Golfsmith International Holdings Inc. Q4 2007 Earnings Call Transcript

Mar. 4.08 | About: Golfsmith International (GOLF)

Golfsmith International Holdings Inc. (NASDAQ:GOLF)

Q4 2007 Earnings Call

March 4, 2008 4:30 pm ET

Executives

Jean Fontana - ICR

Martin Hanaka - Chairman and Interim Chief Executive Officer

Virginia Bunte - Chief Financial Officer

Fred Quandt - Chief Merchandising Officer

Scott Wood - General Counsel

Analysts

Derek Leckow - Barrington Research

Michael Keara - Merrill Lynch

Todd Slater - Lazard Capital Markets

David Cumberland - Robert Baird

Hayley Wolff - Rochdale

Casey Alexander - Gilford Securities

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter fiscal 2007 Golfsmith International Holdings Incorporated earnings conference call. My name is Amity and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We'll facilitate a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Ms. Jean Fontana with ICR. Please proceed ma'am.

Jean Fontana

Thank you. Good afternoon. Thank you for joining us today to discuss Golfsmith's fourth quarter and full year fiscal 2007 results.

Before we begin the call, I would like to review our Safe Harbor statement. Our presentation includes and our response 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 that 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 for fiscal 2006 filed with the Securities and Exchange Commission on March 30, 2007, as updated by the company's annual report on Form 10-K for fiscal 2007 to be filed during March 2008.

We issued our press release at the close of market today. If you did not receive a copy, you can find one on our website or by calling our Investor Relations line at 203-682-8200.

For our call today we have with us Golfsmith's Chairman and Interim Chief Executive Officer, Martin Hanaka; and Chief Financial Officer, Virginia Bunte. Marty will provide an overview of the quarter, followed by Ginger with the financial details, and the Marty will give closing remarks.

I'd now like to turn the call over to Marty.

Martin Hanaka

Thanks, Jean, and thank you, everyone, for joining us on today's call. Also joining us in Austin are our Chief Merchandising Officer, Fred Quandt; and our General Counsel, Scott Wood.

As reflected in our results released today, the fourth quarter of fiscal 2007 proved to be a challenging period, particularly in December as that macro economic environment remains difficult and holiday spending was somewhat disappointing to say the least.

In the fourth quarter, revenues totaled $79 million as compared to $75 million in the fourth quarter of fiscal '06. Comparable store sales declined 4.6%, which was solely due to less traffic in transactions as our average order value was up slightly across all three channels.

The fourth quarter included a non-cash impairment charge of $43 million to goodwill related to the decline in our market capitalization and long-lived assets at three stores. This eliminates all goodwill from our balance sheet. Excluding this charge, loss per share was $0.23 versus a loss of $0.10 for the same period last year.

For the full fiscal year, net revenues increased 8.5% to $388.2 million with comparable store sales declining 3.7%. Including the impairment charge to goodwill and other assets, the loss per share for the year was $2.58. Excluding the impairment charge in 2007 and the loss on extinguishment of debt and other one-time items in 2006, earnings per share were $0.14 for fiscal '07 as compared to $0.61 for fiscal '06. Our EBITDA was $15.3 million versus $18.9 million in 2007 versus 2006.

Our fourth quarter and full year results were reflective of softness in golf industry trends. Golf Datatech reported that rounds played during the fourth quarter were down 4%, and overall industry sales declined across most categories including golf clubs, consumables and accessories.

As per Golfsmith, in the fourth quarter categories like private-label clubs, proline clubs, grips, technology and tennis all outperformed the overall company average, while categories like clubmaking, pre-owned clubs and consumables trailed the overall company.

For the year, we did execute on several of our operational goals. First, we worked with a third-party to help solidify our three-year business strategy as well as give us directional input on growth areas such as apparel, footwear, our large format store and assortment productivity and rationalization.

We also opened 13 stores in new and existing golf and tennis markets, including our first 59,000 square foot box in November in Raleigh, North Carolina, and we are very pleased with the initial results, made money in its first full months, continues to outperform, and will be a solid contributor for the entire year.

This new format has expanded its sphere in [short] areas and provides enhanced activity-based selection throughout. At the end of fiscal 2007, we operated 74 stores in 19 states including 13 of the nation's top 15 golf markets.

In 2008, there are several promising things happening in the industry. First, several manufacturers will begin to institute minimal retail pricing policies across several categories. Given the increasingly competitive nature of the golf retail industry, manufacturers are taking steps to mitigate potential margin erosion and brand equity loss that can arise from excessive promotional activity.

And while it is difficult to put a value on this, we expect to benefit from minimum pricing policies in two ways. For one, we expect this to result in higher average selling prices. And secondly, we believe this initiative will help us compete more effectively against deep discount retailers than the newer big box operators that are driving traffic purely with promotion.

We are also seeing higher priced clubs for the '08 season. Several of the manufacturers will be introducing product at price points higher than in 2007.

Additionally Callaway is introducing a line of golf clubs with interchangeable heads and shafts known as I-MIX that overtime could revolutionize the way OEMs sell their clubs. TaylorMade also had CGB limited, $1,000 package of a head in three shafts. Customers will be able to mix and match a variety of heads with shafts and easily interchange them on their own. Overtime, if accepted by the consumer, this strategy could likely drive overall spending on club equipment higher as avid golfers, who might typically buy only a single club choose to buy multiple shafts and heads of a club for various conditions or courses. The initial launch of the Callaway line is scheduled for April 2008. We'll have it in every store. And although we expect, the full benefit is most likely to come in fiscal '09 or later.

We remain committed to our long-term strategy and are making some positive changes in 2008. We will focus on enhancing the productivity in each of our store formats in assessing store prototypes for future openings to ensure that we open the optimal size store in each market. We believe that the initial success of our first large box speaks to our ability to operate a wide range of store sizes tailored to the market. We are also planning to employ climatic marketing in three discrete climatic zones as opposed to a one size fits all marketing strategy.

Also, with new technology and differentiation in product, we must ensure that we offer our customers the best service in the industry. For example, by April 15th, all of our stores will have traffic counters, which will give us guest conversion rates that will be a real meaningful metric to compliment AOV, average order value, and items per ticket. We will be staffing to traffic caters much better as a result and we will really be able to measure the marketing impact of our ads through using these counters.

Additional focus issue will be placed on leveraging G&A. We are taking a conservative approach to budgeting and spending for 2008, in order to ensure that we deliver meaningful and measurable earnings growth. And given the market conditions today combined with our focus on operational enhancements and market reviews, we currently have signed just one lease for 2008, which is for a new store in California planed to open in Q3. Ginger will provide more details later.

So in conclusion, we're confident in our long-term strategy. We have now proven our new bigger box can work and make money. If we could take advantage of that and bring all of our functional groups together and execute our business plan, and that the consumer agrees with us and cooperates, we think it's going to meet solid earnings growth in 2008 and renewed store unit growth in 2009.

Now I'd like to turn it over Ginger to discuss the financials in more details. Ginger?

Virginia Bunte

Thanks, Marty. Good afternoon, everyone. As Marty mentioned for the fourth quarter of fiscal 2007, we reported net revenues of $79 million compared with $75 million for the fourth quarter of fiscal 2006. The increase of 5.3% in total revenues was driven by sales from 13 stores opened in fiscal '07, and partially offset by a 6.7% decrease in net revenues from our direct-to-consumer channel and a 4.6% comparable store sales decline.

Comparable store sales continue to be negatively impacted by increased competition and [back] geographic markets as well as declines in our retail club component business. Also, we experienced particular weakness across the board in December.

Gross margins for the fourth quarter were 34.9% as compared to 34.6% for the same period last year, or an increase of 30 basis points. This was a result of a favorable merchandise mix as well as improved shrink results for the quarter, which was largely a result of timing of physical inventory count. SG&A expense rose by 280 basis points for the fourth quarter to 37.8% of net revenue, driven by expenses associated with 13 store openings, consulting fees, and deleveraging resulting from negative comparable store sales.

We also recorded a $43 million non-cash impairment of goodwill, associated with the decline in our market capitalization, and long-lived assets related to three stores. This resulted in operating loss of $45.6 million in the fourth quarter of fiscal 2007, compared with an operating loss of $0.6 million for the same period of fiscal '06.

Net loss totaled $46.7 million or $2.95 per share based on 15.8 million fully diluted weighted average shares outstanding. Excluding the 43 million impairment charges, net loss was $3.7 million or $0.23 per share. This compares with a net loss of $1.6 million, or $0.10 per share based on $15.7 million fully diluted weighted average shares outstanding in the three months ended December 2006.

For the fiscal year '07, we reported net revenues of $388.2 million compared with $357.9 million for fiscal '06. This increase of 8.5% was driven by sales from 13 stores opened in fiscal '07, partially offset by $5.3 million or 6.2% decrease in net revenues from our direct-to-consumer channel and a 3.7% decrease in comparable store sales.

The net loss for the year was $40.8 million or loss per diluted share of $2.58, including the fourth quarter impairment charges. This compares to a net loss of $8.1 million or a loss of $0.62 for fiscal '06, including $12.8 million charge for the loss on extinguishment of debt and $3.4 million for other one-time costs associated with our IPO. Without these adjustments earnings per share were $0.14 in fiscal '07 within our pre-released guidance of $0.13 to $0.16 and were $0.61 in fiscal '06.

As of December 29, 2007 total inventory was $98.5 million as compared to $88.2 million on December 30 of '06 and average store inventory was flat year-over-year.

In 2008 we will no longer be giving formal guidance, but rather direction regarding some important components of our business. Total revenue growth is expected to be flat to slightly positive. This assumes flat to negative low single digit comparable store sales results and a decrease in sales from the direct business.

Pre-opening expenses will be substantially lower in fiscal 2008 due to our current plan to open one store in the third quarter, while in fiscal 2007 we opened 13 stores. We also plan to close three stores in fiscal 2008, two of which have already been closed in the first quarter and one that is scheduled to close in the third quarter.

All closings are due to lease expirations that were old store formats from our acquisition of Don Sherwood Golf & Tennis. The bottomline here is we are repositioning this market by closing three stores totaling 24,000 square feet and opening one larger store that embraces our activity [laden] model.

As for taxes, due to having a full valuation allowance against our deferred tax asset, we do not expect to recognize any federal income tax in 2009. However, our projected effective rate for foreign and state taxes is 15 to 20%. We expect all of these actions to provide meaningful earnings growth. Quarters one, three and four will be similar or slightly down to prior year, while second quarter should show meaningful improvement.

Q1 will be impacted by approximately $1.6 million or $0.10 per share in expenses associated with our change in executive management. This includes not only the separation expense, but search fees, interim CEO expenses and other related costs. Q2 earnings should increase due to reduced store opening expenses as well as decreased operational and marketing expenses compared to prior year.

I'll now turn it back over to Marty for closing.

Martin Hanaka

Great. Thanks, Ginger.

Besides Ginger's direction, it's kind of difficult to give more quantitative guidance at this time. We still see 2008 as a challenging environment.

And just look around, I think all of you are more familiar with this than we are, but Office Depot have a 85% drop in earnings last week. Cheesecake's CEO's warning on the casual dining seat. Lone Star is closing stores about 15% of the store base we read this week. Macy's 2,300 jobs evaporated. Home Depot 10% of it's headquarter is gone. Ann Taylor and Zales announced closing last week. And there was more severe stories than that.

Wickes Furniture gone. William Burnett and Sharper Image announced the BK. Fortunoff, the [account] of jeweler in New York and outdoor retailer, bankrupt and changed hands, and Levitt's before that. And there was lots of whispers coming from credit providers.

So, in short, we step back and look at this environment and think about what we need to do. And frankly, we said it's a difficult marketplace. This credit crisis has produced a domino effect that we can't control, but all these are affected by it. And frankly, reality is we're not just fighting in the golf space, we're fighting for every discretionary spending dollar out there against people in all sectors.

So we think with that overview, it is prudent for us to preserve our capital, cherish our cash and postpone unnecessary spending. So we've implemented a contingency plan supplemental to our base business plan to ensure that our earnings improve, and therefore, solidify our future.

The bottomline is not a lack of belief in our long-term strategy. We've got a great brand. We've got a specialty experience. We've got a terrific activity-based format that customer loves and our new stores reflect that. We've got a fully integrated tri-channel business that we control. We have diverse geographic markets, which has insulated us from new competition.

But what we need to do in the near-term and the near-term only is security underlying operational improvements that are in front of us, align our SG&A spend with our revenue growth and make sure we're generating leverage. We need to position an optimal organization which we're hard at work at and invest our marketing dollar smartly.

We expect that, yeah, there will be a further retail shakeup. We think that if we keep our powder dry, there is going to be surplus space available, but right now, a temporary pause. We're choosing to wait to grow aggressively again, be opportunistic and allow the risk-reward ratio to improve in our favor.

And once we see a change in consumer behavior, yeah, we'll move. We can reaccelerate, hopefully, as we move into 2009. But unless a great deal comes along, and there may be some, we'll be patient, keeping our powder dry again, and then, hopefully, be in a position to deploy our Raleigh model in more markets as a much healthier overall company.

Thank you for your time. Now we'd like to open up to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions)

And your first question comes from the line of Mr. Derek Leckow of Barrington Research. Please proceed.

Derek Leckow - Barrington Research

Thank you very much. Hi, Marty. Hi, Ginger.

Martin Hanaka

Hello.

Virginia Bunte

Hi, Derek.

Derek Leckow - Barrington Research

It's refreshing to have that quarter behind us. Just a question on…

Martin Hanaka

Agreed.

Derek Leckow - Barrington Research

Yeah. Question on the closures here, the three stores, where are they located?

Martin Hanaka

Yeah, the three stores are in California. There are three small stores of 9,000 and 9,000 and a 6,000. And in place of that, we are opening one large store that'll be a net gain of 5,000 square feet in the bay area.

Derek Leckow - Barrington Research

And would the operating cost especially offset themselves for that, or...

Martin Hanaka

No, this will be a better story for us.

Derek Leckow - Barrington Research

Okay. As far as the savings from the closures, would that be offset by the new store or the new store operate more efficiently, what's the --?

Martin Hanaka

We expect that we are going to be net-net, better off.

Derek Leckow - Barrington Research

Better off. Okay. And then, shifting over to the direct business, the 6.7% decline, what was the catalog circulation during the fourth quarter?

Martin Hanaka

Actually, we cut circulation 18% in the fourth quarter. And so there was actually a better conversion. The one thing you don't know is how these catalogs drops benefit retail. I can tell you to look at our retail business, we would say it had de minimis impact on retail, but we did drop circulation 18%.

Derek Leckow - Barrington Research

So that's a pretty healthy sign. And I guess the people are more -- the pages were more productive.

Martin Hanaka

In this case, yes.

Derek Leckow - Barrington Research

Okay. And then, as it relates to the guidance, let me just try to flush out a couple of non-comparable items from 2007 to make it easier to understand what 2008 really means. In the first quarter, you had a substantial increase in spending last year regarding some sales and marketing activities.

Martin Hanaka

Yes.

Derek Leckow - Barrington Research

What's the comparison going to be like as far as that particular program? Can you maybe quantify that for us? You also had something else, I think in the fourth quarter this year, you had the consulting expense, so maybe you can add those two items together, let us know what those were?

Martin Hanaka

Yeah. If you look at Q1, the overall reduction in marketing spend is about $1 million rough and tough, but those dollars have been placed differently throughout the year. And if you look back at last Q1, we were running all the same match for retail simultaneously in all markets. This year, we have three zones. We have cold, warm and hot, basically or mild. And so the hot market started in February. The warm market started this week. The cold market started in three weeks. So there is a different rhythm to it, but we think we're tracing the marketing when it most appropriate. And that being goes throughout the year.

Derek Leckow - Barrington Research

Okay.

Martin Hanaka

So depending how it falls, you know, Ginger, can give more information on how the marketing dollars fall by quarter other than that.

Virginia Bunte

No. That's a bulk of it. And then as it relates to, you talked about the fourth quarter expense, you're right. We did have some consulting that we talked about last year, I think in Q3 when we brought it out, that we were going to have increase expenses in Q4 related to the consulting as well as expenses associated with Raleigh, that were not part of the original guidance. So while that particular project will not repeat itself, there are also other consulting arrangements that we have.

You know part of what Marty talked about of us, looking at our organization and make sure that we're streamlining as best as we can. We're doing some business process reengineering. So we had some consulting that we're going to do for that as well. And then, I think the only other thing that you should know, that you should pick out of what I said is that in Q1 that we do have those extraordinary or one-time or how we want to call make senses associated with the executive management change.

Derek Leckow - Barrington Research

Right. Right. Okay.

Martin Hanaka

The other comment I gave on marketing, if you looked at Q4, we did not spend any money on our retail stores, the entire Q4. The thinking was we could bottomline it and save it.

Derek Leckow - Barrington Research

Okay.

Martin Hanaka

At the end of the day we were up in October. We were flat in November. We dropped 9.6% of retail in December. So it didn't pay off. So while we're saving some in Q1, we'll be spending more in Q4. Obviously, we didn't spend any last year. So we think that'll pay for itself, but there is a shift there. It's not a net-net savings.

Derek Leckow - Barrington Research

Okay. Great. Let me stop there. Thanks a lot for your help.

Martin Hanaka

Thank you.

Virginia Bunte

All right. Thanks, Derek.

Operator

Your next question comes from the line of Mr. Michael Keara of Merrill Lynch. Please proceed.

Michael Keara - Merrill Lynch

Thanks. Good afternoon everyone.

Martin Hanaka

Hello

Virginia Bunte

Hi, Michael.

Scott Wood

Hi, Michael.

Michael Keara - Merrill Lynch

I am trying to sort of get my hands around something. You've talked about December deteriorating pretty quickly. I believe back in the middle of January, you guys had got it to about 10% overall sales and now your outlook calls for slightly positive overall sales growth. Is that a function of just being more conservatives for things deteriorating more so in roughly six weeks?

Scott Wood

That's just overall conservatism.

Michael Keara - Merrill Lynch

Okay.

Scott Wood

There really has been, I would say no deterioration in our trend off of Q4, as a total company.

Michael Keara - Merrill Lynch

Right. Right.

Scott Wood

Retails actually a little better. Directs a little worse. But at the end of the day, March is everything. The March is equivalent to January and February in total. They are like $1 million difference. So it's all the next few weeks as how we do in Q1.

Michael Keara - Merrill Lynch

And while I look at your comps guidance that you're looking out for '08 and you've said store openings going forward, are they going to be in existing markets? How does that percentage break down new versus exiting, compared to the past few years? I am just trying to get to a sense of what kind of cannibalization we should be factoring into that guidance?

Scott Wood

I would say, again, without us ramping up our new unit growth given the economy, the store opening is the replacement store in California. So there won't be cannibalization planned at all in '08.

Michael Keara - Merrill Lynch

Okay.

Scott Wood

And our preference is to back the existing markets to get leverage. We did a market assessment, we could add 40 to 50 stores in existing markets without going into any new geography in the future if we chose to.

Michael Keara - Merrill Lynch

And what are the -- could you give a specific timing when the manufacturers are going to start hitting with minimum pricing at retail? Could you give that? I know you had talked about it, I don't know if you could…

Martin Hanaka

Fred Quandt is going to answer that.

Fred Quandt

Hi, Michael. This is Fred. Actually some of it is already hit. The [Kushnet] Company has launched minimum advertising and minimum selling price policies. Some of them hit on, like one of the flagship golf balls in the marketplace. And others will hit as new products hit the marketplace, whether it be some new Cobra clubs it will hit this month later. We're starting to witness some of it right now and some of it is still to come.

Michael Keara - Merrill Lynch

Okay. That's, I think, the best news I've heard in a while. And I guess, Ginger or Martin, as we look to model CapEx for '08, I know it's been about $1.2 million per new store in 18K format. I guess if you figure that on a per square foot basis, it's around $64. When we look at 59K, which will be bigger mix, I guess going forward, should we assume sort of the same capital outlay on a per square foot basis?

Virginia Bunte

No. I don't think so. I mean we haven't put out a model for the 59,000 square foot or our big box model yet.

Michael Keara - Merrill Lynch

Okay.

Virginia Bunte

I would not expect that that same dollar per square foot would occur. And the one store that we are opening this year, as Marty said, is going to be more in the 28,000, 30,000 square foot size for this year.

Michael Keara - Merrill Lynch

Okay. I guess a good segue to that is on that 59K I think I read somewhere, I think when you were at a industry conference that you said that model, the Raleigh model, and we even had a chance to look at it obviously, is running 20% ahead of plan. Is that relative to the 18K prototype you are talking about in terms of sales return?

Martin Hanaka

No. It's in relation to the budget for the bigger box.

Michael Keara - Merrill Lynch

The budget, okay.

Martin Hanaka

And the store continues to exceed our expectations, consistently every day and every week. Now, given it's less than 120 days old…

Michael Keara - Merrill Lynch

Right.

Martin Hanaka

…and given we haven't hit golf season yet.

Michael Keara - Merrill Lynch

Okay.

Martin Hanaka

That will start in a couple of weeks. Our intent is as we get through Q2 and we've had a quarter of a golf season under our belt, we would come out with a pro forma for all future stores. But it's exceeding our expectations, we've got a very favorable mix, we learn how too operate it, so you go from 20 to 60. It's a whole different operating model.

Michael Keara - Merrill Lynch

Right.

Martin Hanaka

Specially becomes big box, and we fully intent to open this activity late in stores, similar to Raleigh. Based on our results today, we feel very strongly about it. The constrain is the consumer, the economy and our desire to be opportunistic.

Michael Keara - Merrill Lynch

Okay. Now, if I look at that 60K, obviously I'm trying to look back in sort of my own [super] model here. How much of that is non-selling? Is it safe to assume 10,000 to 15,000 for the tennis court, putting greens and that stuff is sort of non-selling…

Martin Hanaka

Well, I was thinking that sounds behind the wall. Frankly, these areas have to give you productivity to pave their way. You got to sell more clubs. So at the end of the day, yeah, if you'd say they were non-selling and it was entertainment, then by all means it would be that number.

Michael Keara - Merrill Lynch

Okay. So it's safe to assume that. And I guess one last question, Ginger, you talked about EPS directionally, obviously that's -- I think you already said that's excluding executive compensation, but should we be modeling the 15% to 20% tax rate? I know you aren't paying any federal, but I just want to make sure that I'm using the right operating EPS?

Virginia Bunte

Yeah, 15% to 20% for just state and foreign. And the numbers that we're looking at even with -- we're saying an even with expenses in Q1 related to executive management, which I can say is about $0.10. We're still going to show meaningful improvement in earnings.

Michael Keara - Merrill Lynch

Okay. So excluding that it would be even better, okay.

Virginia Bunte

That is correct.

Michael Keara - Merrill Lynch

Okay. So from an operating standpoint, that's going to be clearly one-time?

Virginia Bunte

Right.

Michael Keara - Merrill Lynch

Unless Martin decides to get something on his way up.

Virginia Bunte

Right.

Michael Keara - Merrill Lynch

All right, guys. Thank you very much.

Virginia Bunte

Thanks, Michael.

Operator

Your next question comes from the line of Mr. Todd Slater with Lazard Capital Markets. Please proceed.

Todd Slater - Lazard Capital Markets

Thanks very much. Hello everybody.

Virginia Bunte

Hi, Todd.

Martin Hanaka

Hello, Todd.

Todd Slater - Lazard Capital Markets

I had just a question on the expenses for starters. You said that you're going to align the SG&A to revenue growth, which I think is flat. So, I guess, my first question is does that include the first quarter management expense or is that exclusive of that?

Martin Hanaka

That's exclusive of that going forward.

Todd Slater - Lazard Capital Markets

So SG&A could be up. So, obviously, SG&A will be higher including that number?

Virginia Bunte

For Q1 definitely, it would be higher.

Todd Slater - Lazard Capital Markets

How about for the year?

Martin Hanaka

For the year, where you're getting increase are the annualization of our 13 new stores, which are all up against partial years. So what we're doing is we're adding a lot of occupancy cost that were reflected a year prior, and then, of course, payroll cost for those stores. What we are trying to do is produce ideal organizations. We're looking at the right full-time, part-time headcount by store, we look at the right hours usage, and we've created discrete peer groups, Todd.

We've formulated eight different groupings of similar volume stores, so we can manage across volume as opposed to managed by geography. So we expect that will have some impact. We do have control on our marketing costs. And the other thing, of course, is the fact that in our SG&A corporate level we actually have a job freeze in place right now, and we're looking at other efficiencies to get control on all of our operating costs.

Todd Slater - Lazard Capital Markets

So with all those expenses or initiatives, I guess, minus the hiring freeze, are we to model SG&A dollars up or -- because you said flat so or closely aligned with sales, which to me means flat. I am just wondering if we're thinking about the right way, excluding the management make sense for the first quarter, for the year?

Virginia Bunte

Yes. And Todd, even with the full impact of the stores year-over-year, and the way we're looking at SG&A is that for dollars it would be up, only to the extent though for right now that you have all of those leases going in there. So it is going to go up for the full year affect, but as you look at the normal, like if I look at my comp base, it would be going down.

Todd Slater - Lazard Capital Markets

Okay. All right. I guess that's a little bit helpful there. Maybe we could just move a little bit to the other line, the gross margin line again, if I could follow up on that. The gross margin in the fourth quarter was up 30 bps, is that?

Martin Hanaka

30 basis points.

Todd Slater - Lazard Capital Markets

And some of that was due to shrink, can you quantify how much of that was shrink and what's happened to the merchandised margin, outside of shrink?

Virginia Bunte

Merchandise margin was slightly up. I mean a lot of that had to do as we did. And I think Marty mentioned earlier and we sold to lot of private label. As it relates to the shrink, if you recall, on some of our previous discussion and our previous SKUs, we changed the timing when we had done physical. So we're up again. We are actually showing loss in margins, due to shrink earlier in the year. When you get to the full year, when you look at the full year effects, its really equal year-over-year. It's just in the quarter it stands out.

Todd Slater - Lazard Capital Markets

Okay. So if merchandise margin were up, inarguably a pretty tough consumer quarter, where you had December, was it unmitigated through the disaster and you're talking about the stabilization, and you're talking about some minimum pricing policies. I am wondering if it's fair to say that you expect gross margins have stabilized and maybe flattened, or could they be up for the year?

Fred Quandt

Hey Todd, its Fred, I'll take that. We've been working diligently on some key initiatives Martin mentioned, again, proprietary growth, shifting our mix to more margin rich categories like apparel. Certainly, some things that we've done whether it'd be ABCD in stocks, marked down management systems, enhance store profiling these are all things that we expect to give us benefits frankly in 2008.

But that caveat that I'll throw out is I think and Martin mentioned, it's a very difficult economic climate right now. And we're experiencing, right now, today a high level of promotion that we're competing against. So you know the good news is that we've got some of these key initiatives in place that are driving margin enhancement throughout organization, but again, we may need to be reinvesting that to drive some traffic as we head into '08.

Todd Slater - Lazard Capital Markets

Sure. Okay. That's reasonable and then just on the clubmaking piece of the business. Just talk again about where you think that's heading in '08? Remind us what the margin profile that business was? If that business declines further then hits the margins, scalable sense on that side of the business?

Fred Quandt

Clubmaking is actually -- it's still declining slightly but it's stabilized. And we're very proud of some initiatives that we put in place to grow our service revenue, custom clubs, half of that are ClubVantage Program, all things that are adding margins to us. So again, business is still soft. We just actually had a competitor go out of business here, recently.

It's a tough industry, but again some of things initiatives that we've done are going to help us. And then, again, I'll give you that Callaway and TaylorMade coming out with I-MIX and CBG Limited and interchangeable clubs. That might help and validate. You know, what we've been doing for the last 40 years as it relates to custom fitting and selling individual component pieces.

Todd Slater - Lazard Capital Markets

So the clubmaking piece is stabilizing and it is higher margin, might people recession or slowdown or economically squeeze, perhaps, move more into clubmaking and buying fancy new clubs that are more expensive?

Fred Quandt

That could happen. That could happen. Now, the one thing I would tell and typically that makes a lot of sense, with the advent of heightened distribution channels and pre-owned as well as manufacture, shortened life cycles and closeouts, there is a lot of ways for a guest to get certainly values. But we're playing up the value on the club making side no doubt.

Todd Slater - Lazard Capital Markets

Okay. And could you just give us or remind us, what is the mix of clubmaking? And if you can also talk about what the mix of apparel was in other higher margin mix benefit, hopefully, going forward in '07 and what do you think it can grow to in '08?

Fred Quandt

Yes we don't give breakouts of categories. Certainly, I will tell you since '02, we've doubled apparel penetration. And we think we're honestly were de-scratching the surface. I think if you have seen that we've put apparel larger pads in middle of our store much more of a lifestyle presentation and frankly, it's paying dividends. I'll give you an example, our comp inventories is down 11% in apparel, but sales were up 9%. So there are some good things that are going on in that category.

Todd Slater - Lazard Capital Markets

Well, that's excellent. Could you give us a little bit of a sense of how that big it is, I mean doubling from a base of maybe 1% doesn't really -- I'm suggesting that's what the number is. How important it is to your business though?

Martin Hanaka

I think that this category, you know, it can run from the 10% to 15% of our business.

Todd Slater - Lazard Capital Markets

Okay. And could you also give us a sense about how tennis is doing as a category as well it sounds like there is some good news there.

Fred Quandt

No, tennis is exciting. It exceeded its plan in our internal plan last year. It's off to a good start in '08. We think we're being accepted as a recognized leader in the space frankly. Our consumers are telling us that. Our manufacture partners are telling us that. You know we're seeing margins improve. We're getting better at the category.

Todd Slater - Lazard Capital Markets

And is that possibly going to be at some point 10%, 15% type of business or is it something you still see as smaller?

Fred Quandt

You know I don't know if it's going to be, Todd, quite that size and we have some experience in the category, as we bought down through it's golf and tennis world and got to see a mature tennis business inside their stores. It didn't quite get to that 10% to 15% range, but it was certainly high single digits. And lets not two, unlike golf, you know, we've been saying that participation rates in golf have been flat to slightly down and tennis have actually had five straight years of participation growth. So there are some exciting opportunities there that we're capitalizing on.

Todd Slater - Lazard Capital Markets

Okay. And just last thing, just sort of an industrial question. Do people you speak to in the industry think that, how long does participation rate declines last? Or you know, what is sort of the lengthiest state of decreases of participation? I mean could we be in for extremely prolonged period or do these things usually run in cycles of x amount of time?

Martin Hanaka

Well, the baby boomer trend was predicted to start to reaccelerate one to two years. So if everybody retires, when they thought they were going to, they'll have the time and discretionary and come to do it. So flat for another couple of years, I guess would be our best guess. So we're competing in a market share gain depending on the markets. But we think it becomes a nice organic growth industry that some people have said the reason that they like the space is that, every year there is going to be 4% or 5% growth in our target consumer once we hit this point in the next couple of years, which would last for quite sometime.

Todd Slater - Lazard Capital Markets

Okay. Great. Thanks very much.

Operator

The next question comes from the line of Mr. David Cumberland with Robert Baird. Please proceed.

David Cumberland - Robert Baird

Thanks. Hi. Can you provide an update on the CEO search?

Martin Hanaka

Yeah, certainly. This is Marty. We've had no lack of interest in the position. And frankly, the interviews are happening fast and furious. I had four interviews last week alone. I have a couple of more for this week, partnering with some Board members, we are betting our candidates. I would say we have a very strong group of people who are well qualified to lead the company. Timeframe, a little more uncertain, we are trying to start the next wave of interviews with individual Board members, and that's just taking time to coordinate, because these people as you can imagine are very busy people with demanding schedule.

So that's the only obstacle we are facing is time and scheduling, not interest, and I'm personally very enthused about the people are interested in this position. I'd like to say April 1st, but I would certainly hope by our annual meeting May 6th that we will definitely have a CEO. So knock on wood, we are striving very hard to make that happen.

David Cumberland - Robert Baird

Good luck on that. A couple of other questions, on the catalog side, are you planning to add any titles in '08, and could you [delete] any title in '08 that you ran in '07?

Martin Hanaka

No, no. You are going to see the same club making and consumer books, tennis and the women's [drive] book remain the same. In Q1, we've actually had circulation increase of 2% earlier versus this year, so we are circulating a few more books, and we have a page count increase of 8.2%. So knowing that this catalog customer shops the web and shops retail, and it's good this multi-channel thing works and we've definitely been able to identify a benefit to retail through our catalog offer, but no drop in books. We want to remain flexible, we don't want t operate at silos, we want to have each one of these books compliment the other channels.

David Cumberland - Robert Baird

And then my last question, what was proprietary brand as a percentage of total sales in 2007?

Fred Quandt

It was 13% of our business, and basically flat as a percent share to last year, but if you dig and pull the couple of areas of anions off, and understand the impact of clubmaking and the decline therein. Very healthy growth in non-clubmaking areas like apparel, clubs, consumables, and quarter four in particular actually saw that growth significantly 170 basis points in share over prior year.

David Cumberland - Robert Baird

And so that 13 compares to about 13 also in '06?

Fred Quandt

Yes.

David Cumberland - Robert Baird

Thank you.

Operator

Your next question comes from the line of Hayley Wolff of Rochdale. Please proceed.

Hayley Wolff - Rochdale

Hi, guys. Just a couple questions. First, when you look at the warm weather markets, rounds played in December and in January were off. Can you give us a sense of what the retail trends are like in those warm weather markets and what predictive value do you think they may have for the full year? And then related to that Marty painted a pretty grim picture of the state of retail, can you contrast that with sort of flattish to slightly negative comp store sales growth expectations for this year, just beyond as having easy comps? Thanks.

Fred Quandt

Sure. I'll give you one example, if we looked at January rounds played in Golf Datatech, California, which is one of our hub markets, rounds played were down 15%.

Hayley Wolff - Rochdale

Right.

Fred Quandt

South Atlantic which includes Florida was down 6%, the South Central, which includes Texas where we have a bunch of store was up 19%, and we didn't experience that. So we haven't been able to correlate this as a market share gain or loss that we've tried. And given the comps, yeah, grim probably the right word because we're being cautious, obviously there is a lot signals out there. All of us look at 401K as another investments and I think people are very nervous. So I think it's prudent for us to be cautious as we enter the year; and as we see signs of change, that I think we can begin to grow again in a very responsible way.

But comps outside of that, I mean we are really thinking that the older stores are going to drop a few points in comp. But the good news is we have a bunch of new stores that are coming in to the comp base at different times throughout the year, and those are doing fine. But it's really hard for us to predict. We really want to be more helpful, but we don't know that we can do that, given the uncertainty, given some of the week-to-week changes in our numbers.

Hayley Wolff - Rochdale

In the warm weather markets, I mean I know you don't like to break out your data this way. But in the warm weather markets are you comping sort of flattish versus last year?

Fred Quandt

Yeah. It's hard to say that really. We really can't say that.

Hayley Wolff - Rochdale

Okay.

Fred Quandt

No way, it's not consistent. There's not a pattern that you can say, this applies to, this first wave of marketing is inconsistent.

Hayley Wolff - Rochdale

And then in terms of the --

Fred Quandt

I am sorry, can't be more helpful.

Hayley Wolff - Rochdale

Okay, the research going in to the location of the San Francisco market vis-à-vis more of a warm weather market for a larger store. Could you just talk about that, and talk about how you think about the market opportunities for the larger store format?

Fred Quandt

Yeah we think that there were certain markets where the larger store format makes sense. A lot of it is the size of the market, the year round golfing, attractiveness of the market, the number of rounds played, the number of golf courses, the amount of travelers who frequent the locations. So there's a lot of things that we take in to consideration. There are certain markets where there is a scarcity of real estate, and they are high-priced and those probably don't make sense for us to go with the next [few] of our big boxes because there is no sense in taking unnecessary risk.

So those kinds of markets are more targets for our core box of 20,000 or 25,000 square feet where we know, we can make money and is available real estate at nominal pricing or reasonable pricing. So, we try to bounce all those up. We have a couple of big box sites located that, in fact, one of them -- we were at couple of weeks ago, we can't get it built in '08 or we certainly would have done it, because as I said, this is not a lack of conviction or strategy, but it will be '09 Q1 opening. And it's all the criteria.

And there is couple others like that that we are negotiating now. And again, we think if we will be patient, there is going to be other opportunities, we are already seeing it come out of the furniture industry, where a lot of those retailers have become casualties that we are beginning to look at as possible targets. But again, the market criteria have to fit before we just go take out a big box.

Hayley Wolff - Rochdale

Okay. And lastly, you know there is a lot of talk about the demographic of the golfer being somewhat immune to weakening consumer spending, can you talk about how you view that and what new products are out there that you think maybe drive higher spending or drive the consumer into the market? And if you think that the square drive from last year will have some lag this year?

Martin Hanaka

Yeah. I am going to let Fred answer the second half of that question. As far as the first half goes, I don't know if the [Cuff-Link Group] is really spending as freely as they used to. I get one anecdote. I have a friend that's heavily involved in a FBO and he is got (inaudible) actually, one of the most affluent communities on the East Coast anyway and for the first time in nine years jet fuel sales dropped substantially, which means people aren't flying their jets anymore. That was indirectly the golf industry and retail, maybe not necessarily, but I think it tells you that this is affecting everybody, all across the board.

And yeah, people who are -- affluent people who have money, I think economize in different ways, but we are not banking that it's as business as usual for that segment. Because you are right, the avid golfer is someone who is a affluent, professional, well educated, but I don't think they are free spending the way they possibly once were. Fred you want to answer the second half?

Fred Quandt

Yeah. Hayley, I would just tell you that, we're starting about some of the 2008 launches, Marty kind of took you through, the Callaway, I-MIX interchangeable, TaylorMade, CGB Limited, again interchangeable $1,000 price point driver, we're excited about that. I will tell you the timing is a little different in 2008 versus 2007, many of these things were in the marketplace in February of last year or this year. We get some of these key products in late March, April. In fact actually number one selling driver in the marketplace is getting a refresh and a $100 extra price point, that's a TaylorMade burner tour driver.

But again that won't be out until April. So, a little bit of a timing issue. We are seeing as Marty said, potential price points climbing, especially in the iron category. Years ago you might only see one manufacturer Callaway with a $1,000 set of irons, this year we'll actually have four brands. They are all competing in a $1,000 type price point. Some exciting things with GPS, coming down in price of $200 where it might get add that next year golfer, that's going to happen in May. But again given all this technology that's entering, just given the economic conditions honestly, we don't have a good handle on what to expect, because we're not sure how the consumer is going to react in their total discretionary spending.

Hayley Wolff - Rochdale

All right. Thanks a lot.

Fred Quandt

Thank you.

Operator

Your next question comes from the line of Mr. Casey Alexander with Gilford Securities. Please proceed.

Casey Alexander - Gilford Securities

Hi. Good afternoon.

Fred Quandt

Hi, Casey.

Casey Alexander - Gilford Securities

You said that the I-MIX is going to launch in your stores in April?

Martin Hanaka

Yes sir.

Fred Quandt

Yeah. It's late March, early April. It's actually on our website for sale right now.

Casey Alexander - Gilford Securities

Okay. So I mean have you taken or will you be taking it into inventory in March, or I mean should we expect a little bit of an inventory bump because of that coming up at the end of the first quarter?

Fred Quandt

Yes, it's going to come into all 74 stores. We are still working on little bit of fixturing with our partner Callaway Golf on that. We get all 74 stores, late March, early April.

Casey Alexander - Gilford Securities

Okay. And when do you expect the TaylorMade (inaudible) in a box to launch?

Martin Hanaka

That's going to be in mid-April.

Casey Alexander - Gilford Securities

Mid-April?

Martin Hanaka

Mid-April.

Casey Alexander - Gilford Securities

Okay. Secondly, you said that one of the components of slowdown was in the pre-owned club area. Can you give me an idea of how you go about depreciating that inventory overtime, and if those depreciation rates have changed based upon your sales experience?

Fred Quandt

Yeah. I can talk a little bit. First of all, it's a little bit intentional. We want it to -- it's a supply/demand game. We have to keep inventory inline with sales. We change our buyback pricing based upon lifecycles, anticipating what used pricing maybe. We manage our own blue book list on that. We've been trying to lower our return rates, doing a better job, fitting equipment upfront, so it'll be coming back less frequently, which we successfully did in 2007.

And so our inventory is in a healthier position, our used club inventory is. But as you know, as inventory per door goes down a little bit, it can impact your sales. You just don't have as much to sell. And again, it's just, we try to do a good job of assessing what market prices might be, making early price changes on buyback list, so that we don't put pressure on margins as product lifecycle is out.

Casey Alexander - Gilford Securities

All right. Okay. Hang on here. Can you review for me, again, because it went pretty quick, what categories, you know, you're sort of think are cycling up for '08 versus categories that are cycling down that are helping you to lead you to your '08 guidelines?

Fred Quandt

Yeah. I think some categories that are cycling out, firstly, certainly apparel. Apparel's going to be large trust of ours, as we move our brand towards lifestyles. I gave you some of the early numbers already. I've seen good early success. Tennis, again, we're becoming a real player. Part of our strategy was to diversify our product mix, make up for losses in category like clubmaking. We expect service revenue to go up. Some key things that's we've done with our sales of grips are going to help us. Anything proprietary, we're anticipating some key jumps there. Some categories that maybe are going to continue to flatten or struggle a bit are gong to be like club heads, as more and more consumers choose potentially not to build their own clubs.

Casey Alexander - Gilford Securities

Okay. And lastly, for those of us who are more proficient at the OEM side than the retail side, can you kind of explain to me how the minimum retail pricing policies work and what makes it different than how it worked before?

Fred Quandt

Yeah. There are two kinds of sales policies that typically manufactures can have. One are the minimum advertising price policy, which they just give you a minimum price that you can go out and market their brand at. And then, there are minimum sale prices which, again it's a unilateral policy. We have the right to sale product to whatever we want to sale products for, but they also have a right to protect their brand and they've created minimum sale policies.

And what that's going to do is help gravitate prices up as deep discounters won't be able to discount, and it's going to gravitate margin potentially up. Now, honestly it plays right into our strategy because we're not necessarily trying to sell on having the lowest price. We're trying to sell on innovation, guest experience, lifestyle, some of key solutions that differentiate our business platform.

Casey Alexander - Gilford Securities

Okay. Lastly -- and that was helpful. Thank you. Lastly, in the adjustable club, do you also plan to carry the [Necan's] product?

Fred Quandt

Yeah, I think you're going to see that in a few doors. I don't know if that's in every door program for us. But certainly we're gaining a little momentum with them, but we have couple doors.

Casey Alexander - Gilford Securities

Okay. Great. Thank you so much.

Operator

I'll now like to turn the presentation back over to management for closing remarks.

Martin Hanaka

Great. Thank you, everyone. We appreciate your time and attendance today, your interest. We're really committed to turning around and getting the kind of earnings improvement we deserve. A great group of management here is working very hard, great organization. And hopefully, you'll see improvement across the board as we get through Q1.

Thank you very much. Have a good day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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