Golfsmith International Holdings, Inc. saw second quarter net revenues increase 9.6% to $125.0 million from $114.1 million for the second quarter of fiscal 2006. Sales benefited from the opening of 15 new stores, net of closure, in the trailing 12-month period, but was offset by a 4.8% decrease in net revenues from the direct channel and a 4.7% decrease in comparable store sales.
Comparable store sales for the quarter were impacted by the continuation of heightened levels of competition in the Dallas and Atlanta markets, and declining sales in the clubmaking business. Furthermore, golf rounds played in the United States, a leading indicator of golf participation tracked by the National Golf Foundation, declined 1.1% year-over-year in the second quarter despite growth in May and June.
The company reported income from operations of $7.7 million in the second quarter compared with $6.5 million for the second quarter of fiscal 2006. Gross margins and operating income continued to be pressured by a higher sales mix of lower margin products and a decline in sales in the higher margin clubmaking business. The company's operating results were also largely affected by increased selling, general and administrative expenses associated with 15 new stores opened since July 1, 2006, eight of which opened during the second quarter of 2007. Selling, general and administrative expenses also included increased corporate support costs related to the growth of the business as a public-equity company.
The company also reported net income of $6.8 million in the second quarter, or earnings per diluted share of 43 cents, based on 15.8 million fully diluted weighted average shares outstanding. This compares with a net loss of $7.9 million, or a loss per diluted share of 73 cents, based on 10.8 million fully diluted weighted average shares outstanding in the three months ended July 1, 2006.
The second quarter of fiscal year 2006 included certain charges incurred by the company concurrent with its initial public offering (“IPO”) on June 20, 2006. The charges included $12.8 million related to the extinguishment of the company's long-term debt that was retired with proceeds raised in its IPO and $3.0 million of expenses related to the termination of a management consulting agreement with First Atlantic Capital, Ltd., partially offset by $1.0 million of derivative income associated with the IPO. Additionally, the company recorded a non-cash, stock-based compensation expense of $0.4 million during the second quarter of 2006. Excluding these charges, net income for the second quarter of 2006 was $7.2 million or $0.64 per diluted share.
“The second quarter was a good quarter overall for Golfsmith's business. We drove revenues by opening eight stores that incorporate our core activity-based store format and by increasing sales in certain key categories, such as apparel, tennis and electronic accessories,” said Jim Thompson, chief executive officer and president of Golfsmith. “We closely managed our operations and remained flexible in the way we ran our business in this highly competitive and promotional environment.”
Year-to-Date Results
For the six-month period ended June 30, 2007, Golfsmith reported net revenues of $202.7 million compared with net revenues of $188.9 million for the six-month period ended July 1, 2006. The increase of 7.3% was due to net revenues from 15 non-comparable retail stores that were opened subsequent to July 1, 2006. This increase was partially offset by a 6.8% decrease in net revenues from its direct channel and a 5.1% decrease in comparable store sales.
The company reported an operating income of $3.8 million for the six-months ended June 30, 2007, compared with an operating income of $8.4 million in the first six months of fiscal year 2006. Gross margins and operating income continued to be pressured by a higher sales mix of lower-margin products and a decline in sales in the higher margin clubmaking business. The company's operating results were also largely affected by increased selling, general and administrative expenses associated with 15 stores opened since July, 1 2006.
The company also reported net income of $1.9 million, or earnings per diluted share of 12 cents, based on 15.9 million fully diluted weighted average shares outstanding. This compares with a net loss of $8.8 million, or a loss per diluted share of 85 cents, based on 10.3 million fully diluted weighted average shares outstanding in the six months ended July 1, 2006.
Results for the six months ended July 1, 2006, included certain charges incurred by the company concurrent with its IPO on June 20, 2006. Excluding these charges totaling $15.2 million and previously described in detail in the discussion of second quarter results, net income for the six months ended July 1, 2006, was $6.4 million or $0.59 per diluted share.
Outlook
Due to both the seasonality of the golf retail business, which can vary from year to year with weather and the timing and success of club introductions, and the company's desire to manage the business in a fluid manner within the fiscal year, the company currently plans to only provide, and update as necessary, full-year guidance.
For the full year of fiscal 2007, the company is updating its previously reported outlook. The company expects comparable store sales of negative 3.0% to negative 2.0% and diluted earnings per share for the year to be between 30 cents and 35 cents based on fully diluted weighted average shares outstanding of 15.9 million. This lowers the high end of the previously provided earnings per share estimate for the year. Furthermore, the company now expects to open 13 stores in fiscal 2007. Three stores were opened in the first quarter, eight stores were opened in the second quarter and one store has been opened to-date in the third quarter. The company plans to open one store in the fourth quarter of fiscal 2007.
Golfsmith International Holdings, Inc.
Consolidated Statements of Operations
(Unaudited)Three Months Ended Six Months Ended
————————– ————————–
June 30, July 1, June 30, July 1,
2007 2005 2006 2005
———— ————- ———— ————-Net revenues $124,998,760 $ 114,138,315 $202,661,256 $ 188,948,611
Cost of products
sold 80,556,095 72,437,031 132,135,365 121,444,970
———— ————- ———— ————-
Gross profit 44,442,665 41,701,284 70,525,891 67,503,641Selling, general
and
administrative 35,612,535 34,163,217 64,964,435 57,865,696
Store pre-
opening
expenses 1,147,630 1,022,987 1,778,396 1,222,736
———— ————- ———— ————-
Total operating
expenses 36,760,165 35,186,204 66,742,831 59,088,432
———— ————- ———— ————-
Operating income 7,682,500 6,515,080 3,783,060 8,415,209
Interest expense (933,212) (2,753,646) (1,916,702) (5,813,072)
Interest income 39,624 144,692 45,526 155,475
Other income 206,852 1,098,712 238,850 1,420,776
Other expense (26,177) (65,296) (69,156) (108,240)
Loss on debt
extinguishment – (12,755,270) – (12,755,270)
———— ————- ———— ————-
Income (loss)
before income
taxes 6,969,587 (7,835,728) 2,081,578 (8,705,122)Income tax
benefit
(expense) (154,200) (108,090) (175,182) (108,090)
———— ————- ———— ————-Net income
(loss) $ 6,815,387 $ (7,943,818) $ 1,906,396 $ (8,813,212)
============ ============= ============ =============
Net income
(loss) per
share:
Basic $ 0.43 $ (0.73) $ 0.12 $ (0.85)
Diluted $ 0.43 $ (0.73) $ 0.12 $ (0.85)
Weighted average
number of
shares
outstanding:
Basic 15,797,633 10,823,558 15,768,818 10,330,492
Diluted 15,830,810 10,823,558 15,872,254 10,330,492
