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How Soon Before Golfsmith’s Stock is Worthless?

As an observer of golf and and a sometime investor in the stock market, it is sad to see a venerable name like Golfsmith slowly slide into stock-value oblivion.  When the IPO came out it peaked at around $12/share and if you look at the stock charts, its been on a slow descent every since.  Today’s closing price was 85-cents.  For the price of one Titleist Pro V1, you can buy five shares of Golfsmith. As an early investor, it might be time just to write-off your investment.

Golfsmith hasn’t been dealt a very good hand right now.  The economy stinks.  The golf economy, even thought it isn’t talked about much yet, is probably worse.  Golfsmith is really a single-product segment retailer.  Unlike a Dick’s Sporting Goods, who bought Golf Galaxy, Golfsmith can’t rely on skiing or exercise equipment to prop up its sales. Its golf (and a little tennis) or nothing.

At 85-cents a share, its market capitalization is only $13 MILLION.  A retailer with 73 stores all across the country isn’t worth more than a dollar a share.  Like most retailers, Golfsmith’s sales are suffering.  For instance, according to their latest financials, net revenues decreased 2.3 percent to $379.1 million for fiscal year 2008 compared with net revenues of $388.2 million for fiscal year 2007. Net revenues reflect a 6.3 percent decrease in comparable store sales, and a 13.1 percent decrease in net revenues from the company’s direct channel (website).  I’m sure the first quarter of 2009 will be at least as dismal.

If I had to place a bet on Golfsmith remaining as an independent company that stays out of bankruptcy, I think I’d lose that bet.  Don’t be surprised to see Golfsmith begin to close unperforming stores, announce layoffs and hire an advisory firm that will help them search for “strategic alternatives”.  Even if they found someone interested in buying them, financing will remain a problem.  Dick’s can survive a severe downturn.  Golfsmith, like Circuit City before them, can’t.

Clubbuilding War Breaks Out

The clubbuilding industry is in for some significant changes with the recent purchase of GolfWorks by Golf Galaxy.

Let’s look at the signs that are starting to emerge. Golfsmith, founded in 1967 is the granddaddy of clubbuilding. They began with a catalog that supplied components to the do-it-yourself clubbuilder. Then, they expanded into brand name merchandise, started opening retail stores (currently 50+ stores) with a clubbuilding department, and now have a powerful Internet presence. In 2002 they were bought by Atlantic Equity Partners III.

Golf Galaxy was founded in 1995 and started out opening retail stores (currently 51 stores). They went public in 2005. In 2005 they launched their Internet site, recently purchased GolfWorks (considered the 2nd largest component seller) and intend to open clubbuilding departments in each store. With this recent acquisition, they are clearly setting their sights on Golfsmith.

It will be a little like the ongoing cola war between Coke and Pepsi. They both sell the same product, they both have major brand visibility and they both sell to the same customer. With both companies being well financed, both will need to keep propping up their value with increased sales. The only way to do that quickly is by adding new stores or by acquisition.

Look for a marketing battle in the next few years as these two well financed gladiators try to steal business from each other. This should open up market opportunities for smaller players that can fill niches not adequately covered by the BIG TWO, especially in the clubbuilding realm.

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