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Ten Reasons To Love GOLF

Posted: Aug 14, 2008 08:28 AM by Will Ashworth

Tickers in this Article: GOLF, ELY, ADGF, NKE

I'm not talking the sport here, not entirely anyway. Rather, I'm referring to Golfsmith International Holdings (Nasdaq:GOLF). If you're a golfer or tennis player, you've likely heard of the company. If you're not, allow me to introduce you to this Austin-based specialty golf and tennis retailer. Golfsmith has had its struggles over the years, but it seems to be turning the corner and may now be worthy of investment. Therefore, without further delay, here are the top 10 reasons to love GOLF:

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Reason No.10
Demographics favor its long-term growth. As more boomers hit the links, the National Golf Foundation predicts rounds played annually should increase by 100 million to 600 million by the year 2020. In addition, overall Tennis participation has grown 12.2% over the last six years. While the NGF has been playing this tune for some time, there are very few sports like golf where you can play into your late 80s or longer. Eventually, these predictions will come to fruition.

Reason No.9
It went public on July 16 2006, selling 6,000,000 shares at $11.50. With the net proceeds of approximately $61.2 million, it paid down some secured notes. The reduction of debt is always good in my books. (To learn more about companies going public, read our IPO Basics Tutorial.)

Reason No.8
While it hasn't always been easy, Golfsmith's history goes all the way back to 1967 when Carl Paul and wife Barb opened a clubmaking business in their New Jersey home. Now located in Austin, it has been operating for more than 40 years. It keeps chugging along, refusing to die.

Reason No.7
After going public in 2006, its stock immediately dropped, briefly making it back above $11 in early 2007, only to come crashing down once again in early 2008. With the stock down 66% in the last 52-weeks, it has far more upside than down given its better than expected second quarter earnings.

Reason No.6
Private equity firm First Atlantic and its Atlantic Equity Partners III, L.P. owns 7,934,418 shares and vote another 1,523,140 shares owned by Carl and Franklin Paul (the founders); this comes to approximately 57.7% of the common stock outstanding. Atlantic sunk $50 million into the business in 2002, and even though it probably could have taken some money off the table when Golfsmith went public in 2006, it didn't. That says commitment.

Reason No.5
Analysts like the stock. Four cover the company including Lazard Capital, Merrill Lynch and JPMorgan. Last week, analysts at Robert Baird raised their price target to $4, up a dollar while maintaining their 'neutral' rating. They did hike earnings per share estimates for 2008, which are now 24 cents, up from 15 cents and in 2009 to 32 cents from 23 cents. Lazard Capital Markets rates it a 'buy' with a target price of $8. (For more on analyst expectations, read Analyst Recommendations: Do Sell Ratings Exist?)

Reason No.4
It's one of the largest specialty retailers of golf and tennis equipment and apparel in the U.S. carrying well-known brands like Callaway (NYSE:ELY), Adams Golf (Nasdaq:ADGF) and Nike (NYSE:NKE).

Reason No.3
With stores in 19 states across the country plus internet and catalog sales, it has grown tremendously from its first retail store opening in 1972. Sales in the last five years are up $130 million to $388 million in 2007 (from $258 million in 2003) with 36 new stores bringing the total to 74. On July 23, it opened its 73rd store in Palm Desert, California. With over 36,000 square-feet, it was one of Golfsmith's large format superstores, featuring an indoor tennis court and golf driving range. It's no wonder then that retail stores accounted for 77.4% of total revenue last year.

Reason No.2
Its second quarter, earnings were 54 cents per share, 6 cents better than analyst expectations, achieving a 12.5% earnings surprise on the upside. It opened 12 stores in the second quarter resulting in revenue growth of 4% to $130 million. Even same-store sales increased 0.5%, which in this retail environment is better than a kick in the head. Operating income increased $2.7 million to $10.4 million, a 35% increase. Talk about protecting the bottom line. Despite this, its price-to-sales, price-to-book and PEG ratios are well below 1. Golfsmith is definitely unloved.

And the No.1 reason to love GOLF
In June, it announced interim CEO Martin Hanaka was taking over full-time. Hanaka was CEO of Sports Authority from 1998 through 2003, COO of Staples from 1994 to 1997, and before that he spent 20 years at Sears. Analysts applauded the move suggesting Hanaka's background made him a natural choice to lead the company through a weak economic environment. I couldn't agree more. If you're patient like First Atlantic, you should be rewarded.

To learn more about analyzing companies such as GOLF, read our related article Analyzing Retail Stocks.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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