Golfsmith International Holdings CEO Discusses Q2 2011 Results - Earnings Call Transcript

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 |  Includes: GOLF
by: SA Transcripts

Golfsmith International Holdings, Inc. (NASDAQ:GOLF)

Q2 2011 Earnings Call

July 28, 2011 9:00 am ET

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

Operator

Good day, everyone, and welcome to the Golfsmith International Holdings, Inc. Second Quarter 2011 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, ma’am.

Jean Fontana

Thank you. Good morning, everyone. Thank you for joining us today to discuss Golfsmith’s second 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

Great, thank you, Jean, and good morning, everyone. Business momentum continued through the key selling season of Q2, which is the biggest quarter of the year for Golfsmith. Our results reflect great execution and several key initiatives and I’d like to congratulate our entire team both in Austin and all of our stores for terrific job.

With that ten straight months of solid comps, now three straight quarters, 6.4% in Q4 last year, 13.3% in Q1 and now 7.1% in the all important second quarter. We continue to focus on strengthening our product offering differentiating, marketing and assortments, building our Web business, expanding what is proven to be a very successful store model and enhancing our selling culture.

In fact we continue to gain meaningful market share as the industry continues to consolidate and if you look at the core segment with Golf Datatech reports, we’ve had double digit share gains again, and that’s both in units and dollar shares. Then you probably know you’ve spent the last few years strengthening our business model, and are well positioned to capitalize on competitive closings and demographic changes that should benefit the Golf industry as a well.

We’re really proud of our team and look forward to continue momentum as we remain committed to delivering great product, excellent service, and a dynamic activity rich shopping environment.

Some of the numbers, net revenues increased over 10% to $130.2 million compared to $118 million in the second quarter of last year. Comparable store sales, as I said earlier were up 7% with our direct sales increasing 9% and that’s net of a 27% growth on our Web business let down by a continued decrease in clubmaking and a reduction in our circulation of the consumer catalog, so a net number of 9% in the direct channel.

Our AOV conversion came in over plan. Our traffic was a very slight increase, and then I think we’re demonstrating results on a improved product mix and the selling culture.

We delivered 36% EPS growth of $0.49, per just $0.36 a year ago. Consolidation continues to be an opportunity for Golfsmith to expand our market share even in a climate where rounds played are down 7% year-to-date through May. We don’t expect the June numbers, which will do, be much improved over that. So in a very tough climate we’re having good results.

It should be month, the date of July our sales top line, on July, and it’s on Saturday, is up at a rate consistent with Q2. Some of the highlights and merchandizing, as our custom fitting continues to be very strong and services of cornerstone around model. We are expanding apparel and footwear, we had started a couple of years with apparel at 15% of our total mix, are now up to about 90% and it targeted 25% long term and I have confidence that will be achieved.

Proprietary brands stand at 11% of our business and a product quality certainly on par with the OEM brands driving higher brand awareness and value. Our new stores are performing above planned most recently one in the Washington DC area, we’re very pleased with that opening. And I’m pleased to announce today that we will have a fourth new store in fiscal ’11 located in (inaudible) Florida that we will open in the fourth quarter there by achieving our four store goal for the year.

I mentioned selling culture and store ops are really driving performance and our new stores have achieved about 28% apparel mix, so the margin mix is much better than we have in our core business. We feel so good about our new store performance that we are announcing that we have signed two new leases for next year in the DC area again as we tend to sell out that market, also in Ohio and we have targeted Atlanta where we will reposition our entire network.

We’re going to [muddle] beach as the recession has lifted our boat to that market and it’s a big void and a really Golf crazy marketplace and in Chicago. We’re going to build our web business aggressively as we have year-to-date. We’re doing that in a couple of different ways, number one, by growing our data base to e-mail and player rewards capture and very interested in social media, we are over 127,00 Facebook likes today. We are more than every other specialty golf competitor combined. And our job is to make those relationships deeper and monetize them in every way possible.

In conclusion, we are going to capitalize our new product trends in shrinking competitor playing field, the operational initiatives continue to drive good results and we think our long term growth prospects are strong albeit through market share gains and hopefully an outlook for improving industry fundamentals as we go into 2012.

I would like to turn over to Sue Gove, now Sue.

Sue E. Gove

All right. Thank you Martin, good morning everyone. For the second quarter again net revenue increased 10.3% to $130.2 million compared to $180 million in the second quarter of 2010. The sales growth was driven by a 7% comparable store sales increase and 9% growth in our direct-to-consumer business.

In addition, sales benefitted from the opening of one net new store, we opened four new stores and closed three since the second quarter of last year. comparable store sales were driven by higher conversion rate, increased AOV as well as a slight improvement in traffic.

We believe this strong comp store sales growth is a reflection of our efforts to drive store traffic to enhance marketing efforts, as well as enhancements to our merchandize assortment and selling culture that we have been employing over the last several quarters. Also as Martin mentioned, round played for the five months ended May 2011 decreased 6.3% as compared to the same period in 2010. We are growing our market share despite challenging industry trends.

Gross margin for the second quarter increased 10 basis points to 35.1% as compared to 35% for the same period last year. The gross margin improvement consisted of a 70 basis points increase in merchandize margin, primarily due to a sales mix shift towards our higher margin goods such as shoes and apparel consistent with our strategy. This was partially offset by an increased shipping and freight cost related to free shipping offers as well as higher freight costs resulting from fuel surcharges and increased inventory receipts compared to 2010.

SG&A expense increased 5.5% to $35.6 million in the second quarter compared to $33.7 million in the same period last year. As a percentage of net revenue, SG&A decreased to 27.3% in the current quarter compared to 28.6% in the same period last year. The dollar increase in SG&A was primarily due to the opening of four new stores and an increase in performance based compensation. As a percentage of sales, SG&A declined 130 basis points due to leverage as well as increased efficiencies.

Stores reopening expenses were $229,000 in the second quarter of 2011, compared to $208,000 in the same quarter last year. We recorded a $183,000 lease termination charge during the second quarter. This led to operating income growth of 32.7% to $9.7 million for the fiscal quarter 2011 compared to operating income of $7.3 million for the second quarter last year.

Operating margin expanded 120 basis points to 7.4% of sales compared to 6.2% of sales in the second quarter of last year. Provision for income tax in the second quarter totalled $1.1 million as compared to $859,000 last year in the same quarter.

Income tax expense for the period differed from the amount which would have been recorded using the US statutory rate of 34%, primarily due to changes in our valuation allowance offset by state taxes, which change largely as a result of the change in projected growth received during the current fiscal period.

Net income totalled $8.3 million or $0.49 per diluted share, excluding lease termination charges, net income was $8.5 million or $0.50 per share. This compared to net income of $6.2 million or $0.36 per diluted share in the last year’s second quarter.

As of July 2 this year total inventories were $95.5 million, slightly higher than ending inventory of $95.3 million in last year's second quarter. This is despite a 10% increase in top line. On an average store basis, inventories decreased 3% compared with second quarter of 2010, following significant reductions in prior quarters.

Our increased focus on inventory management lead to merchandised margin expansion, as well as improvements in the ageing of inventories and we expect to continue to benefit from these initiatives.

As of July 2, again, we have $31.2 million of outstanding borrowings under our credit facility and borrowing availability of $45.4 million. This compares to $27.6 million of outstanding borrowings under the credit facility and borrowing availability of $44.5 million at the same time last year.

Now, I will highlight some of the operational initiatives, which we believe led to our strong financial results. We remain very pleased with our increase in conversion rates and as well as our continued focus on enhancing our product improvement with innovation, proprietary brands, and improved apparel and footwear offering.

In addition, we remain focused on improved selling techniques with training and incentives. Our second initiative is new store growth.

We opened our third new store in 2011 during the second quarter as mentioned in Washington DC market. We’re pleased with the initial results, as well as the performance of our stores in Boca Raton, Florida and St. Louis, Missouri, which we opened earlier this year. As we have stated in the past, our new stores typically reach profitability in the first full fiscal year operation. Our plan is for up to 10 new stores in fiscal year 2012.

Thirdly, systems investments, we are in the midst of our Oracle ERP systems implementation. We have stated that we expect to enhance our decision-making capabilities and provide the foundation for new merchandising systems. We remain on track to convert by the end of this fiscal year.

Our relentless focus on operational excellence is driving significant increases again in conversion rate, as well as higher AOV. We also serviced over 1200 additional custom fittings during the second quarter compared to last year and 2000 more on a year-to-date basis.

We continue to make enhancements to the website from increasing skew count to improve navigation and order fulfillment. To the use of social media, all which have helped to drive growth in our e-commerce business, we are very encouraged by the progress we have made as demonstrated in our results and we believe that we are better positioned than ever to deliver long term sales and earnings growth.

I’ll now turn it back to Marty for few additional comments.

Martin E. Hanaka

Thank you, Sue. Obviously you can see that we’ve add a good consistent string of three good operating results quarter after quarter, successive months of comps, with equally well positioned and now we can accelerate our growth somewhat, our original goal is seven new stores next year to 10. and really believe that our web business will continue to grow close to 20% for the foreseeable future.

With that remarks we will open the questions.

Question-and-Answer-Session

Operator

We’ll go first to Jennifer Davis of Lazard Capital Markets.

Jennifer Davis – Lazard Capital Markets

Hey, guys congratulations on another great quarter.

Martin E. Hanaka

Thank you.

Jennifer Davis – Lazard Capital Markets

$0.32 for the first half, it’s a very good start to year return to profitability. Couple of questions on the new stores, I think you guys said apparel is about 28% of the sales, and now you’ll have new fixturnig in your old stores, just wondering if there is anything else you can take from the new stores and apply to the old store to may be increase the apparel penetration?

Martin E. Hanaka

Yeah one of the things that we really done at new stores as made apparel the center piece. It’s in the center of the store, it’s gotten to expand is square footage. It’s got an extended brands and we have tried to do that in all of our, old stores going backwards. And for the last three years, we re-fixtured every single apparel for we have and as we remodel stores, we are trying to again follow the new store path. So expanding it, relocating it and we have rationalize tennis in a number of stores to expand apparel and to the extend we can execute that get apparel more prominence, more square footage, extending assortments, we think we can accelerate that growth track to approach the new store experience. But we are really thrilled with the new stores and I think the customer is rolling that way.

Jennifer Davis – Lazard Capital Markets

Thanks. And can you talk a little bit about comps, I think you said that conversion increased, traffic increased, slightly average order value increased, can you may be break that out a little bit and what’s driving that higher average order value, is that kind of sales of those 399 drivers and higher priced merchandize and how does the apparel sales impact that?

Martin E. Hanaka

Yeah, sorry, absolutely I am sorry. Apparel sales bring that down because our average order is roughly, I’d say $100 for modelling purposes. Our traffic is just up slightly flattish and I think that’s function of fact that rounds played are down. So if rounds played are down 7%, everyday people are consuming less of that clubs and balls and would stop that meaningless traffic into the stores.

So it’s a combination of conversions, which is over our plan and AOV, which is over our plan and the whole selling culture trying to get the people by that one more item. So just a so-called pressure I am taking care of the customer like never before. It’s also a function of us, not just selling higher price, then certainly ’11 is a good example of 399, D2 Titleist, but yesterday we started taking pre-orders for Pagan and their drivers at 330, so it’s a mix of different initiatives and the one thing that we didn’t talk about really is the custom fitting, we have over 30% last year in custom fitting orders, we’re up double-digit again this year and that customer gets custom fits spends more money. So we have to keep hitting on all cylinders selling an extra item, selling the premium goods, selling custom fitting, and make sure that every that we get our best win.

Jennifer Davis – Lazard Capital Markets

All right, great thanks and then two last questions. I think you’re going to open 10 new stores next year, do you think that you can kind of continue at that rate going forward and how many stores do you think you can ultimately operate in the US.

Martin E. Hanaka

We have targeted 105 locations for growth. Based on our productive model, it looks at a number of factors you can imagine, but really couples the fluency of the golfer and then the number of target customers that are in a given geography. So it is built from the ground up, there is 105 place that we know we want to go and we have targeted that over the next four years, we will open at least 10 stores per year. It is a combination of new markets and a combination of back filling existing markets, where we now we have some holes.

Jennifer Davis – Lazard Capital Markets

All right, great. Thanks and best of luck.

Martin E. Hanaka

Thank you.

Sue E. Gove

Thank you.

Operator

(Operator Instructions)

Martin E. Hanaka

Operator we can wrap it up.

Operator

All right. And now I’ll turn the conference back to you. Do you have any closing or additional remarks?

Martin E. Hanaka

Very good. I just want to thank all the people in Austin for a terrific effort in job, and dedication, and all the people on the stores. Well done, we appreciate your efforts. Look forward to Q3, thank you.

Operator

And again that does concludes today’s conference call. Thank you for your participation.

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