Golf Galaxy May Be On The Upswing

Golf Galaxy (GGXY) owns and operates a chain of golf specialty retail stores primarily in the northern and midwestern United States. The company offers golf equipment, apparel, accessories and gifts, as well as various golf services such as video instruction, equipment and club fitting. Through a wholly owned subsidiary, The GolfWorks, it sells its products directly to consumers via catalog and the Internet.

Golf Galaxy opened 11 new stores during the first six months of fiscal 2007. As of August 26, 2006, they operate 61 superstores in 24 states, e-Commerce websites and a catalog. A few more stores planned for the rest of the year. Many of there stores are located in midwestern and northeastern states where late spring and summer represent the peak of the golf season. It is possible the impact of seasonal fluctuations could change as they continue to expand into additional geographic regions. The Father’s Day holiday in June drives a significant seasonal sales increase, and sales also increase during the December holiday season, albeit to a lesser extent.

Due to the seasonal nature of their business, interim results are not necessarily indicative of results for the entire fiscal year. Net sales and net income are generally greatest during the first and second quarters of our fiscal year. Net sales for the second quarter of fiscal 2007 were $95.6 million, an increase of 37.4% compared with $69.6 million for the second quarter of fiscal 2006. Net sales for the first six months of fiscal 2007 were $178.2 million, an increase of 39.0%,
compared with $128.2 million for the same period of the prior fiscal year. The increase in net sales for both the fiscal second quarter and six month period ended August 26, 2006, resulted primarily from sales at new stores opened in the current or prior fiscal year, sales through The GolfWorks, which Golf Galaxy acquired on March 16, 2006; and, to a lesser degree, an increase in comparable store sales.

Golf Galaxy is still a rather small retailer, with only about $200 million in fiscal 2006 sales, yet it grew sales by 50% last year and predicts 52%-57% growth this year. What really impresses us about Golf Galaxy is that it was founded by two former Best Buy(Nasdaq: BBY) executives and that the rest of the management team includes players from Select Comfort(Nasdaq: SCSS), Calloway(NYSE: ELY), and Target(NYSE: TGT).

The number of golfers in the USA has been fairly stagnant for a few years now, and according to the National Golf Foundation, the number of rounds of golf played in 2005 was down slightly from 2004, which was also the first year in the previous three years that the number had actually increased. Even so, it looks like 2006 might be a good year, as the number of rounds played has risen just less than 2% year-to-date.

In the recent CIBC World Markets report covering the sporting goods sector, Golf Galaxy is rated as a sector performer. While they face formidable competition from the large operators, they have the opportunity to gain market share from on-course pro shops and smaller retail chains. Weak sales trends are expected to be offset by continued margin upside which will help the company meet estimates for FY06.

With Golf Galaxy's shares having fallen 30% year-to-date, we believe the current level has limited downside.

Stats:

Golf Galaxy Inc. (GGXY)
Sector: Specialty Stores [Golf]
Market Cap (mm) $151.9
Price: $13.78
52 Wk High: $26.10
52 Wk Low: $11.26
Avg. Vol.- 3Mo. (mm): 0.04
P/E: 24.9x