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Executives

Jean Fontana – ICR

Martin Hanaka – Chairman and Chief Executive Officer

Sue Gove – President, Chief Financial Officer and Chief Operating Officer

Analysts

Jennifer Davis – Lazard Capital Markets

Casey Alexander – Gilford Securities

Golfsmith International Holdings, Inc. (GOLF) Q4 2011 Earnings Call March 1, 2012 4:30 AM ET

Operator

Good day everyone and welcome to the Golfsmith International Holdings, Inc. Fourth Quarter Fiscal 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 – ICR

Thank you. Good afternoon everyone. Thank you for joining us today to discuss Golfsmith Fourth quarter and full year 2011 earnings results. As a reminder, our presentation includes, and responses to various questions may include, forward-looking statement 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 afternoon. 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 President, Chief Financial and Operating Officer, Sue Gove.

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

Martin Hanaka

Thank you, Jean, and good afternoon everyone. We appreciate your time and interest in the Golfsmith fourth quarter earnings results today. I am in Myrtle Beach, I am suffering a little here, there is pollen flying everywhere not on vacation and Sue Gove and our team are in Texas. I’d just like to pause before we get into this and please join me in congratulating Sue on her recent promotion to President, she has done amazing job for us over the last three plus years and Sue has earned her recognition.

I’m going to start with the headlines, and then Sue will do the numbers and then I’ll end with some 2012 guidance. As I look back at the quarter there is four things we point out and I’ll go into each one of these in more depth in a minute. But we had a soft top line and frankly it’s our first set back in several quarters and I think there are some good reasons for it that I’ll explain.

Second, the ERP conversion that we conducted was not perfect and we roughed with it and that cost us about a $0.5 million in profit. The third thing is the movement in gross margins. We are buying better and the strategy of moving to mix both in apparel and proprietary is working really beautifully, so that’s really developed into some gains in the quarter and year-to-date and we see that continuing.

And then finally, the big one maybe you probably you want to know about is the $1.3 million and cost outside the ordinary course of business, and frankly I hope you can appreciate that this disclosure is meant to explain higher cost, but we are really cannot get into the details behind it, so we will not be answering any questions on this topic at this time. You could trust that we will be proactive and transparent and if there is something to share you’ll hear it from us first.

Now, let me give you more flavor on the results before turning it over to Sue to go in-depth on the numbers, and once again I will conclude with 2012 direction.

The top line really is an issue in October. We had a double digit decrease in October, a combination of reasons. Came back in November where we were down less than 1% basically flat in December. But we were disappointed obviously in October, it was a byproduct of several things. The ERP is certainly a factor, particularly in web generated orders that we send off the back door of our retail stores that cost us good deal of comps.

Our traffic was down 6% and that’s the byproduct of killing a direct marketing event that we wish we hadn’t [indiscernible], but our AOV was up, our conversion was basically flat. So at the end of the day between ERP and not horrendous direct marketing event for retail had cost us and it hurt us badly. We did still perform better than the industry in the quarter, but our market share gain was only in the single digits as opposed to the double digit share gain we’ve seen all year. In fact we had 11.5% share gain if you measure it in dollars across the eight categories of Golf Datatech measures and we had a 12.6% share gain in units for the full year.

Our web demand was solid, it was up 16% for the quarter and 19% for the year, but again in October only a 3% gain. So that was the month it was. It really affected our quarterly results because there is still some business to be done in October.

In hindsight there were a couple of other things that we did. We would have changed had our brothers in the fourth quarter besides October when we thought we had momentum and we could take the money and take it to the bottom line. We are looking at that as an opportunity for next year. But we did move our friends and family up earlier before our Thanksgiving, a trend we saw elsewhere in retail and we think that was a mistake and then finally we kept the same timing December year-over-year and wish we had pushed it back a month because we lost some growth there in the quarters. So mistakes that we will not be repeating going forward.

Those are kind of the headlines for the quarter. At this point I would like to turn it over to Sue, who is going to go into the numbers in-depth. Sue?

Sue Gove

Okay, thank you Marty and good afternoon everyone. For the fourth quarter net revenues increased 2.3% to $74.5 million compared to $72.9 million in the fourth quarter of 2010. The sales growth was driven by four net new stores since the end of the fourth quarter last year partially offset by a 4.7% decrease in comp store sales and a 3.5% decrease in net revenues from the direct to consumer channel.

The comparable store sales declined as Marty mentioned was due to slow traffic and a disruption created by the company by deployment of a new ERP system. Golf rounds played for the 12 months ended December 31, 2011 decreased 2.5% as compared to the same period last year. As Marty mentioned we are growing our market share despite challenging industry trends with market share gain of 11.5% for the year.

Gross margin for the fourth quarter increased 470 basis points to 36.8% as compared to 32.1% for the same period last year. The increase was attributable primarily to a favorable sales mixture in higher margin categories including apparel and footwear as well as an increase in vendor funded promotions. Approximately 70 basis points of the increase stemmed from a correction to last year’s fourth quarter cost of goods related to a timing difference and vendor funding. SG&A expense increased 19.1% to $32.4 million in the fourth quarter compared to $27.2 million in the same period last year. The dollar increase was related to the four new stores and higher performance bonuses.

SG&A expense also included $600,000 in legal and other professional service costs incurred outside of the ordinary course of business. Store free opening expenses were approximately $350,000 as compared to $240,000 in the fourth quarter of last year.

In the fourth quarter of 2010 we recorded a $1.1 million store closing charge for lease termination, asset impairments associated with five retail locations. Operating loss was $5.3 million in the fourth quarter of fiscal 2011 compared to an operating loss of $5.2 million for the fourth quarter last year. Excluding the unusual item of $600,000 mentioned earlier operating loss was $4.7 million in fourth quarter compared to $4.1 million excluding the lease termination charge last year.

Income tax benefit in the fourth quarter totaled approximately $120,000 compared to an income tax expense of roughly $39,000 last year. Net loss for the fourth quarter totaled $5.6 million or $0.34 per diluted share as compared to a net loss of $5.7 million or $0.35 per diluted share last year. Excluding the store closing cost and other unusual charges, the company’s net loss for the fourth quarter was $5 million or $0.31 per share as compared to $4.6 million loss or $0.28 per share in fiscal 2010.

Moving on to our fiscal year, net revenue increased 10.1% to $387.3 million in fiscal 2011 compared to $351.9 million in fiscal 2010. Net revenue reflects a 4.7% increase in comp store sales and a 9.2% increase in revenue for the company’s direct to consumer channel. Operating income for the year totaled $2.8 million compared to a loss of $4.3 million for fiscal 2010.

Operating income results for 2011 include $1.3 million in legal and other professional services mentioned earlier in addition to approximately $180,000 in lease termination costs. Fiscal 2010 included $2.7 million in store closing, costs lease termination and asset impairment costs. The company incurred $1.3 million in costs in 2011 associated with exploring a strategic transaction that may include a potential sale of the company. The company to-date has not reached an agreement with respect to a transaction and we cannot predict whether an agreement will be reached.

We will make no further comment, nor provide any speculation on this matter. Please limit your question in the question and answer session to our operating result.

We reported net income for fiscal 2011 of $900,000 or $0.05 per share. This compares to a net loss of $5.5 million or $0.34 per share in fiscal 2010. Excluding the one time charges the net income was $2.1 million or $0.13 per share compared to an operating loss of $2.8 million or $0.17 per share in fiscal 2010.

We ended the year with $90.7 million in inventory compared to $79.4 million in 2010. Comparable average store inventory increased approximately 5.4%. The increase was primarily related to product launches planned for the first quarter as well as inventory associated with planned new store openings. We ended the year with $41.9 million of outstanding borrowings under our credit facility with excess borrowing availability of $28.7 million. This compares to $40.4 million of outstanding borrowings under our credit facility and excess availability of $18.5 million at the end of fiscal 2010. We expect to file our 10-K with the SEC next week.

Now, just to move on to our initiatives. We continue to execute on various operational initiatives that position us for growth in 2012. Our key initiative are outlined in eight key drivers as follows: Number one, driving profitable web growth; two, expanding proven powerful new stores; three, intensifying our selling culture; four, delivering increased traffic through our marketing spent; five, realizing improved mix of apparel and proprietary products; six, achieving inventory placement improvements; seven, sustaining operational excellence; and eight, exceeding our business development income targets.

You will note that several of these are building on the success of 2011 and taking our performance to the next level. We built a solid foundation for growth over the last three years and we believe that we are poised to continue to drive improvement in 2012. I’d now like to turn the call back to Marty.

Martin Hanaka

Great Sue. Thank you very much. So moving past Q4 we think 2012 will deliver solid improved growth. We are looking for low to mid single digits kind of comps and January are February we are up between 5% and 6%. So we are back on track, keeping in mind however that March is half the quarter, so there is a lot of big volume mix ahead of us. But we feel good about our current comp line trend.

We think margin will improve another 40 to 50 basis points. Again on the back of buying and moving our mix. We see mid teens growth in our direct business with web being north of that, and one of the other downsize of our ERP conversion was we haven’t really done a lot of web enhancements over the last 18 months or so. So we see a lot of things being done for speed and to help our conversion.

If you look back in 2010 our adjusted EBITDA without one timer is about $8.9 million. We reported about $16.3 million preliminarily and we think next year that that number will be closer to $25 million and $20 million. So we see this kind of result from these investments. Most particularly these stores we did a separate press release for about 10 new stores and four relocations. We’ve already one new one and we’ve already moved one. They are open for business, and we also see Q4 as an opportunity for next year. We have to improve on the results that we had.

So, we can make sure that we are diligent in taking advantage of that. So our prospects are solid. We are taking share. We just learned today from the longitude study that there are 16% fewer doors today than there were a year ago. In fact there were a 142 net closings in the industry so this restructuring of the off course base continues and we are really well positioned to take advantage of it and all the growth we are talking about is self funded. So we see a solidifying our leadership position as we go through 2012 and very anxious to keep it going. So on that note we would like to open it up to questions please.

Question-and-Answer Session

Operator

Thank you very much. [Operator Instructions] We will take our first question from Jennifer Davis with Lazard Capital Markets.

Jennifer Davis – Lazard Capital Markets

Hey guys. Okay, so I really want to ask about the charge, but I won't.

Martin Hanaka

Thank you.

Jennifer Davis – Lazard Capital Markets

Let me start by saying congratulations to you. Well deserved, and it does sound like you have got opportunities and fourth quarter for next year. I guess could you talk a little bit about what you are doing with or what you did do with the ERP system and what benefit you expect to see from that going forward? I apologize I got the press release late so I haven’t had time to go through all of it yet, so if some this has been said then I do apologize for that. But, can you talk about what drove – I think you said average order value was up, what drove that, was it ticket? And what kind of launches are you seeing for the first quarter this year? Thanks.

Martin Hanaka

Okay. Sue, you want to do the ERP and I will take the second part of it?

Sue Gove

Sure. The ERP Assistant Implementation that we did went live October 1st and it is a new Oracle system that is the platform for all of our systems. We had an Oracle system before that was implemented in 2000. It wasn’t being supported and we had a significant amount of built-on and customized processes. So we had come to the conclusion several years ago that that needed to be changed. We went through an extensive process of selecting the right system and the right partners to implement that.

As with any system, it can be challenging in the early stages which it was particularly as we mentioned in the release on the direct to consumer channel just making those changeovers in the custom programmed areas, the custom orders, and special orders. So we worked through that and feel like we have the right platform for growth in the future. Where that goes from here will be again the base for our merchandising systems that we see on the horizon. Our customer relationships and marketing systems that we see on the horizon as well as our web platform.

The other question that you ask was with regard to our AOV I think and launch, Marty, you are going to take both of those.

Martin Hanaka

Yeah. The AOV was absolutely up in the single digits. So we held it, that’s the trend we had all year long and felt really good about it. The second part of the launch, as many of you may be aware last year was a terrific driver year and the TaylorMade product don’t desire ’11. Really was a catalyst for big unit sales and the average order value was much higher, in fact we are moving some 399 drivers again. We’ve all been very concerned that we could make those units because it was pretty exceptional last year, and the fact of the matter is TaylorMade has come out with another product called Rocket Balls. And they have anniversary of the R11 with an R11S product at the same price point. It’s not matching up to R11, but the good news is the Fairway Woods are selling like hot cakes. And so the net result is now – we will go through the first five weeks, six weeks of the launch year-over-year, we’ve crossed the line and the net dollars are better for us. So we are doing okay and it’s not as we are having an amazing current yea.

If you remember last fourth quarter, 2010 we had a tremendous increase 40 some odd percent of the USGA changed its rules. This year we dropped substantially but we are back on track there. So there is several segments that are outweighing the fall off and drivers, and so the net result is really positive.

Besides TaylorMade, you know, Callaway has got some great product out there. Ping, gosh this i25 from Ping is exceptional. Ping is continuing to bring out new product and they were very smart this year. They used to bring out products together and instead of doing that this year they launched one-half of their product family last August and then the other half in February. It’s made all the difference in helping bump our total club number. So, feel good about it. Any other questions.

Operator

Jennifer is still on the line with some more questions I believe.

Martin Hanaka

I'm sorry Jennifer.

Jennifer Davis – Lazard Capital Markets

Yeah, sorry about that. When was the R11 lost last year and you’ve already begun to cycle that, is that right?

Martin Hanaka

That’s correct, and launched on about February 1st and that’s when the new product launch this year. Same almost exact timing, and yeah, we feel like we are cycling through it and it was a big worry in our planning of big risk, but the aggregate of the two families this year and then other brands have really held us together. We’ll see we are going into the big season now. Preseason is behind us. Right now we feel like we are going to be just fine.

Jennifer Davis – Lazard Capital Markets

And you said that January and February costs were up, did you say…

Martin Hanaka

5% and 6%, yeah.

Jennifer Davis – Lazard Capital Markets

Okay.

Martin Hanaka

But we feel good about the top line. Again I always caution, you know, the big month is March, it’s equal to January and February combined. And then they beginning with the Masters it really ramps in the second quarter.

Jennifer Davis – Lazard Capital Markets

Right. But the fact is [indiscernible] launch of R11 I think is [indiscernible].

Martin Hanaka

Yeah. Everybody wants this new Fairway Wood, and a lot of people who are R11 owners are replacing it with the new R11, and so a new driver and then different Fairway Woods and the market behind it is proven extra 17 yards off the track and it looks like they are delivering it and people are excited about it. That went into TaylorMade family and again having these other brands do what they are doing is a real positive.

Jennifer Davis – Lazard Capital Markets

Okay, got it. Can you talk about what were the drivers of the average order value? Was that an increase in units or higher tickets, can you talk a little bit about what you’ve seen so far this year?

Martin Hanaka

The AOV last year I think – again the Driver led the way on the club category, but everyone of our merchants has looked trying to raise their AOV out the door by getting their average price points to go up and that’s in the buying, sorting and pricing. So, I think leadership we have there is terrific and we’ve built a great team over the years and they are delivering. It’s not just one thing, it’s no silver bullet, and that’s continuing this year too, so fingers crossed.

Sue Gove

I would add to that great execution in the stores. We said AOV as one of our key metrics on the store side and it was part of our compensation program. So we really had the team very focused on it.

Martin Hanaka

To Sue’s point there, she and the whole team has done a great job trying to intensify our selling culture and we’ve added IPT as a new criteria. So, it’s all about selling and saving the customer a trip and giving them one extra item in the basket to kind of continue to raise our AOV and insulate us from any other swings within these categories.

Jennifer Davis – Lazard Capital Markets

All right, thanks. Thanks a lot.

Martin Hanaka

Thank you.

Operator

[Operator Instructions] We will go next to Casey Alexander with Gilford Securities.

Casey Alexander – Gilford Securities

Hi good afternoon. First of all congratulations to Sue on the new position.

Sue Gove

Thank you.

Casey Alexander – Gilford Securities

Secondly, how are your sales patterns skewing geographically with – particularly in this first quarter with unusual weather patterns we have been having?

Martin Hanaka

That’s a really good question. Obviously this is a weather sensitive industry and we had that benefit of weather. So, yeah, you’ve seen our North East business to be better than house total. But at the same time no one is playing golf yet, so. You know, it’s getting people interested and I think [indiscernible] was right, and if it is and these courses open much longer than last year then we should see a benefit of that as you get into March and April. But the total buying compared to places like Texas and California is not what you think.

Casey Alexander – Gilford Securities

Okay. Thanks.

Operator

At this time there are no further questions in the queue. I’d like to turn the call back to Jean Fontana for any additional or closing remarks.

Jean Fontana

Actually Marty will make closing remarks.

Martin Hanaka

Thank you everybody. We appreciate again your time and interest. We appreciate the hard work of all our associates throughout the country. We got Q4 over, have a mull again but at the same time there is some explainable reasons why our top line wasn’t as strong as it needed to be. Having said that great year. It was a turnaround from a loss to a profit and we think we have got the momentum to keep that going all throughout 2012. Look forward to our Q1 call together at the end of April. Take care all. Bye, bye.

Operator

This does conclude today’s conference. We thank you for your participation.

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