DBRS Confirms Ratings of Golf Town Canada Inc. & Golfsmith International Holdings Inc.

DBRS has today confirmed the Issuer Rating of Golf Town Canada Inc. & Golfsmith International Holdings, Inc. (collectively Golfsmith or the Company) at B (high) and the Senior Secured Second Lien notes at B (low) with a recovery rating of RR-6. Since the initiation of Golfsmith’s ratings (after Q2 2012) the Company’s sales and earnings growth, and therefore key credit metrics have been significantly weaker than expected. The rating confirmation, however, reflects DBRS’s belief that at least a portion of the weakness in operating performance is attributable to less than favourable weather conditions in 2013 and the Company’s ongoing integration efforts, while Golfsmith’s liquidity remained adequate for the rating category and the Company benefited from strong sponsorship support from OMERS Administration Corporation (OMERS). That said, should operating performance remain weaker than expected going forward, a negative rating action could result. Golfsmith’s ratings continue to be supported by the Company’s well-established market position, differentiating store format, geographic diversification across North America and strong sponsorship from OMERS. The ratings also consider the discretionary and cyclical nature of the golf retail business, intense competition, sensitivity to weather and risks surrounding longer-term profitability and growth.

Going forward, DBRS believes that Golfsmith’s earnings profile should stabilize somewhat and could strengthen over the longer term on a through-the-cycle basis; but the Company’s earnings will continue to reflect its sensitivity to weather and cyclical macroeconomic factors. Revenues should increase with expected new store openings (approximately ten) in 2014 and a return toward positive same-store sales growth, while adjusted EBITDA margins should remain relatively flat or improve modestly as cost-cutting initiatives related to the merger are partially offset by rising selling, general and administrative expenses from new store openings. DBRS therefore believes that consolidated EBITDA should improve toward the $50 million range in the near- to medium-term.

In terms of financial profile, DBRS expects that Golfsmith will improve over the longer term as earnings are expected to increase and positive free cash flow is allocated to debt repayment. Cash flow from operations should grow in-line with operating income, while working capital and capex requirements should remain relatively stable (estimating approximately ten net new store openings per year through 2015). As such, DBRS expects the Company will improve toward free cash flow breakeven in 2014, while free cash flow could improve toward the $25 million level with earnings growth in the medium-term. Free cash flow is expected to be used to repay amounts drawn on the Company’s asset-backed loan revolver which will help to improve credit metrics. However, should credit metrics deteriorate further, as a result of weaker than expected operating performance and/or more aggressive than expected financial management, the ratings could be pressured.

Notes:
All figures are in unless otherwise noted.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Merchandising Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.