After I covered Golf Galaxy (NASDAQ:GGXY) last quarter, I was intrigued enough to dip my toe into this stock. I'm impressed by the concept, partially because as a golfer, it sounds like exactly the type of shop I'd want to visit. (Alas, there are none near me yet). Management is composed of ex-Best Buy (NYSE:BBY) marketing mavens -- Best Buy owns about 10% of the company -- along with experienced managers from Select Comfort (NASDAQ:SCSS) and Target (NYSE:TGT), all companies that have built successful brands and retail empires. Golf Galaxy will never approach the size of say, Target, but I think there's enough proof of concept and management experience here to make this a Foolish bet.
This quarter's results continued to impress, with sales up 37% to $95.6 million and earnings up 29% to $7 million year over year. Gross margins ticked up about 110 basis points year over year to 32.7%, which boosted net margins to 7.3%, up from 6.7% last year. However, management fell into a sand trap again, reducing revenue expectations by about 2% for the second straight quarter.
Still, it's heartening as an investor to see management mention that business is still strong through August and into September, since seasonality tends to make the third and fourth quarters dramatically weaker than the first and second. This is due to many of the stores' locations in the midwestern and northeastern U.S., where spring and summer generally mark the peak of the golf season.
Since I've mentioned many of the positive aspects of Golf Galaxy's story, it might be useful to present a few of the negative ones as well. For one thing, with interest rates rising and the housing and lending boom slowing down, it's clear that discretionary spending for consumers is under pressure. As any determined hacker knows, golf is quite a hit to the pocketbook, with greens fees, cart rentals (essential, I say!), and that brand-new shiny Callaway (NYSE:ELY) driver beckoning to be added to the bag. And if the current upswing in interest in golf, driven by Tiger Woods and current teen phenom Michelle Wie among others, slows down, Golf Galaxy and competitor Golfsmith (NASDAQ:GOLF) might draw a lot less traffic.
Overall, though, I think the positives outweigh the negatives. The stock's valuation looks quite compelling at a forward P/E of 16, especially if the company can deliver two to three years of 20% to 30% growth.
More little white ball Foolishess:
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Fool contributor Stephen Ellis owns shares in Golf Galaxy, but holds no financial position in any other companies mentioned. You can see his holdings for yourself . The Motley Fool has a no-mulligan disclosure policy .
