By Tom Ryan

In an affidavit filed in the United States Bankruptcy Court for the District of Delaware, Brian Cejka, Golfsmith’s chief restructuring officer, blamed the company’s bankruptcy filing on a range of factors including an expansion effort with larger store formats, the recession, the ongoing shift toward online shopping and the declining popularity of the game of golf, in part caused by the descent from stardom of Tiger Woods.

In the court filing, Cejka said Golfsmith had “historically … been profitable” and was supported by a “wide-ranging, loyal customer base” and strong interest in golf.

The company was founded in 1967 by Carl and Barbara Paul as a provider of custom-made golf clubs, golf club manufacturing components and golf club repair services. It opened its first brick-and-mortar store in Austin, TX in 1972, and circulated its first general catalog selling third-party products in 1975.

Rise and fall of the Golfsmith empire
Golfsmith primarily operated as a catalog-based business until the 1990s, when it embarked on a large-scale expansion. In 1992, the company moved to its present headquarters, a 40-acre campus that includes corporate administration offices, a practice driving range, a 30,000-square-foot Golfsmith superstore and 240,000 square feet of shipping and distribution facilities. In 1995, Golfsmith began an aggressive retail expansion with the opening of superstores in Houston and Dallas, TX and Denver, CO. In 1997, it launched its first e-commerce website to further expand its direct-to-consumer business.

“The surge in the popularity of golf at the turn of the century coincided with the rise of professional golfer Tiger Woods’ success,” wrote Cejka in court papers. “Golfsmith responded to what has been dubbed the ‘Tiger Woods Phenomenon’ by rapidly expanding its businesses and increasing its store presence in targeted urban markets.”

Recently, however, economic downturns, industry trends and global shifts in consumer behavior began to put “significant pressure” on the company’s operational performance.

“Beginning in 2008, the golf industry experienced a steady decline as golf participation slowed during the recession,” Cejka said. “The retail industry as a whole was severely impacted by the recession, and as a result, specialty retailers like GSI, which focuses on leisure products, were hit particularly hard. This period also marked the beginning of a consistent shift by consumers away from shopping in traditional ‘brick and mortar’ retail stores toward a preference for the convenience provided by shopping on e-commerce platforms. At the same time, the enthusiasm underpinning the ‘Tiger Woods Phenomenon’ significantly waned.”

Beginning in 2011, in an effort to maintain its competitive edge during the rise of the sports “superstore,” Golfsmith began to open large-format stores in excess of 30,000 square feet. Those expansion efforts “reached their apex” in July 2012 with the formation of Golfsmith International Holdings LP (GSI), which represented the merger of U.S.-based Golfsmith and Canadian-based Golf Town. At the time, the parties declared the merger created the largest golf retailer in the world.

Cejka wrote, “The merger succeeded in joining two companies that had been serving golfers in North America for more than four decades, with the intention of allowing the company to pursue an aggressive growth strategy to maximize its footprint in the golf retail industry.”

For Golfsmith International, however, those changes were particularly debilitating, given that they coincided with the company’s aggressive expansion efforts. The “superstore” strategy led to higher rents and occupancy costs as well as reduced store-level productivity. Following the merger, Golfsmith opened even more stores in historically-successful metropolitan markets in an attempt to capture additional sales.

Wrote Cejka, “This strategy also was ineffective and resulted in significant sales cannibalization and increased overhead expenses. In short, a subset of underperforming and oversized stores and above-market leases drive the debtors’ occupancy costs to overwhelming levels.”

Stabilization efforts
Since 2014, Cejka wrote, Golfsmith International has taken a number of steps to improve its liquidity and operational performance. The steps included out-of-court strategic restructuring alternatives, securing additional collateral to increase available borrowings under its credit line, landlord negotiations to ease lease terms, vendor negotiations to improve payment terms during off-season periods, job cuts and selling certain non-core assets.

“Despite the company’s best efforts, however, this process did not sufficiently shrink Golfsmith’s underperforming store base and optimize its lease portfolio – two objectives that are indispensable to Golfsmith’s successful restructuring,” wrote Cejka. “The company’s EBITDA cannot support its current capital structure.”

Moreover, in recent months several key vendors have tightened trade terms, reducing Golfsmith’s ability to secure inventory and impacting its ability to borrow under its loan facility. Cejka wrote, “This vicious cycle has severely limited the company’s ability to dedicate essential time and resources to investing in operational growth commensurate with consumer trends.”

To address these concerns, the company conducted an “extensive auction process” prior to the commencement of its chapter 11 cases. The process led to an agreement to sell Golf Town to Fairfax Financial Holdings and CI Investments. Fairfax and CI collectively hold approximately 40 percent of the company’s senior secured notes. Proceeds from the sale will be used to reduce Golfsmith’s debt.

The bankruptcy filings are designed “to stabilize their businesses and to pursue an operational and financial restructuring around a smaller footprint of profitable Golfsmith stores,” said Cejka.

Beyond bankruptcy
The Golfsmith restructuring is expected to result in the closing of at least 20 Golfsmith doors, a nearly 72 percent reduction of Golfsmith’s obligations under its senior secured notes, and the refinancing of the remaining asset-based credit line with a new working capital facility. Wrote Cejka, “The transactions will provide a comprehensive solution for the company and will be the best outcome for its suppliers, employees, customers and other economic stakeholders.”

As part of its interim financing arrangements and in order to maximize the value of their estates and creditor recoveries, GSI is also exploring a sale of the U.S. Golfsmith business, which Cejka described as a continuing of efforts started in June 2016.

He noted that as of August 29, the company received four bids to purchase some or all of the company’s assets, which included two bids to purchase Golf Town only, one non-binding bid to purchase the entire company, and one non-binding bid to purchase Golfsmith. Only the Fairfax and CI bid was consummated.

While the sale process proceeds, the company intends to advance the Golfsmith debt restructuring efforts and to take steps to refinance or repay the remaining asset-based loan obligations. Wrote Cejka, “In the event that the sale process generates a higher or otherwise better value for the debtors’ assets, the debtors will, in consultation with their creditor constituencies, determine whether a sale of Golfsmith should be pursued in lieu of the Golfsmith restructuring.”

Cejka also noted that the pressures that led GSI to bankruptcy court “are not unique to Golfsmith,” pointing out that direct competitors such as Sports Authority, Sports Chalet and City Sport have also recently filed for bankruptcy. He added, “Other specialty apparel retailers such as Quiksilver, American Apparel, Aéropostale, and Pac-Sun have all sought chapter 11 protection in the face of similar market conditions recently.”

In addition, he listed Wal-Mart, Macy’s, Sears, J.C. Penny, Ralph Lauren, Jos. A. Bank and Staples among those announcing “significant store closures” in 2016.

Possible turnaround keeps hope alive
Cejka noted that the bankruptcy filings and restructuring efforts come as “market trends indicate that a turnaround in the golf retail market could be imminent.” He noted that golf participation in the U.S. has stabilized and “begun to experience material growth for the first time since the recession-era decline.”

Specifically, Cejka pointed out that in 2015 the number of golf rounds played increased by 2 percent and approximately 2.2 million people took up the game, approaching the record 2.4 million who began playing at the peak of the “Tiger Woods Phenomenon.” According to the March 2016 National Golf Rounds Played Report, golf rounds played increased by 5.5 percent between March 2015 and March 2016. Moreover, in the coming years, approximately 4 million people in the U.S. will enter into retirement and the NGF Study projects that this increase in the number of retirees will contribute to an incremental approximately 50 million rounds of golf played each year.

At the same time, the emergence of “exciting, young professional golfers” like Rory McIlroy, 27, Jordan Spieth, 23 and Jason Day, 28, “coupled with an increased focus by the industry on technological innovation and enhanced experience, have started to draw more millennials and junior golfers into the game.”

Cejka concluded that restructuring its current capital structure and being able to close some of its 109 retail locations through bankruptcy proceedings will “significantly reduce the burdens that inhibit Golfsmith from taking full advantage of the recent upward swing in golf’s popularity.”

Image courtesy Golfsmith