Golfsmith More Than Doubles Income on 5.8% Sales Gain

Golfsmith International, Inc. reported net revenues of $102.5 million for the quarter ended July 2, 2005, a 5.8% increase over $96.9 million for last year's quarter. Net income for the period increased 160.9% to $6.0 million from $2.3 million last year. Not all was rosy, though, as comp store sales slipped 0.5% for the quarter.

The $5.6 million increase in net revenues from the three months ended July 3, 2004 to the three months ended July 2, 2005 was mostly comprised of a $6.9 million increase in non-comparable store net revenues offset by a decrease in comparable store revenues of $0.4 million, or 0.5%, a decrease in direct-to-consumer channel revenues of $0.4 million, or 1.5%, and a decrease in international revenues of $0.5 million, or 25.1%. In comparison, comparable store revenues for the same period in 2004 increased by $0.3 million, or 0.7%. The company believes the decrease in comparable store net revenues was due to increased competition in select markets, offset by a 1.0% increase in the number of golf rounds played in the U.S. during the three months ended June 30, 2005 as compared to the same period in 2004, as reported by Golf Datatech. Non-comparable store net revenues primarily include revenues from eight stores in operation that were opened subsequent to July 3, 2004 and three stores that became comparable during the quarter but which contributed $1.0 million in non-comparable store net revenues during the quarter. The decrease in direct-to-consumer channel revenues was primarily due to planned reductions in catalog circulation intended to improve direct-to-consumer channel profitability. The decrease in international net revenues was primarily due to the sale of the rights to a trademark in fiscal 2004. Sales of products using this trademark contributed approximately one-third of international net revenues during the three months ended July 3, 2004 but did not contribute any international net revenues during the three months ended July 2, 2005.

Gross profit was $37.8 million, or 36.9% of net revenues, compared to $33.4 million, or 34.4% of net revenues, for the three months ended July 3, 2004. Increased net revenues for the three months ended July 2, 2005 compared to the three months ended July 3, 2004 led to higher gross profit for the three months ended July 2, 2005. The increase in gross margin percentage was primarily due to increases in vendor allowances, which resulted in higher margins, and to the company realizing economies of scale due to continued retail store growth, which has allowed the company to purchase products in higher volumes with more favorable pricing.

Selling, general, and administrative expenses increased $1.1 million to $28.0 million for the three months ended July 2, 2005 from $26.9 million for the three months ended July 3, 2004. Increased selling, general, and administrative expenses for the three months ended July 2, 2005 compared to the three months ended July 3, 2004 resulted from an increase in expenses of $2.6 million related to general operations for non-comparable retail stores, offset by a decrease of $1.3 million related to general operations for existing retail stores and a decrease of $0.2 million related to general operations for corporate and international expenses.

Store pre-opening costs include costs associated with hiring and training personnel, supplies and occupancy and miscellaneous costs related to new store openings and are expensed as incurred. During the three months ended July 2, 2005, the company incurred $0.9 million in store pre-opening expenses related to the opening of three new retail locations and the opening of two new retail locations during the third fiscal quarter of 2005. During the three months ended July 3, 2004, the company incurred $0.1 million in store pre-opening expenses related to residual costs from the opening of four new retail locations during the first quarter of fiscal 2004.

Interest expense consists of costs related to Golfsmith’s 8.375% senior secured notes and its senior credit facility with a financial institution. Interest expense was $2.9 million and $2.8 million for the three months ended July 2, 2005 and July 3, 2004, respectively.

The company records income taxes, consisting of federal, state, and foreign taxes, based on the effective rate expected for the fiscal year. Actual results may differ from these estimates. The company did not record federal income tax expense for the three months ended July 2, 2005 due to a full valuation allowance being recorded. Income tax expense of $0.1 million during the three months ended July 2, 2005 represents foreign income tax expense. Income tax expense was $1.3 million, or 37.3% of pre-tax net income, for the three months ended July 3, 2004.