of revenue and 10 million from its "selling general and administrative" year-over-year.

While the internet may offer better equipment deals from competing websites such as, Amazon (NASDAQ:AMZN), or eBay (NASDAQ:EBAY), it's only Golfsmith that offers a golf simulator for those who wish to hit the clubs they intend to buy. In golf, buying a club untested is cringeworthy.

While reviews are helpful, nothing beats the ability to try out equipment before you buy it. For that reason, the stores will be around for a long time given the value added experience of being able to try before you buy.

At present the stock is trading 5 million over its balance sheet valuation. If revenue picks up this holiday season, as it did Q2 with a 6.2 million profit, then confidence could grow for this out of favor gem. Should Q4 produce the same profitability of Q2, that would represent a 6.4 million profit, a 7.25 P/E for the year, and a step in the right direction.

Disclosure: No positions