Golfsmith Lands in the Rough

Investors sliced the golf retailer's shares Wednesday after it reported lower same-store sales amid tougher competition

Golfsmith International (GOLF) is struggling in the face of competition. The Austin, Texas golf and tennis equipment retailer said March 14 that it lost money and customers during recent months.

The company's net revenues rose to $75.0 million during the quarter ended Dec. 30, up 4.5% compared with the same period last year. But sales at stores open more than a year dropped by 5.5% compared with a 13.5% gain for the prior-year period. The company noted "increased competition in certain markets and a decline in sales in the clubmaking industry," in a press release March 14.

The upshot was a net loss of $1.6 million during the December quarter, compared to a net loss of $2.3 million the same period last year.

Golfsmith is battling for customers against companies like the Atlanta retailer PGA Tour Superstores, a 3-unit chain owned and operated by Golf & Tennis Pro Shop, which describes itself as "the exclusive PGA Tour partner for off-course/off-airport golf retailing".

"PGA Tour Superstores unfortunately aren't going away," said JP Morgan analyst Nancy Hoch in a research note. She downgraded Golfsmith to neutral from overweight, noting that the small but growing PGA Tour chain has deep-pocketed investors such as the former Home Depot (HD) executives Arthur Blank and Dick Sullivan. The chain entered Dallas this month and announced plans to expand into Houston, Los Angeles, Orlando, Phoenix, and San Diego - all core Golfsmith markets.

"Though we've given the company some benefit of the doubt in 2007, earnings risk seems fairly high given the current competitive environment," Hoch said. (JP Morgan does business with companies covered in its research reports.)

As competition intensifies Golfsmith expects to have comparable store sales of between negative 7% and negative 6% during the March quarter, amounting to between $0.22 and $0.20 per share lost. Then comparable store sales will range between 1.5% and 3.0% for the full year and earnings per share will range between $0.69 and $0.79.

After the news investors sold the stock 12.1% to $9.70 per share on the Nasdaq.

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