Edwin Watts Golf Shops files for Chapter 11 Bankruptcy on November 4, 2013
Lynda K. Barr, the company’s Chief Financial Officer explained the Edwin Watts Golf filing:
“Headquartered in Fort Walton Beach, Florida, EWGS, is one of the world’s premier specialty golf retailers with a commanding presence in the Southeast United States. Founded in 1968, the Company operates as an integrated, multi-channel retailer, offering the most-recent assortment of brand name golf equipment, apparel and accessories through its 91 domestic retail locations, 3 pro shops, e-commerce Internet site www.edwinwattsgolf.com, telephone/catalog/direct mail sales and digital catalog. The Company’s retail stores are located in desirable, high-growth locations across 16 states with a strong presence in the Sunbelt market, including Florida, Georgia, Texas, Alabama, South Carolina and Louisiana.
“The Company’s stores feature indoor hitting areas, putting greens and fitting rooms, with most featuring the latest in computer swing analysis systems. EWGS has highly experienced and knowledgeable sales associates who average more than a decade of experience with the Company, and assist customers of all skill levels with lessons, performance fitting, special orders and repair services. …
“The Company is one of a small number of golf retailers with significant scale in the highly fragmented United States golf specialty retail industry, and is the leading golf specialty retailer in the Southeastern United States. The Company was featured in the June 2013 issue of Consumer Reports as the #1 ranked “sporting-goods specialist” in the United States specialty retail industry. EWGS’ current footprint consists of 91 Company-owned stores located in sixteen states throughout the Southeastern United States and Texas, with recent expansion into Utah and the Midwest, as well operating three pro shops in Florida and one independently owned franchise store in Alabama.
“The southeast is the most attractive region in the United States for golf retailing. There are more golf facilities than any other region in the United States; there are more top golf resorts than any other region of the world; it is a leading destination for golf enthusiasts; and there are strong underlying demographics featuring the highest income growth of any region in the United States. Perhaps most importantly, there is limited exposure to seasonal fluctuations due to a mild climate year-round.
“The location of the majority of EWGS’ stores in warm-weather climates reduces the seasonality of business. The stores are typically free-standing or end-cap spaces in shopping malls near local golfing communities. The stores are designed to have “look and feel” of a large pro shop. The majority of stores are between 6,000–15,000 square feet with an average size of 9,000 square feet.
“The Company is the only retailer that performs in-house robot product testing, which enables a faster and more-reliable fit of the customer to their optimal product. The Company’s ~12 corporate managers, ~88 store managers, ~56 assistant managers, ~407 retail associates and ~10 mail-order associates have an average tenure of 14 years, 13 years, 8 years, 5 years and 17 years, respectively. As a result, the Company’s associates are better prepared to provide expert advice to customers, which is paramount to building a long-term, loyal customer base. The superior “Technical IQ” of EWGS’ in-store associates, in addition to a focus on premium-branded golf equipment, accessories and apparel, differentiate EWGS as an industry leader and allows the Company to command a high number of customers who are avid golfers.
“The Company offers a wide assortment of premium, branded pro-line golf equipment and accessories with over 46,800 SKUs. EWGS is the industry’s largest purchaser of custom golf clubs and places a strong emphasis on selling pro-line branded golf equipment.
“Management believes the emphasis on premium brands creates greater customer loyalty and satisfaction and drives more repeat business. Management recently implemented a strategy to increase sales of higher margin apparel. Furthermore, there is additional upside in sales of select private label items.
“The Company offers a diversified sales mix. EWGS has established, long-term relationships with its vendors and has sold product from its key vendors such as Callaway, TaylorMade, Titleist, Ping and FootJoy for over 30 years.
“Management believes EWGS commands a disproportionate share of customers who are avid, loyal, committed to the game, relatively affluent, less price-sensitive and more performance-driven compared to other major golf retailers in the United States. This improves sell-through of higher-margin, newer technologies and drives greater repeat purchases. It also enhances credibility and legitimacy of brand and represents a strong referral base.
“Customers are attracted by EWGS’ long-standing reputation for highly knowledgeable associates with whom customers have cultivated strong, trust-based relationships. They also desire a wide assortment of premium, pro-line branded golf equipment and seek a customer-friendly atmosphere staffed with peers who are passionate about the game of golf.
“EWGS operates an efficient, low-cost warehouse in centrally-located Ft. Walton Beach, Florida. The 62,000 square foot warehouse has the capacity to handle all future increases in business. The warehouse distributes 33,000 packages and almost $15 million of products annually, with returns for any reason averaging 1.55%.
“In addition to a strong retail business, EWGS also possesses a direct channel platform. The Company has a customer list of over 3.0 million and distributes 4.4 million catalogs per year. This strong advertising platform for the EWGS brand drives consumer awareness. Furthermore, the catalog is considered a staple in pro shops across America. As a result, many of the Company’s first-time customers were referred by golf professionals.
“In May 2007, an affiliate of Sun Capital Partners, Inc. acquired EW Golf Holding, LLC from Wellspring Capital Management LLC and certain other parties, which had previously acquired a majority interest in December 2003 from the Company’s founders. Shortly thereafter, in 2008, John Watson, Chief Executive Officer, and Lynda Barr, Chief Financial Officer, joined the Company to spearhead its growth. The Company implemented a growth strategy of purchasing distressed golf stores in middle-markets where scale, vendor terms and operational efficiencies could easily improve performance. Due to the macroeconomic downturn in 2008, the management team has focused on operational improvements versus an aggressive growth strategy. Recent efforts include: continuing to expand the Company’s geography and increase its regional penetration with 29 store acquisitions and 10 new stores completed since 2007; the introduction of new private label apparel and accessories in 2012 providing an opportunity for increased margins; and in 2013, EWGS implementing a new, fully-integrate ERP system – Microsoft Dynamics AX for Retail – to centralize purchasing to drive lower inventories, lower out-of-stock rates, reduce aged product, increase margins and reduce fixed expenses. …
“The golf industry is significantly correlated to weather and consumer spending. The industry experienced particularly good weather in 2012, however, the weather in 2013 has been significantly off, which has in turn negatively impacted revenue. Consumer spending continues to recover from the financial crisis, but remains lower than prior periods. These factors have negatively impacted the golf industry as a whole.
“The Debtors have also seen increased competitor intrusion into their markets. The Debtors are concentrated in the most desirable regions for golf retailing and the Debtors’ competitors, from big box retailers to specialty retailers, have increased their presence in areas where the Debtors historically faced lower competition.
“The Debtors also suffered from recent lackluster product launches. The Debtors cannot maintain high margins on newly introduced products with low customer demand. One of the Debtors’ key suppliers’ recent product launch was not well received by the public and has not resulted in high consumer demand. Accordingly, the supplier has reduced the pricing of such products much earlier than with prior years’ launches. This forced the Debtors to discount their own prices to remain competitive in the marketplace which has negatively impacted profitability.
“The Debtors have also suffered from lower golf participation as a whole. Although industry sources expect the total participation in golf to increase substantially in the near future, the recent decline in participation has further constrained the Debtors’ liquidity. When combined with the other factors above, the Debtors were unable to maintain sufficient liquidity to await the recovery of the industry. …
“The Debtors intend to pursue a sale of substantially all of their assets pursuant to section 363 of the Bankruptcy Code. The Debtors have determined in consultation with their advisors that the value of the Debtors’ estates is likely to be maximized through a prompt sale.
“On November 1, 2013, the Debtors entered into a term sheet (the “Term Sheet”) relating to a proposed agreement (the “Agreement”) with a joint venture (the “JV”) formed between Hilco Merchant Resources, LLC (“Hilco”) and GWNE, Inc. (“GWNE”). Pursuant to the Agreement, a GWNE will purchase and continue to operate a significant number of the Debtors’ locations under the Debtors’ name. Hilco will act as the Debtors’ agent to liquidate inventory at the remaining stores. The Agreement provides for a guaranteed amount to be paid to the debtors of $45 million, subject to adjustment based upon the inventory of the Debtors. The Agreement provides for the JV to act as a stalking horse bidder and the Agreement is subject to higher and better offers and provides for certain bidding protections and a breakup fee.
What is Section 363 of the Bankruptcy Code?