Golf Galaxy Posts Solid Q2 Results, But Lowers Sales Guidance on Tougher Business…

Golf Galaxy, Inc. celebrated its fourteenth consecutive quarter of comparable sales increases, following up last year’s 7.4% improvement with an 0.8% gain during this year’s second quarter, but missed Q2 sales guidance that called for sales in the $98 million to $102 million range as well as comparable sales guidance that called for an improvement of 3% to 5%. This sales miss prompted management to once again lower their expectations for revenues and comparable store sales for the full year, as they did after the first quarter.

During a conference call with analysts, management announced that the company’s Advantage Club membership program had surpassed the 1.1 million member mark and that those customers now account for more that 50% of total sales.

The real excitement on the call, though, came not from the company’s loyalty program, but rather from its acquisition of GolfWorks and its rolling out of the concept to its retail stores. The services category has grown from 3% of sales during the first half of 2005 to 4.4% of sales for the first half of this year. That growth was fueled by the GolfWorks concept being in only half of the retail chain’s stores. By Thanksgiving, the company expects to have GolfWorks in the entire retail chain, which will not only help to grow service revenues, but also help GGXY more effectively market the GolfWorks brand, since it will be able to do so company-wide. Management said that when comparing the first half of this year to the first half of last year, those stores that have GolfWorks in them, have seen “a near doubling of [service] revenues.”

The majority of the sales gains for the company came during the last half of the quarter. Management pointed to the “hottest summer since the Dust Bowl” amongst other factors leading to the weakness, but pointed to new markets in which it is going up against Dick’s Sporting Goods and Golfsmith as “some of [their] highest comping markets.”

The e-commerce business was said to have “comped dramatically,” while clubs were said to be “relatively flat” with only a share shift amongst manufacturers due to promotional activities like buy a driver, get a fairway wood free programs.

Looking ahead to the third quarter, management expects net sales to be in the $45 million to $50 million range, an increase of 42% to 57% over the same quarter last year, with comparable store sales increasing in the mid-single-digits. The company expects to report a net loss of $2.7 million to $2.3 million, or 25 cents to 21 cents per diluted share. The company typically reports a net loss in its third quarter as a result of the seasonality of its business.

For the full year, net sales are currently expected to be $285 million to $295 million, compared with the prior estimate of $292 million to $300 million and its original estimate of sales in the $300 million to $310 million range. Comps are expected to increase 2% to 4%, down from previous estimates of a 3% to 5% gain and original guidance of 5% to 7% growth. The company reaffirmed its previous guidance of net income for fiscal 2007 of $6.8 million to $7.3 million, or 60 cents to 64 cents per diluted share.

Thus far into fiscal 2007, Golf Galaxy has opened 11 new stores with an additional 4 more planned to open in November, bringing the company to a total of 65 stores at year-end. GGXY expects to open 16 to 18 stores next year, with 12 of those openings occurring in the spring. Of those stores, 4 or 5 are planned as fill-ins in existing markets with the balance being opened in new markets for the retailer.