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Executives

Jean Fontana – Investor Relations, ICR, Inc.

Martin E. Hanaka – Chairman and Chief Executive Officer

Sue E. Gove – Executive Vice President, Chief Operating Officer and Chief Financial Officer

Analysts

Jennifer Davis – Lazard Capital Markets

Golfsmith International Holdings, Inc. (GOLF) Q1 2011 Earnings Call April 28, 2011 9:00 AM ET

Operator

Good day, everyone, and welcome to the Golfsmith International Holdings, Inc. First Quarter 2011 Earnings Conference Call. Just a reminder today’s call is being recorded.

And at this time, I would like to turn things over to Ms. Jean Fontana. Please go ahead, ma’am.

Jean Fontana

Good morning, everyone, thank you for joining us today to discuss Golfsmith’s first quarter 2011 earnings 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 the 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 filed with the SEC.

We issued a press release this morning. If you have not received a copy, you can find it on our website or by calling Investor Relations at 203-682-8200.

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

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

Martin E. Hanaka

Thank you very much and good morning everybody. With me in Austin today are Anna Jobe, our Controller; our General Counsel, Jim Eliasberg; and [Jeff Laforce]. Sue Gove is joining us remotely.

We are really excited on the momentum we’re building at Golfsmith from the fourth quarter and the first quarter 2011. Q1 represents our best year-over-year quarterly performance in almost six years. The initiatives that our team has put in place such as really focusing on the Web business, improving our selling culture and shifting our mix into apparel are really beginning the show results.

The industry consolidation and competitor closings are also a net positive for us. So hopefully that will continue. We think it will come to least into Q3, but it looks like business is stabilizing around the country too. Not only are we seeing strong sales across all of our channels, but also continue to gain market share within the golf industry. At least for the first two months we have double-digit share gains both in dollars and units according to Golf Datatech.

Our direct business was up 20.7 and what’s really encouraging is our Web business was up 30.3%, so excited on that trend again on top of 40% in Q4. We benefited from technological advancements in equipment, some new store openings. In fact we opened two and have six new stores over the last 12 months. We opened both in the town of Florida and St. Louis. And I’m pleased to announce today that our third store will open in June in Tysons Corner, Virginia.

Our signature club-fitting has really worked out. Our Play Better Guarantee is producing double-digit results again and again, and we are very pleased with the progress there.

So, overall, very pleased with the first quarter results and look forward to building on this momentum through the upcoming year and into Q2. And I can tell you, April is very consistent with our last two quarters combine, which are roughly 10% comp increases.

So the trends continue to be strong. We think we will continue to take market share. We see rounds played were up, real absolute numbers of rounds played in January and February, we are anxious to see March. But if that trend continues, the markets expanding and with the economy improving some what, we think that bodes well for the balance of 2011.

There is lot of new technology out there as I mentioned, there are some great club introductions starting with TaylorMade R11, Callaway’s RAZR product has obviously been very strong as well and as the Titleist D2 product. In fact clubs had its strongest quarter in a long time and outpaced the house. Customers are purchasing higher priced goods, 399 drivers, full price and that help raise our AOV by 6%.

We are dedicating more floor space to apparel. In fact we just completed a conversion of all of our apparel floors to a new fixed ring, which took us three years to do that’s going be behind us. And shop lines in total is almost 19% of our business, up from 15% a few years ago with a long-term goal to get to 25%. But those sales continue to be very strong and encouraging for us going forward. And proprietary brands exceeded 10% of our business, another key initiative.

Sue is going to give you more detail on the numbers but three things that we think are really going to help us into the balance of the year; we continue to aggressively build the Web business, continue to invest in proprietary to differentiate us, shifting space and other resources to apparel and footwear. And if we can continue to calculate on this great club trend, which looks very, very strong right now and our people are very excited about what’s coming in May and June. We think 2011 will definitely be the year we return to profitability.

On that comment, I like to introduce Sue Gove. Sue?

Sue E. Gove

Okay, thank you. Good morning, everyone. I’ll first review our first quarter financial results and then we’ll provide an update on the initiatives that we laid out last quarter to driving sales and earnings growth in 2011.

For the first quarter of fiscal 2011, net revenues increased 20.5% to $81.5 million compared to $67.6 million in the first quarter of last year. Sales were driven by six new store openings the first quarter of last year as well as by comparable store sales increase of 13.4%. Our average transactions grew 7% reflecting the improvements we made to our merchandise assortment and our continued focus on improving our selling culture.

As Marty mentioned, sales were positively impacted by continued consolidation in the industry and number of new technology advancements, product launches, the increase in our custom fitting and our new store growth, all of which have combined to create record sales momentum and a significant market share increase.

Further, net revenues reflect a 20.7% increase from our direct-to-consumer channel, led by an increase in Web sales of over 30%. Our Web business continues to be a key strategic focus for the company as we move through 2011.

Gross profit increased 20.4% to $27.4 million compared to $22.8 million in the first quarter of last year. Gross margin was 33.6% as compared to 33.7% for the same period last year. This 10 basis point decline in gross margin was primarily due to an increase in shipping and freight costs associated with free shipping offers on our direct business in which we generated record sales.

Gross margins were also impacted by a 20 basis point reserve for price repositioning of used clubs. This was almost entirely offset by improved merchandise margins driven by a sales shift to higher margin categories.

SG&A expense increased to $30.5 million in the first quarter compared to $27.9 million in the same quarter last year. As a percentage of net revenue, SG&A decreased to 37.4% in the current quarter compared to 41.2% in the prior year. The increase in dollar relates primarily to expenses associated with our new store openings in addition to higher healthcare cost and marketing fees related to a one time consulting project aimed at improving our marketing effectiveness going forward. These increases will partially offset by three store closures in 2010.

The improvements in SG&A as a percentage of sales was primarily due to our ability to continue to leverage our expenses, which was also primarily from ongoing efforts to better align our fixed cost and improved profitability.

Store pre-opening and closing expenses were approximately $300,000 in the first quarter of 2011 compared to approximately $250,000 in the first quarter last year. This increases for pre-opening and closing was due to store openings in Boca Raton, Florida and St. Louis, Missouri. We ended the quarter with an operating loss of $3.3 million for the first quarter of fiscal 2011 compared to an operating loss of $5.3 million for the first quarter of fiscal 2010.

We recorded income tax benefit of approximately $600,000 and $700,000 on pre-tax losses of $3.7 million and $5.5 million respectively. Income tax expense for the period differed from the amount, which would have been recorded using the U.S. statutory rate of 34% due to change in our valuation allowance.

Net loss totaled $3.1 million or $0.19 per share in the current quarter compared with a net loss of $4.8 million or $0.30 per share in the three months ended April 3, 2010. As of April 2 this year total inventories increased $11.1 million to $98.9 million as compared to $87.8 million at the end of Q1 last year. Comparable average store inventory increased approximately 4.2% as we continue to expand our product offerings and add to our proprietary mix.

We had $4.9 million of outstanding borrowings under our credit facility and borrowing availability of $34.7 million at the end of the first quarter fiscal 2011. This compares to $42.8 million of outstanding borrowings under the credit facility and $24.5 million of availability at the same time last year.

Now to comment on few of our strategic initiatives, first, we continue to be focused on improving our web-based channel. We have enhanced our navigation and bandwidth to the one quick check out and increased our SKU offerings. Our social media efforts continue to grow with the launch of our iPhone app and continued expansion of our Facebook fan page. Our card e-mailing is bringing people back to our site to complete their purchases. Further we’re shipping to new countries overseas and are excited that our brand is resonating in new geographies.

Second, we are shifting our mix to increase apparel and footwear through our buy more, save more promotions; we are driving an increased AOV and multiple unit sales. We are working to provide exclusive products with the Nike and Adidas, which we believe, will drive traffic and sales in the second half of the year as well and a near completion of our Casual Apparel micro site.

Third, we’re gaining traction with the expansion of our proprietary brand. We have positioned our products to be value-added, more for the same or the same for less. Replacing our proprietary product at par consistent with OEM brands, we are improving our brand awareness and driving sales.

Fourth, we continue to grow our store base into new markets. Thus far we have opened two stores in Boca Raton, Florida as mentioned and St Louise and have signed a lease for a third location. Our stores continue to be a way for us to demonstrate our excellent service levels, familiarize customers with our proprietary brands and further our market share gains and markets where we can capitalize on the consolidation of the industry.

Fifth, we’re focused on improving our retail contribution to create optimal overall results through continuing to enhance training to drive our selling culture. We are focused on increasing conversion, AOV, and custom fitting. Our new workforce management system is helping us better schedule staffs to increase productivity and leverage our payroll.

Finally, we continue to emphasize operational excellence. We have set goals to increase our AOV by $2.50 and our conversion by over 1%. We are aimed at improving traffic and web conversion as well.

In summary, we believe that we are well poised to take advantage of the industry consolidation, by improving our web business, focusing on our selling culture, shifting our mix to higher margin footwear and apparel category, we continue to make progress and remain on track to achieve our fiscal year 2011 objective.

I will now turn it back over to Marty for a few additional comments.

Martin E. Hanaka

Great. Sue, no more comments. Thank you very much. I would like to open up to questions, please.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will take our first question from Jennifer Davis with Lazard Capital Markets.

Jennifer Davis – Lazard Capital Markets

Hi, guys. Congratulations on a great start to the year.

Martin E. Hanaka

Thank you.

Jennifer Davis – Lazard Capital Markets

My first question is around gross margins. I understand the free shipping would have a negative impact, but I guess some surprised that we didn’t see more of a positive impact from; I think you have about a point shift in proprietary mix and then also an increase in higher margin apparel sales. So could you talk a little bit about that and then how we should think about that going forward as well?

Martin E. Hanaka

Yeah. Our merchandise margins were solid and the mix was solid. It was really between merch margin and our gross margin with shipping cost. But Sue, do you want to elaborate in detail on that please.

Sue E. Gove

Sure. Yes, as Marty mentioned, we did achieve our merchandise margin objective. So we are affecting the mix affects that that we called out in our strategy.

As we commented the free shipping is a factor and again as our web business does grow disproportionately that will have a small drag on the gross margin or the benefit that we’re achieving in merch margin.

I also commented that we did make a reserve adjustment right at the end of the quarter for repositioning some used clubs. So that was really a one-time affect and I don’t think we’ll have an affect on the remainder of the year. But, again for the balance of the year as the web does continue to really outperform the overall growth rate, it could have as much as 20 basis point effect on gross margin.

Jennifer Davis – Lazard Capital Markets

Okay. So, we have about a 20 basis point impact. I guess what about leverage like buying and occupancy leverage with the comp. How much of an impact does that have and then...

Sue E. Gove

Buying and occupancy is not in our gross margin. It’s in SG&A.

Jennifer Davis – Lazard Capital Markets

Okay.

Sue E. Gove

Okay.

Jennifer Davis – Lazard Capital Markets

All right. Thanks. And then, going into the first quarter, I think Marty, you had said that you were a little bit late on apparel inventory. Can you talk about how you field out your position now?

Martin E. Hanaka

We’re in great position. Apparel was up double digits. We’re in a great inventory position heading into the Christmas selling season for us. So we’re pretty confident. That was a great problem because we outsold it. And we did the same thing last summer actually, but our people really put together a great transition plan this year and we think we’ve covered it off very well. Not concerning going forward.

Jennifer Davis – Lazard Capital Markets

Okay. Thanks.

Sue E. Gove

Jennifer, I just want to go back and then make sure that we’re clear. I’m not saying that overall margins are going to be down 20 basis points, I’m saying the affect.

Jennifer Davis – Lazard Capital Markets

Right.

Sue E. Gove

Right, shipping. So where we still ship still achieve our overall merch margin growth impact that we’re seeing.

Jennifer Davis – Lazard Capital Markets

So, going forward for the next probably second quarter and third quarter we should think of gross margins about flattish with the benefits of the higher margin businesses offset by higher shipping costs? And then in the fourth quarter you should probably anniversary that.

Sue E. Gove

Yes, I would say slightly up but not as dramatic as you had called out earlier. I think you said that you were expecting 100 basis points.

Jennifer Davis – Lazard Capital Markets

Yes.

Sue E. Gove

So, no, not a 100, but somewhere between there.

Jennifer Davis – Lazard Capital Markets

All right. Thanks.

Sue E. Gove

Okay.

Martin E. Hanaka

Thank you very much.

Operator

(Operator Instructions)

Martin E. Hanaka

Why don’t we wrap it up?

Operator

All right. At this time, there are no questions.

Martin E. Hanaka

Okay. Thank you very much. Obviously, we are excited about our results, very pleased, best performance year-over-year in a quarter in almost six years. And kudos to our entire team for the dedication, we’re reaping the results they produce. We think we’re really well positioned to capitalize on these new product trends and the shrinking competitive playing field, which we hope continues as well.

Look forward to our second quarter call, our biggest quarter of the year. Thank you very much for your interest in Goldsmith. Good day.

Operator

And that does conclude today’s teleconference. Thank you all for joining.

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