2005: Business - IPO fuels Golf Galaxy’s aspirations

With the announcement that it plans an initial public offering, Golf Galaxy is likely to accomplish at least two things: speed the consolidation among golf retailers, and put an end to competitors’ persistent whispers questioning the financial strength of the Eden Prairie, Minn., retailer.

Golf Galaxy’s May 17 filing with the Securities and Exchange Commission paints a picture of a company that is profitable, hitting its stride and ready to ramp up a national expansion. The company hopes to raise $46 million through the IPO, which it will pour back into opening new stores and paying the private-equity groups that backed the company. It is in the process of opening 14 to 16 stores this year, and envisions as many as 250 stores nationally.

That’s not welcome news for the many small, independent retailers fighting extinction. And Golf Galaxy’s IPO, while not unexpected, is a clear challenge to the companies to which it is most often compared, Edwin Watts Golf Shops and Golfsmith International.

Golf Galaxy was founded in 1997 by two outsiders to the golf business, chief executive Randy Zanatta and chief operating officer Greg Maanum, who left senior positions at Best Buy, where they were trained to be “students of retail.” Avid golfers, they opened their first store in Bloomington, Minn., on Easter weekend in 1997 – fortuitously coinciding with Tiger Woods’ 12-stroke victory at the Masters.

The retailer has rolled through the upper Midwest and increasingly looked for new markets in the Mid-Atlantic, on the West Coast and, most recently, in major Texas cities. Its methodical expansion has taken a toll on weaker retailers, and the backlash has led to rumors that the company is losing money.

Zanatta consistently has shrugged off such talk, insisting that the company is profitable and funding its growth from cash flow. Now the numbers are public, and they speak for Zanatta, who cannot comment publicly because the company is in a SEC-imposed quiet period.

Golf Galaxy has posted strong profits the past two years (see box), and sales at stores open more than a year grew 6.7 percent the past year. (It benefited last year from the sale of an $8.4 million stake in Golf Town Canada.) Golf Galaxy also has a low cost structure because it doesn’t operate a distribution center; manufacturers ship product directly to its stores.

In addition, the company has won admirers among manufacturers hoping for more consolidation and sophistication – in operating systems and marketing – from their retail accounts.

“Randy’s very dynamic, and he really has a vision of what he wants Golf Galaxy to be,” a senior executive for a major equipment company recently said of Zanatta. “He’s forcing the competitors to react a little quicker. . . . In terms of giving consumers compelling reasons to shop at their stores, the others are playing catch-up to Golf Galaxy.”

It’s too early to judge investors’ interest in the Golf Galaxy offering. In broad terms, Wall Street clearly has soured on golf because participation has flat-lined and equipment companies compete in an increasingly commoditized market. In addition, while Golf Galaxy is profitable, golf retailing is a low-margin business with consolidation continuing, but not as fast as investors might like.

“It’s like any other form of retailing, there’s astounding saturation,” says Jim Dion, president of Dionco Inc., a Chicago retail consultancy. “Mainline retailers have been forced to cherry-pick other categories like golf, just enough to destroy the pricing integrity. At any given time I can go into Costco or Sam’s and find an amazing deal on balls or golf clubs.”

Still, the imminent retirement of Baby Boomers offers the industry, and golf investors, hope that well-heeled golfers will increase their frequency of play. Also, Golf Galaxy will have to persuade investors it is more like Guitar Center, a well-regarded specialty retailer, and less like Gander Mountain, an outdoor-sports retailer that has struggled since going public a year ago.

“Our role model is the Guitar Center,” Zanatta said in an interview six weeks before the IPO filing. “What they’ve done in the music industry is become a dominant national retailer, and that’s what we hope to become.”

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