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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~October~~March 131, ~~2011~~2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-52041

GOLFSMITH INTERNATIONAL ~~HOLDINGS, INC.~~

HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		16-1634847
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

11000 N. IH-35, Austin, Texas		78753 — 3195
(Address of Principal Executive Offices)		(zip code)

Registrant’s Telephone Number, Including Area Code: (512) 837-8810

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report: Not Applicable

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

~~Indicate~~As ~~the~~of ~~number~~May 15, of2012, there were 15,927,536 shares outstanding of ~~each of~~ the ~~issuer~~registrant’s ~~classes of~~ common stock, aspar ofvalue ~~the~~$ ~~latest practicable date~~.001.

Class of Common Stock		Outstanding at October 27, 2011
$.001 par value		15,813,135 Shares

GOLFSMITH INTERNATIONAL HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED ~~OCTOBER~~MARCH 131, ~~2011~~2012

TABLE OF CONTENTS

	Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at October 1, 2011 (unaudited), October 2, 2010 (unaudited) and January 1, 2011		4
Condensed Consolidated Balance Sheets at March 31, 2012 (unaudited), April 2, 2011 (unaudited) and December 31, 2011		4
Unaudited Condensed Consolidated Statements of Operations for the three-and nine-month periods ended October 1, 2011 and October 2, 2010		5
Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three-month periods ended March 31, 2012 and April 2, 2011		5
Unaudited Condensed Consolidated Statements of Cash Flows for the nine-month periods ended October 1, 2011 and October 2, 2010		6
Unaudited Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2012 and April 2, 2011		6
Notes to Unaudited Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosures About Market Risk		2018
Item 4. Controls and Procedures		2118
Part II. Other Information
Item 1. Legal Proceedings		2119
Item 1A. Risk Factors		2119
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		2119
Item 3. Defaults Upon Senior Securities		2119
Item 4. [Reserved]		21
Item 4. Mine Safety Disclosures		19
Item 5. Other Information		2119
Item 6. Exhibits		2119
Signatures		2220

CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on our beliefs, assumptions and expectations of future events, taking into account the information currently available to us. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement the strategy, our objectives, the amount and timing of future store openings, store remodels and capital expenditures, the likelihood of our success in expanding our business, financing plans, working capital needs and sources of liquidity. The words “believe,” “may,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “potential,” “project,” “plan,” and similar statements are intended to identify forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause our actual results, performance, or financial condition to differ materially from the expectations of future results, performance, or financial condition we express or imply in any forward-looking statements. We note these factors pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These risks and uncertainties include, but are not limited to:

•

the state of the economy;

•

the level of discretionary consumer spending;

•

changes in consumer preferences and demographic trends;

•

the number of golf participants and spectators, and general demand for golf;

•

our ability to successfully execute our multi-channel strategy;

•

expansion into new markets;

•

the intense competition in the sporting goods industry and actions by our competitors;

•

the cost of our products;

•

adverse or unseasonal weather conditions;

•

inadequate protection of our intellectual property;

•

our ability to protect our proprietary brands and reputation;

•

credit and equity markets, availability of credit and other financing, and financial markets in general;

•

the timing, amount and composition of future capital expenditures;

•

the timing and number of new store openings and our expectations as to the costs associated with new store openings;

•

assumptions regarding demand for our products and the introduction of new product offerings;

•

the timing and completion of the remodeling of our existing stores;

• the fact that a majority of our shares are currently beneficially owned by a single stockholder who can control the election of our directors and approval of significant corporate transactions; ~~and~~

•

the float and the market price of our shares could be affected by a distribution of shares by our majority shareholder to its investors and

•

other factors that we may not have currently identified or quantified.

Forward-looking statements are not guarantees of performance. Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. Many of these factors are beyond our ability to control or predict. Our forward-looking statements speak only as of the date of this report. Other than as required by law, we undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise.

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Golfsmith International Holdings, Inc.

Condensed Consolidated Balance Sheets

October 1,2011

October 2,2010

January 1,2011

March 31,2012

April 2,2011

December 31,2011

(unaudited)

ASSETS

Current assets:

Cash

870,112

767,632

204,340

Cash and cash equivalents

8,694,616

547,119

2,647,478

Receivables, net of allowances of $161,170, $217,131 and $107,757 at October 1, 2011, October 2, 2010 and January 1, 2011, respectively

1,494,570

1,998,339

2,011,241

Receivables, net of allowances of $377,805, $94,749, and $881,035 as of March 31, 2012, April 2, 2011 and December 31, 2011, respectively

3,699,140

2,663,238

5,955,683

Inventories

85123,~~349~~551,~~907~~231

8098,~~734~~926,~~274~~130

7990,~~417~~375,~~087~~824

Prepaid expenses and other current assets

714,~~467~~954,~~946~~197

59,~~914~~172,~~758~~696

68,~~891~~717,~~261~~141

Total current assets

95150,~~182~~899,~~535~~184

89111,~~415~~309,~~003~~183

88107,~~523~~696,~~929~~126

Property and equipment, net

6066,~~358~~806,~~141~~279

5860,~~126~~754,~~118~~413

5859,~~925~~451,~~620~~248

Intangible assets, net

2527,~~284~~022,~~751~~251

25,~~652~~426,~~606~~094

25,~~524~~276,~~016~~751

Other long-term assets

2964,~~859,307~~160

12,~~735~~520,~~941~~635

2,~~057~~487,~~363~~402

Total assets

~~183~~245,~~684~~691,~~734~~874

~~174~~200,~~929~~010,~~668~~325

~~175~~194,~~030~~911,~~928~~527

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

4291,~~169~~465,~~848~~513

3360,~~966~~590,~~447~~238

3549,~~694~~682,~~830~~063

Accrued expenses and other current liabilities

1820,~~838~~215,~~175~~788

1419,~~934~~221,~~597~~776

2022,~~393~~315,~~614~~818

Total current liabilities

61111,~~008~~681,~~023~~301

4879,~~901~~812,~~044~~014

5671,~~088~~997,~~444~~881

Deferred rent liabilities

16,559,846

14,625,706

15,344,004

Deferred rent and other long-term liabilities

18,640,692

16,804,339

16,632,995

Long-term debt

3554,~~365~~316,~~260~~126

42,~~636~~861,~~399~~830

4041,~~390~~905,~~034~~144

Total liabilities

~~112~~184,~~933~~638,~~129~~119

~~106~~139,~~163~~478,~~149~~183

~~111~~130,~~822~~536,~~482~~020

Stockholders’ Equity:

Common stock –$.001 par value; 25,000,000 shares authorized at October 1, 2011, October 2, 2010 and January 1, 2011; 15,813,135 shares issued and outstanding at October 1, 2011, 15,803,035 at October 2, 2010, and 15,806,035 at January 1, 2011

15,814

15,804

15,807

Common stock –$.001 par value; 25,000,000 shares authorized at March 31, 2012, April 2, 2011 and December 31, 2011; and 15,815,235 shares issued and outstanding at March 31, 2012 and December 31, 2011, 15,806,035 shares issued and outstanding at April 2, 2011

15,816

15,807

15,816

Preferred stock –$.001 par value; 10,000,000 shares authorized at October 1, 2011, October 2, 2010 and January 1, 2011; no shares issued and outstanding

Preferred stock –$.001 par value; 10,000,000 shares authorized at March 31, 2012, April 2, 2011 and December 31, 2011; no shares issued and outstanding

—

Deferred stock units –$.001 par value; 487,322 shares outstanding at October 1, 2011 454,998 shares outstanding at October 2, 2010 and January 1, 2011, respectively

487

455

Deferred stock units –$.001 par value; 487,322 shares outstanding at March 31, 2012, and December 31, 2011; 454,998 shares outstanding at April 2, 2011

487

455

487

Additional paid-in capital

126,~~332~~860,~~635~~233

125,~~000~~534,~~730~~974

~~125~~126,~~247~~595,~~156~~381

Accumulated other comprehensive loss

(~~308~~280,~~393~~353

)

(~~163~~103,~~888~~330

)

(~~252~~341,~~374~~376

)

Accumulated deficit

(5565,~~288~~542,~~938~~428

)

(5664,~~086~~915,~~582~~764

)

(61,~~802~~894,~~598~~801

)

Total stockholders’ equity

7061,~~751~~053,~~605~~755

6860,~~766~~532,~~519~~142

6364,~~208~~375,~~446~~507

Total liabilities and stockholders’ equity

~~183~~245,~~684~~691,~~734~~874

~~174~~200,~~929~~010,~~668~~325

~~175~~194,~~030~~911,~~928~~527

See accompanying notes to unaudited condensed consolidated financial statements

Golfsmith International Holdings, Inc.

Condensed Consolidated Statements of ~~Operations~~

Comprehensive Loss

(Unaudited)

	Three Months Ended						Nine Months Ended
	Fiscal Quarter Ended
	October 1,2011			October 2,2010			October 1,2011			October 2,2010
	March 31,2012			April 2,2011
Net revenues	$	~~100~~90,~~996~~456,~~878~~068		$	9381,~~272~~515,~~151~~037		$	~~312,731,797~~		$	~~278,966,906~~
Cost of products sold		6660,~~140~~135,~~939~~314			6154,~~242~~097,~~069~~281			~~204,792,519~~			~~183,020,581~~
Gross profit		3430,~~855~~320,~~939~~754			3227,~~030~~417,~~082~~756			~~107,939,278~~			~~95,946,325~~
Selling, general and administrative		3233,~~935~~639,~~504~~844			3130,~~474~~451,~~726~~510			~~98,941,133~~			~~92,933,451~~
Store pre-opening expenses		~~109~~1,~~257~~188,429			39307,~~544~~471			~~645,295~~			~~497,210~~
Store closing, lease termination and impairment charges		-			1,572,624			182,914			1,572,624
Lease termination charges		426,060			—
Total operating expenses		3335,~~044~~254,~~761~~333			3330,~~086~~758,~~894~~981			~~99,769,342~~			~~95,003,285~~
Operating income (loss)		1,811,178			(1,056,812	)		8,169,936			943,040
Operating loss		(4,933,579	)		(3,341,225	)
Interest expense		~~383~~461,~~944~~258			~~356~~444,~~806~~968			~~1,190,639~~			~~806,111~~
Other income (expense), net		~~(28~~72,~~023~~387	)		4043,~~310~~265			~~42,752~~			~~64,856~~
Income (loss) before income taxes		1,399,211			(1,373,308	)		7,022,049			201,785
Loss before income taxes		(5,322,450	)		(3,742,928	)
Income tax (expense) benefit		(86,702	)		229,430			(508,389	)		20,886
Income tax benefit		1,674,823			629,762
Net income (loss)	$	1,312,509		$	(1,143,878	)	$	6,513,660		$	222,671
Net loss	$	(3,647,627	)	$	(3,113,166	)
Net income (loss) per common share-basic	$	0.08		$	(0.07	)	$	0.40		$	0.01
Net loss per common share - basic	$	(0.22	)	$	(0.19	)
Net income (loss) per common share-diluted	$	0.08		$	(0.07	)	$	0.39		$	0.01
Net loss per common share - diluted	$	(0.22	)	$	(0.19	)
Basic weighted average common shares outstanding		16,~~300~~302,~~309~~557			16,~~254~~261,~~860~~033			~~16,282,664~~			~~16,178,853~~
Diluted weighted average common shares outstanding		16,~~704~~302,~~730~~557			16,~~254~~261,~~860~~033			~~16,825,773~~			~~16,889,560~~
Other Comprehensive Loss
Foreign currency translation gain		61,023			149,044
Comprehensive Loss	$	(3,586,604	)	$	(2,964,122	)

See accompanying notes to unaudited condensed consolidated financial statements

Golfsmith International Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended
	Three Months Ended
	October 1,2011			October 2,2010
	March 31,2012			April 2,2011
Operating Activities
Net income	$	6,513,660		$	222,671
Net loss	$	(3,647,627	)	$	(3,113,166	)
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		83,~~070~~115,~~384~~425			72,~~456~~619,~~567~~906
Amortization of intangible assets		~~319~~4,~~265~~501			~~205~~97,~~162~~922
Amortization of debt issue costs		~~103~~34,~~892~~631			~~293~~34,~~093~~630
Provision for bad debt expense		~~33,357~~—			~~114~~(22,~~816~~089	)
Stock-based compensation		1264,~~070,055~~851			~~904~~287,~~148~~818
Loss on retirement of property and equipment		206,828			-
Non-cash impairment charges		-			371,286
Change in operating assets and liabilities:
Accounts receivable		~~442~~2,~~842~~314,373			(~~224~~599,~~441~~153	)
Inventories		(631,~~464~~225,~~844~~826	)		(319,~~973~~193,~~823~~976	)
Prepaids and other current assets		(2376,~~034,046~~390	)		(1,~~316~~722,~~357~~636	)
Other assets		(~~747~~261,~~583~~388	)		(~~384~~259,~~239~~651	)
Accounts payable		840,~~137~~084,~~933~~329			227,~~722~~032,~~805~~024
Accrued expenses and other current liabilities		(17,~~746~~362,~~985~~848	)		(42,~~595~~771,~~671~~403	)
Deferred rent		1785,~~479,765~~103			1(74,~~635,250~~315	)
Net cash provided by operating activities		153,~~384~~729,~~523~~134			32,~~431~~315,~~267~~911
Investing Activities
Purchases of property and equipment		(910,~~709~~103,~~211~~199	)		(94,~~652~~447,~~926~~422	)
Net cash used in investing activities		(910,~~709~~103,~~211~~199	)		(94,~~652~~447,~~926~~422	)
Financing Activities
Principal payments on line of credit		(8525,~~233~~444,~~781~~435	)		(7923,~~643~~224,~~275~~000	)
Proceeds from line of credit		8037,~~209~~855,~~006~~417			8625,~~279~~695,~~674~~796
Debt issuance costs		-			(389,926	)
Net cash provided by financing activities		12,410,982			2,471,796
Proceeds from exercise of stock options		15,463			54,354
Effect of exchange rate changes on cash and cash equivalents		10,221			2,494
Net cash (used in) provided by financing activities		(5,009,312	)		6,300,827
Change in cash and cash equivalents		6,047,138			342,779
Effect of exchange rate changes on cash		(228	)		(7,734	)
Cash and cash equivalents, beginning of period		2,647,478			204,340
Change in cash		665,772			71,434
Cash and cash equivalents, end of period	$	8,694,616		$	547,119
Cash, beginning of period		204,340			696,198
Cash, end of period	$	870,112		$	767,632
Supplemental cash flow information:
Interest payments	$	1457,~~121,761~~356		$	~~800~~440,~~043~~796
Income tax payments	$	~~160~~37,~~878~~800		$	~~314~~28,~~115~~150

See accompanying notes to unaudited condensed consolidated financial statements

GOLFSMITH HOLDINGS INTERNATIONAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. ~~Basis~~ ~~of Presentation and~~ Summary of Significant Accounting Principles

Basis of ~~Interim~~ Presentation and Principles of Consolidation

Golfsmith International Holdings, Inc. (the “Company”) is a multi-channel, specialty retailer of golf equipment, ~~and related~~ apparel and related accessories. The Company offers golf equipment from top national brands as well as its own proprietary brands. In addition, the Company provides clubmaking services, including the sale of individual club components for customers to build clubs, custom fitting, and repair services. ~~and~~The Company is also a retailer of tennis equipment and apparel. The Company markets its products through retail stores and through its direct-to-consumer channels, which ~~include~~have ~~its~~been ~~Internet~~aggregated ~~site~~into ~~and~~one ~~catalogs~~reporting segment.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary Golfsmith International, Inc. (“Golfsmith”) and ~~Golfsmith’s~~ its subsidiaries. The Company has no operations nor does it have any assets or liabilities other than its investment in Golfsmith. Accordingly, these unaudited condensed consolidated financial statements represent the operations of Golfsmith and its subsidiaries. All inter-company account balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. As information in this report relates to interim financial information, certain footnote disclosures required by GAAP for complete audited financial statements have been condensed or omitted. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments consisting of normal and recurring accruals considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the periods presented. Operating results for the ~~interim~~ three- ~~and nine-~~month period ~~periods~~ ended ~~October~~March 131, ~~2011~~2012, are not necessarily indicative of the results that may be expected for the fiscal year ending December 3129, ~~2011~~ 2012. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended ~~January~~December 131, 2011, included in the Company’s Annual Report on Form 10-K filed with the ~~SEC~~Securities onand ~~February~~Exchange Commission on March 2330, ~~2011~~2012.

Revenue Subject to Seasonal Variations

The Company’s business is seasonal and its sales leading up to and during the warm weather golf season and the December holiday gift-giving season have historically contributed a significantly higher percentage of the Company’s annual net revenues and annual net operating income than in other periods induring its fiscal year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates

Fiscal Year

The Company’s fiscal year ends on the Saturday closest to December 31. The three-month periods ended ~~October~~March 131, ~~2011~~2012 and ~~October~~April 2, ~~2010~~2011 both consisted of 13 weeks. ~~The nine-month periods ended October 1, 2011 and October 2, 2010 both consisted of 39 weeks.~~

Comprehensive Income (Loss)

Comprehensive income (loss) is computed as net income (loss) plus certain other items that are recorded directly to stockholders’ equity. In addition to net income (loss), the components of comprehensive income (loss) also include foreign currency translation adjustments. ~~There~~The ~~were~~difference nobetween net ~~material~~loss ~~changes~~and to comprehensive ~~income (~~loss) ~~during~~for each of the three- ~~and nine-~~month periods ended ~~October~~March 131, ~~2011~~2012 and ~~October~~April 2, ~~2010~~2011 resulted from the impact of foreign currency translation and revaluation gains of $0. 1 million.

Fair Value of Financial Instruments

The carrying amounts of the Company’s cash and cash equivalents, accounts receivable and accounts payable approximate fair values due to their short-term nature. The carrying value of the Company’s credit facility at March 31, 2012 approximates fair value based on rates available for similar debt available to comparable companies in the marketplace.

~~Fair~~The ~~Value~~fair values of ~~Financial~~our ~~Instruments~~financial instruments are determined using a hierarchal disclosure framework based upon the level of subjectivity of the inputs used in measuring assets and liabilities as follows:

The carrying amounts of the Company’s cash, accounts receivable and accounts payable approximate fair values due to their short-term nature. The carrying value of the Company’s credit facility at October 1, 2011 approximates fair value based on rates available for similar debt available to comparable companies in the marketplace.

The fair values of our financial instruments are recorded using a hierarchal disclosure framework based upon the level of subjectivity of the inputs used in measuring assets and liabilities as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2—Inputs ~~are inputs~~ other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3—Inputs are unobservable for the asset or liability and are developed based on the best information available in the circumstances, which might include the Company’s own data.

~~Recent~~Accounts ~~Accounting Pronouncements~~Receivable

InAccounts ~~October~~receivable ~~2009,~~consists ~~the~~primarily ~~FASB~~of ~~issued~~amounts ~~guidance~~due onfrom ~~revenue~~credit ~~recognition~~card ~~that~~merchants ~~provides~~who ~~clarification~~process ~~on whether multiple deliverables exist, how~~ the ~~arrangement~~Company’s ~~should~~credit becard ~~separated,~~sales and remit the ~~consideration~~proceeds to ~~allocated~~the Company. AnThe ~~entity~~Company isalso ~~required~~maintains tocertain ~~allocate~~accounts ~~revenue~~receivable infor anindividual ~~arrangement~~customers ~~using~~for ~~estimated~~whom ~~selling~~credit ~~prices~~is ofprovided. ~~deliverables~~Allowances inare ~~the~~made ~~absence~~based ofon ~~vendor-specific~~historical ~~objective evidence~~data orfor ~~third-party~~estimated ~~evidence~~unrecoverable ~~of selling price~~amounts. ~~These~~As ~~amendments~~a ~~eliminate~~result ~~the use~~ of ~~the~~credit ~~residual~~card ~~method~~processing complexities ~~and~~arising ~~require~~from ana ~~entity~~system toconversion ~~allocate~~in ~~revenue using~~ the ~~relative~~fourth ~~selling~~quarter ~~price~~of ~~method.~~fiscal ~~These~~2011, ~~amendments~~the ~~significantly~~Company ~~expanded~~increased ~~the~~its ~~disclosure requirements~~allowance for ~~multiple-deliverable~~doubtful ~~revenue~~accounts ~~arrangements. These provisions are~~ to be$0.9 ~~applied~~million onas aof ~~prospective~~December 31, ~~basis~~2011. ~~for~~During ~~revenue~~the ~~arrangements~~three ~~entered~~months ~~into~~ended ~~or materially modified in fiscal years beginning on or after June~~March 1531, ~~2010~~2012, ~~with~~we ~~earlier~~reduced ~~application permitted. The adoption of~~ the ~~guidance~~recorded ~~did~~allowance ~~not~~to ~~have~~$0.4 ~~a material impact on the Company’s consolidated results of operations or financial position~~million.

~~2. Basic~~Recently ~~and~~Issued ~~Diluted~~Accounting ~~Net~~Standards ~~Income (Loss) Per Common Share~~

~~The~~Presentation ~~calculation~~of ~~for~~Comprehensive ~~basic~~Income: In ~~net~~June ~~income~~2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (~~loss~~Topic 220) ~~per~~— ~~share~~Presentation of ~~common~~Comprehensive ~~stock~~Income is(ASU ~~based~~2011-05), onto ~~the~~require ~~weighted~~an ~~average~~entity ~~number~~to ofpresent ~~shares~~the total of ~~common~~comprehensive ~~stock outstanding~~income, ~~including~~the ~~outstanding~~components ~~deferred~~of ~~common~~net ~~stock~~income, ~~units~~and ~~(“DSUs”).~~the ~~Diluted~~components ~~net~~of other comprehensive income ~~per~~either ~~share~~in a single continuous statement of ~~common~~comprehensive ~~stock~~income isor ~~computed~~in ~~based~~two onseparate but consecutive statements. ASU 2011-05 eliminates the ~~weighted~~option ~~average~~to ~~number~~present the components of ~~shares~~other comprehensive income as part of ~~common~~the ~~stock~~statement ~~outstanding,~~of ~~including~~equity. ~~outstanding~~ASU ~~DSUs,~~2011-05 is effective ~~adjusted~~for byus ~~the~~in ~~number~~our first quarter of ~~additional~~fiscal ~~shares~~2012 ~~that~~and ~~would~~should ~~have~~be ~~been~~applied ~~outstanding~~retrospectively. ~~had~~The ~~the~~adoption ~~potentially~~of ~~dilutive~~ASU ~~common~~2011-05 ~~shares~~has ~~been~~had ~~issued.~~no ~~Potentially~~impact ~~dilutive~~on ~~shares~~our statements of ~~common~~financial ~~stock~~position, ~~include~~operations ~~outstanding~~or ~~stock~~cash ~~options~~flows.

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements: In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (Topic 820)—Fair Value Measurement (ASU 2011-04), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. ASU 2011-04 became effective for us in our first quarter of fiscal 2012. The adoption of ASU 2011-04 has had no impact on our consolidated financial statements.

~~The~~2. ~~following~~Basic ~~table sets forth the computation of basic~~ and ~~diluted~~Diluted ~~net~~Net ~~income~~Loss ~~(loss)~~Per ~~per~~Common ~~common share:~~ Share

	Three Months Ended					Nine Months Ended
	October 1,		October 2,			October 1,		October 2,
	2011		2010			2011		2010
Net income (loss)	$	1,312,509	$	(1,143,878	)	$	6,513,660	$	222,671
Basic:
Weighted-average shares of common stock outstanding		15,812,987		15,799,862			15,809,669		15,787,957
Weighted-average shares of deferred common stock units outstanding		487,322		454,998			472,995		390,896
Shares used in computing basic net income (loss) per common share		16,300,309		16,254,860			16,282,664		16,178,853
Effect of dilutive securities:
Stock options		404,421		-			543,109		710,707
Shares used in computing diluted net income (loss) per common share	$	16,704,730	$	16,254,860			16,825,773	$	16,889,560
Basic net income (loss) per common share	$	0.08	$	(0.07	)	$	0.40	$	0.01
Diluted net income (loss) per common share	$	0.08	$	(0.07	)	$	0.39	$	0.01
Potentially dilutive securities (1)		2,172,600		3,024,071			2,172,600		1,014,421

Basic net loss per common share is computed based on the weighted-average number of shares of common stock outstanding, including outstanding deferred stock units (“DSUs”). Diluted net loss per common share is computed based on the weighted average number of shares of common stock outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued unless anti-dilutive.

~~(1)~~The ~~Potentially~~following ~~dilutive~~table ~~securities~~sets ~~have~~forth ~~been excluded from~~ the computation of basic and diluted net ~~income (~~loss) per common share for the ~~above~~ periods ~~because their effect would have been anti-dilutive.~~indicated:

3. Income Taxes


	Three Months Ended
	March 31, 2012			April 2, 2011
Net loss	$	(3,647,627	)	$	(3,113,166	)
Basic:
Weighted-average shares of common stock outstanding		15,815,235			15,806,035
Weighted-average shares of deferred common stock units outstanding		487,322			454,998

Shares used in computing basic net loss per common share		16,302,557			16,261,033
Effect of dilutive securities (1):
Stock options		—			—

Shares used in computing diluted net loss per common share		16,302,557			16,199,085

Basic net loss per common share	$	(0.22	)	$	(0.19	)
Diluted net loss per common share	$	(0.22	)	$	(0.19	)

~~For~~(1) ~~the~~Potentially ~~three~~dilutive ~~month~~shares ~~periods~~of ~~ended~~common ~~October 1,~~stock ~~2011~~include 3,205,774 and ~~October 2~~3, ~~2010~~327,038 ~~the Company’s provision for income taxes reflects an effective tax rate~~ of ~~approximately 6.2%~~outstanding ~~and~~stock ~~16.7%~~options ~~respectively.~~under ~~For~~ the ~~nine month periods ended October 1, 2011 and October 2, 2010, the~~ Company’s ~~provision~~stock ~~for~~option ~~income~~plans ~~taxes~~as ~~reflects an effective tax rate~~ of ~~approximately 7.2%~~March ~~and~~31, ~~10.4%~~2012 ~~respectively. For the three~~ and ~~nine~~April ~~month periods ended October 1~~2, 2011 ~~and October 2~~, ~~2010, the Company’s effective tax rate was lower than the U~~respectively.S. ~~federal~~The ~~statutory~~computation ~~rate primarily due to change in state taxes as a percentage~~ of ~~income~~dilutive ~~before~~shares ~~income~~excluded ~~taxes~~these ~~and~~options ~~changes~~because insuch ~~valuation~~outstanding ~~allowances.~~options ~~Due~~would tobe ~~the~~anti-dilutive ~~utilization~~due ~~of deferred tax assets relating~~ to ~~net operating losses,~~ the Company’s ~~does~~net ~~not~~loss ~~anticipate paying any U.S. federal income taxes~~ in ~~fiscal~~each ~~2011, however, actual results could accelerate or defer the utilization of its deferred tax assets~~period.

With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2007. The tax years 2007 through 2010 remain open to examination by all the taxing jurisdictions to which the Company is subject, though the Company is not currently under examination by any taxing jurisdictions.

The Company had no liability for unrecognized tax benefits at fiscal year end 2010 or as of October 1, 2011.

3.	Income Taxes

During the three-month periods ended March 31, 2012 and April 2, 2011, the Company recorded income tax benefits of approximately $1.7 million and $0.6 million on pre-tax losses of approximately $5.3 million and $3.7 million, respectively. The Company’s benefit for income taxes reflects an effective tax rate of approximately of 31.5% and 16.8% for the three months ended March 31, 2012 and April 2, 2011, respectively. The increase in the effective tax rate, year over year, was driven primarily by the estimated deferred tax expense from the amortization of our indefinite-lived intangible assets. The amortization of indefinite-lived assets results in deferred tax expense and a deferred tax liability without a corresponding reduction in our valuation allowance. Due to the utilization of net operating loss carryforwards, the Company does not anticipate paying any U.S. federal income taxes in fiscal 2012.

With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2008. The tax years 2008 through 2011 remain open to examination by all the major taxing jurisdictions to which the Company is subject, though the Company is not currently under examination by any major taxing jurisdictions.

The Company had no liability for unrecognized tax benefits at year end 2011 or as of March 31, 2012.

Debt

Credit Facility

The Company has a credit facility (the “Credit Facility”) by and among Golfsmith International, L.P., Golfsmith NU, L.L.C. and Golfsmith USA, L.L.C., as borrowers (the “Borrowers”), the Company and the other subsidiaries of the Company identified therein as credit parties (the “Credit Parties”), General Electric Capital Corporation, as administrative agent (the “Agent”) and lender. The Credit Facility consists of a $90.0 million asset-based revolving credit facility (the “Revolver”), including a $5.0 million letter of credit sub facility. On an ongoing basis, loans incurred under the Credit Facility will be used for working capital and capital expenditures of the Borrowers and their subsidiaries (the “Loans”). The Credit Facility has a term of four years and expires on July 9, 2014.

Interest Rate and Fees . Loans outstanding under the Credit Facility currently bear interest per annum, at the Company’s election, at a rate equal to either (1) LIBOR plus a margin equal to 2.75% (such margin, the “Applicable Revolver LIBOR Margin”), or (2) the “Base Rate” plus a margin equal to 0.25%. The “Base Rate” is a rate equal to the highest of (i) the publicly quoted rate as published by The Wall Street Journal on corporate loans posted by at least 75% of the nation’s 30 largest banks, (ii) the Federal Funds Rate plus 300 basis points per annum, and (iii) the sum of LIBOR plus the excess of the Applicable Revolver LIBOR Margin over 0.25%. Commencing on January 1, 2011, the applicable margins are subject to adjustment (up or down) prospectively on a quarterly basis on the first business day of each fiscal quarter as determined by average daily borrowing availability for the immediately preceding quarter. The fee in respect of the Borrowers’ non-use of available funds is 0.375% with no utilization-based decrease and is payable monthly. During the three months ended ~~October~~March 131, ~~2011~~2012 and ~~October~~April 2, ~~2010~~2011, the weighted average interest rate on the Company’s outstanding borrowings was 3.0601% and 3.1009%, respectively. ~~During the nine months ended October 1, 2011 and October 2, 2010, the weighted average interest rate on the Company’s outstanding~~ ~~borrowings was 3.06% and 2.62%, respectively.~~

Covenants and Events of Default . The Credit Facility contains customary affirmative covenants regarding, among other things, the delivery of financial and other information to the lenders, maintenance of records, compliance with law, maintenance of property and insurance and conduct of the Company’s existing business. The Credit Facility also contains certain customary negative covenants that limit the ability of the Credit Parties to, among other things, create liens, make investments, enter into transactions with affiliates, incur debt, acquire or dispose of assets, including merging with another entity, enter into sale-leaseback transactions and make certain restricted payments. The foregoing restrictions are subject to certain customary exceptions for facilities of this type. The Credit Facility includes events of default (and related remedies, including acceleration of the Loans made thereunder) usual for a facility of this type, including payment default, covenant default (including breaches of the covenants described above), cross-default to other indebtedness, material inaccuracy of representations and warranties, bankruptcy and involuntary proceedings, change of control and judgment default. Many of the defaults are subject to certain materiality thresholds and grace periods usual for a facility of this type. As of ~~October~~ March 131, ~~2011~~2012, ~~October~~April 2, ~~2010~~2011 and ~~January~~December 131, 2011, the Company was in compliance with all applicable covenants.

Borrowing Capacity . Available amounts under the Credit Facility are calculated against a borrowing base. The borrowing base is limited to (i) 90% of the net amount of Borrowers’ eligible accounts, as defined in the Credit Facility, plus (ii) the lesser of (x) 70% of the Borrowers’ eligible inventory, as defined in the Credit Facility, or (y) up to 90% of the Borrowers’ net orderly liquidation value of eligible inventory, plus (iii) 63% of the fair market value of eligible real estate, as defined in the Credit Facility, minus (iv) any reserves, as defined in the Credit Facility (reserves associated with gift card liability are 25% and customer deposits are 50% of the Borrowers’ book value of each liability), and (v) letters of credit outstanding. The Agent has the right to establish, modify or eliminate reserves against eligible inventory and accounts from time to time in its reasonable credit judgment. The Credit Facility stipulates that borrowing availability at any given time cannot be less than $3.5 million. In addition, when the available amount of the Loans is less than 15% of the borrowing base, the Agent may request that amounts in the Borrowers’ accounts be forwarded to a deposit account designated by the Agent.

At ~~October~~March 131, ~~2011~~2012, the Company had $3554.43 million of outstanding borrowings under its Credit Facility and $2935.17 million of borrowing availability after giving effect to all reserves. At ~~October~~ April 2, ~~2010~~2011, the Company had $42.69 million of outstanding borrowings under its Credit Facility and $1834.47 million of borrowing availability after giving effect to all reserves. At ~~January~~December 131, 2011, the Company had $4041.49 million of outstanding borrowings under its Credit Facility and $1829.56 million of borrowing availability after giving effect to all reserves

Guarantees and Collateral . Borrowings under the Credit Facility are jointly and severally guaranteed by the Credit Parties, and are secured by a security interest granted in favor of the Agent, for itself and for the benefit of the lenders, in substantially all of the personal and owned real property of the Credit Parties, including a lien on all of the equity securities of the Borrowers and each of the Borrower’s current and future domestic subsidiaries.

The Company has no operations other than its investment in its wholly-owned subsidiary Golfsmith, and its liability under its Credit Facility. Golfsmith and its domestic subsidiaries comprise all of the Company’s assets, liabilities and operations, including its liabilities under its Credit Facility. There are no restrictions in the Credit Facility on the transfer of funds in the ordinary course of business between the Company, Golfsmith and any of Golfsmith’s domestic subsidiaries.

Guarantees and Collateral. Borrowings under the Credit Facility are jointly and severally guaranteed by the Credit Parties, and are secured by a security interest granted in favor of the Agent, for itself and for the benefit of the lenders, in substantially all of the personal and owned real property of the Credit Parties, including a lien on all of the equity securities of the Borrowers and each of the Borrower’s current and future domestic subsidiaries.

5.	Intangible Assets

Identifiable intangible assets consisted of the following as of each of the periods presented:

	October 1, 2011					October 2, 2010					January 1, 2011
	March 31, 2012					April 2, 2011					December 31, 2011
	Gross carrying		Accumulated			Gross carrying		Accumulated			Gross carrying		Accumulated
	Gross carryingamount		Accumulatedamortization			Gross carryingamount		Accumulatedamortization			Gross carryingamount		Accumulatedamortization
	amount		amortization			amount		amortization			amount		amortization
Definite lived intangibles
Customer database	$	3,~~454~~448,~~205~~963	$	(3,~~454~~448,~~205~~963	)	$	3,~~454~~448,~~205~~963	$	(3,~~031~~253,~~850~~120	)	$	3,~~454~~448,~~205~~963	$	(3,~~160~~448,~~440~~963	)
Patents		~~182~~180,000		(2738,~~500~~000	)		100,000		-—			~~100~~180,000		-(33,500	)
	$	3,~~636~~628,~~205~~963	$	(3,~~481~~486,~~705~~963	)	$	3,~~554~~548,~~205~~963	$	(3,~~031~~253,~~850~~120	)	$	3,~~554~~628,~~205~~963	$	(3,~~160~~482,~~440~~463	)
Indefinite lived intangibles
Trade names	$	11,158,000	$	-—		$	11,158,000	$	-—		$	11,158,000	$	-—
Trademarks		1315,~~972~~722,251		-—			13,972,251		-—			13,972,251		-—
	$	2526,~~130~~880,251	$	-—		$	25,130,251	$	-—		$	25,130,251	$	-—
Total	$	2830,~~766~~509,~~456~~214	$	(3,~~481~~486,~~705~~963	)	$	28,~~684~~679,~~456~~214	$	(3,~~031~~253,~~850~~120	)	$	28,~~684~~759,~~456~~214	$	(3,~~160~~482,~~440~~463	)

~~Amortization~~Definite ~~expense related to the Company’s definite~~ lived intangibles was approximately $0.1 million in each of the three-month periods ended October 1, 2011 and October 2, 2010, and was approximately $0.3 million in each of the nine-month periods ended October 1, 2011 and October 2, 2010. Amortization expense is recorded in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations. The Company’s definite lived intangibles include a customer database, which is being amortized over an estimated useful life of 9 years through fiscal 2011, and patents for certain intellectual property, which are being amortized over an estimated useful life of 10 years through fiscal 2021.

Amortization expense related to the Company’s definite lived intangibles was approximately $0.04 million and $0.1 million during the three month periods ended March 31, 2012 and April 1, 2011, respectively. Amortization expense is recorded in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations. The Company’s definite lived intangibles include a customer database, which was fully amortized as of December 31, 2011, and patents for certain intellectual property, which are being amortized over an estimated useful life of 10 years through fiscal 2021.

Indefinite lived intangibles

On May 20, 2009, we entered into a license agreement with MacGregor Golf Company. Under the terms of the license agreement, we obtained an exclusive perpetual license and sub-license in and to certain MacGregor^® trademarks throughout the United States, Canada, Europe, Africa, South America and Australia for a total of $1.75 million payable in eight quarterly installments beginning in May 2010. In conjunction with the Company’s final installment in February 2012, our interest in the MacGregor trademarks was reclassified from “other long-term assets” to “intangible assets.”

6.	Commitments and Contingencies

Lease Commitments

The Company leases all but one of its store locations under operating leases that provide for annual payments that, in some cases, increase over the life of the lease. The operating leases expire at various times through June ~~2022~~ 2028. The aggregate of the minimum annual payments is expensed on a straight-line basis over the term of the related lease. In addition, the Company has entered into certain sublease agreements with third parties to sublease retail space previously occupied by the Company. The sublease terms end at various times through June 2022. Rent expense, net of sublease rental income, was $67.0 25 million and $65.68 million for the three-month periods ended ~~October~~March 131, ~~2011~~2012 and ~~October~~April 2, ~~2010, respectively, and was $17.9 million and $18.1 million for the nine-month periods ended October 1,~~ 2011 ~~and October 2~~, ~~2010,~~ respectively. Sublease rental income ~~recorded as a reduction to rent expense~~ was $0.3 million for each of the three-month periods ended ~~October~~March 131, ~~2011~~2012 and ~~October~~April 2, ~~2010, respectively and was $1.0 million and $0.8 million for the nine-month periods ended October 1,~~ 2011 ~~and October 2, 2010, respectively~~.

The Company previously entered into a guarantee agreement in conjunction with assigning one of its leases to a subtenant which provides that the Company will assume responsibility for rental payments in the event the subtenant defaults. During the ~~fourth~~first quarter of ~~2010~~2012, the ~~tenant to whom the lease was assigned filed for bankruptcy, and the~~ Company recorded a ~~charge of~~ $0.34 million charge for ~~its~~ estimated ~~obligation~~lease termination costs associated with ~~this~~a ~~event.~~store relocation ~~During~~which ~~the~~occurred ~~second~~in ~~quarter~~March of ~~2011,~~ the ~~Company~~current ~~recorded an additional charge of $0~~year.~~2 million for the estimated remaining obligation associated with the vacancy of this location.~~ (See Note 7 of the notes to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q). The ~~estimated~~lease ~~obligation~~has ~~represents the~~ future minimum lease payments inof $0.3 million, $0.4 million, $0.4 million and $0.3 million for fiscal years 2012, 2013, 2014 and 2015, respectively. In addition, tothe Company is liable for other expenses related ~~expenses~~to the above lease, such as property taxes and common area maintenance~~, which were previously paid by the bankrupt tenant~~.

Legal Proceedings

On October 23, 2009, David O’Flynn, on behalf of himself and all others similarly situated, filed a class action lawsuit (the “O’Flynn claim”) in the California Superior Court in Orange County against Golfsmith USA, LLC asserting denial of meal and rest breaks, failure to timely pay final wages or commissions and failure to provide itemized employee wage statements in violation of the California Labor Code. During the fourth quarter of 2010, we reached an agreement to settle the O’Flynn claim, subject to court approval. The Company’s provision for estimated losses on this legal action of $0.2 million, net of insurance, has been recorded in accrued expenses and other current liabilities as of October 1, 2011.

On June 3, 2010, Ed Leo, together with three other plaintiffs, filed a lawsuit against the Company in the California Superior Court of San Diego County in connection with a Women’s Night promotional event held by the Company on March 25, 2010. The plaintiff’s claim is based on alleged violations of the Unruh Act, California legislation which has been interpreted to prohibit promotional activities that discriminate on the basis of certain protected classes. While the plaintiffs in this action have alleged that the Company engaged in conduct that was discriminatory and actionable, the Company disputes these claims and intends to vigorously contest the lawsuit. At this time, it is not possible to estimate the amount of loss or range of possible loss, if any, that might result from an adverse resolution of this matter.

The Company is involved in various other legal proceedings arising in the ordinary course of conducting business. The Company believes that the ultimate outcome of such matters, in the aggregate, will not have a material adverse impact on ~~its~~our financial position, liquidity or results of operations. The Company believes the amounts provided in ~~its~~our ~~unaudited condensed~~audited consolidated financial statements are adequate in consideration of the probable and estimable liabilities.

7. ~~Store~~ ~~closing,~~Lease ~~lease~~Termination ~~termination and impairment charges~~ Charges

During the first ~~second~~ quarter of ~~2011~~2012, the Company recorded ana ~~additional~~ $0.24 million charge for estimated ~~future~~lease ~~rental~~termination ~~obligations~~ costs associated with a ~~lease~~store ~~previously~~relocation ~~assigned to a subtenant~~ which ~~declared~~occurred ~~bankruptcy~~in ~~during~~March of the ~~fourth~~current ~~quarter of 2010~~year. The fair value of ~~the~~this estimated charge was determined based on the Company’s discounted cash obligation to the landlord of this property, net of estimated sublease reimbursements, and is therefore regarded as a Level 3 fair value measurement. (See Note 6 of the notes to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q). ~~As of October 1, 2011, this obligation is included in accrued expenses and other liabilities on the unaudited condensed consolidated balance sheet.~~

~~During the third quarter of 2010, the Company recorded store closing, lease termination and asset impairment charges in the amount of $1~~8.6 ~~million,~~Subsequent comprised of $0.3 million in lease termination costs, $0.6 million in future rent obligations, $0.4 million in fixed asset impairment charges and $0.3 million in store closing expenses. The fair value of the future rent obligation and early lease termination charges was determined based on the Company’s discounted cash obligation to the landlords of these properties, net of sublease reimbursements, and is therefore regarded as a Level 3 fair value measurement. Events

On May 14, 2012, Golf Town USA Holdings, Inc. (“Golf Town”) and Golfsmith announced that they entered into a definitive merger agreement, pursuant to which holders of the outstanding shares of the Golfsmith’s common stock at the effective time of the merger will receive $6.10 per share in cash.

The boards of directors of both Golf Town and Golfsmith have approved the transaction, in our case, following the approval and recommendation of a transaction committee of independent directors. Atlantic Equity Partners III, L.P. and certain of our executive officers, holding collectively a majority of our outstanding shares of common stock, have executed a written consent approving the transaction and the transaction is not subject to further stockholder approval.

Golfsmith and Golf Town have made customary representations, warranties and covenants in the merger agreement.

The closing of the transaction, which is subject to limited closing conditions, including regulatory approvals, is expected to occur in the third quarter of 2012. The transaction is not subject to a financing condition. In the three-month period ended March 31, 2012, we incurred $0.2 million in legal and other expenses related to our merger as described above.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. See the cautionary statement regarding forward-looking statements on page 3 of this Quarterly Report for a description of important factors that could cause actual results to differ from expected results.

Overview

We are one of the nation’s largest specialty retailers of golf equipment, apparel, footwear and accessories. We operate as an integrated multi-channel retailer, offering our customers the convenience of shopping in our retail locations across the nation and through our direct-to-consumer ~~channels~~channel, which ~~include~~includes both our Internet ~~website~~site, www.golfsmith.com , and our direct mail catalogs. As of ~~October~~March 131, ~~2011~~2012, we operated 7882 retail stores in 23 24 states and 3438 markets. We were founded in 1967 as a golf clubmaking company offering custom-made clubs, clubmaking components and club repair services. In 1972, we opened our first retail store, in 1975, we mailed our first general golf products catalog, and in 1997, we launched our ~~website~~Internet site designed to expand our direct-to-consumer business.

During the three months ended ~~October~~ March 131, ~~2011~~2012, we opened three new stores in three new markets and relocated our Walnut Creek location as part of our plan to open ten new stores and relocate four existing retail sites in 2012. On April 12th, we announced the relocation of our Park Meadows store in Denver, Colorado. On April 13th, we announced the grand opening of a new, extreme golf retail ~~location~~center in ~~the~~Atlanta, ~~Sarasota~~Georgia. On April 30th, ~~Florida~~we ~~market~~opened a new store in Cleveland, ~~which~~Ohio, isand ~~scheduled~~on toMay 10th, ~~open~~we opened another new store in ~~November~~Wilmington, Delaware. In the future, we will continue to explore strategic opportunities to open additional stores in existing and new geographic markets, as well as evaluate our effectiveness in existing ~~locations~~markets.

As a specialty retailer, we are subject to changes in consumer confidence and economic conditions that impact our customers. The demand for our products is affected by the financial health of our customers, which may be adversely influenced by macroeconomic factors such as unemployment, fuel and energy costs, weakness in the housing market and unavailability of consumer credit. The demand for our products was adversely impacted by the recent economic downturn. In response to this downturn, beginning in fiscal 2008 and continuing into fiscal ~~2011~~2012, we ~~have~~took ~~been taking~~ significant steps to reduce our cost structure and introduce increased operational efficiencies. We expect to leverage this reduced cost structure to improve profitability in the future.

In addition to future new store openings, a significant part of our growth strategy continues to be enhancing the non-clubmaking and Internet ~~aspects~~portions of our direct-to-consumer channel. Our plan also entails the ongoing development of our own brand portfolio, as we continue ~~our efforts~~ to grow our proprietary business.

Recent Developments

Golfsmith and Golf Town have made customary representations, warranties and covenants in the merger agreement.

The closing of the transaction, which is subject to limited closing conditions, including regulatory approvals, is expected to occur in the third quarter of 2012. The transaction is not subject to a financing condition. In the three month period ended March 31, 2012, we incurred $0.2 million in legal and other expenses related to our merger as described above.

Fiscal Year

Our fiscal year ends on the Saturday closest to December 31 and consists of either 52 weeks or 53 weeks. Each quarter of each fiscal year generally consists of 13 weeks. The three- month periods ended ~~October~~March 131, ~~2011~~2012 and ~~October~~April 2, ~~2010~~2011 each consisted of 13 weeks. ~~The nine-month periods ended October 1, 2011 and October 2, 2010 each consisted of 39 weeks.~~

Results of Operations

The following table presents our unaudited condensed consolidated statements of operations and the related percentage of total net revenues for the three- ~~and nine-~~month periods ended ~~October~~March 131, ~~2011 and~~2012 ~~October~~and April 2, ~~2010~~2011:

	Three Months Ended										~~Nine Months Ended~~
	October 1,2011					October 2,2010					October 1,2011					October 2,2010
	March 31,2012					April 2,2011
Net revenues (1)	$	~~100~~90,~~996~~456,~~878~~068		100.0	%	$	9381,~~272~~515,~~151~~037		100.0	%	$	~~312,731,797~~		~~100.0~~	%	$	~~278,966,906~~	~~100.0~~	%
Cost of products sold (2)		6660,~~140~~135,~~939~~314		6566.5	%		6154,~~242~~097,~~069~~281		6566.74	%		~~204,792,519~~		~~65.5~~	%		~~183,020,581~~	~~65.6~~	%
Gross profit		3430,~~855~~320,~~939~~754		3433.5	%		3227,~~030~~417,~~082~~756		3433.36	%		~~107,939,278~~		~~34.5~~	%		~~95,946,325~~	~~34.4~~	%
Selling, general and administrative		3233,~~935~~639,~~504~~844		3237.62	%		3130,~~474~~451,~~726~~510		3337.74	%		~~98,941,133~~		~~31.6~~	%		~~92,933,451~~	~~33.3~~	%
Store pre-opening expenses (3)		~~109~~1,~~257~~188,429		0.1.3	%		39307,~~544~~471		0.04	%		~~645,295~~		~~0.2~~	%		~~497,210~~	~~0.2~~	%
Store closing, lease termination and impairment charges (4)		-		0.0	%		1,572,624		1.7	%		182,914		0.1	%		1,572,624	0.6	%
Lease termination charges (4)		426,060		0.5	%		—		0.0	%
Total operating expenses		3335,~~044~~254,~~761~~333		3239.70	%		3330,~~086~~758,~~894~~981		3537.57	%		~~99,769,342~~		~~31.9~~	%		~~95,003,285~~	~~34.1~~	%
Operating income (loss)		1,811,178		1.8	%		(1,056,812	)	-1.1	%		8,169,936		2.6	%		943,040	0.3	%
Operating loss		(4,933,579	)	-5.5	%		(3,341,225	)	-4.1	%
Interest expense		~~383~~461,~~944~~258		0.45	%		~~356~~444,~~806~~968		0.45	%		~~1,190,639~~		~~0.4~~	%		~~806,111~~	~~0.3~~	%
Other income (expense), net		~~(28~~72,~~023~~387	)	0.01	%		4043,~~310~~265		0.01	%		~~42,752~~		~~0.0~~	%		~~64,856~~	~~0.0~~	%
Income (loss) before income taxes		1,399,211		1.4	%		(1,373,308	)	-1.5	%		7,022,049		2.2	%		201,785	0.1	%
Loss before income taxes		(5,322,450	)	-5.9	%		(3,742,928	)	-4.6	%
Income tax (expense) benefit		(86,702	)	-0.1	%		229,430		0.2	%		(508,389	)	-0.2	%		20,886	0.0	%
Income tax benefit		1,674,823		1.9	%		629,762		0.8	%
Net income (loss)	$	1,312,509		1.3	%	$	(1,143,878	)	-1.2	%	$	6,513,660		2.1	%	$	222,671	0.1	%
Net loss	$	(3,647,627	)	-4.0	%	$	(3,113,166	)	-3.8	%

(1) ~~Revenues~~Net revenues consist of merchandise sales, net of actual and expected returns, from our stores and our direct-to-consumer ~~channels~~business, as well as gift card breakage.

(2) Cost of products sold includes inbound freight, vendor discounts and rebates, as well as cooperative promotional vendor income that does not pertain to incremental direct advertising costs. It also includes salary and facility expenses, such as depreciation and amortization, associated with our distribution and fulfillment center in Austin, Texas.

(3)	Store pre-opening expenses consist primarily of rent, marketing, payroll and recruiting costs related to the opening of new retail stores that are incurred prior to a new store opening.

(4) During the ~~second~~first quarter of ~~2011~~2012, we recorded a $0.24 million incharge for estimated lease termination ~~charges~~costs associated with a ~~lease~~store ~~previously~~relocation ~~assigned to a subtenant~~ which ~~declared~~occurred ~~bankruptcy.~~in ~~Store~~March ~~closing,~~of ~~lease termination and impairment charges during~~ the ~~previous~~current year ~~resulted from store closures during the third quarter of 2010~~. (See Notes 6 and 7 to our unaudited condensed consolidated financial statements).

The following table presents consolidated net revenues by channel and comparable store sales percentage changes for the three- ~~and nine-~~month periods ended ~~October~~March 131, ~~2011~~2012 and ~~October~~April 2, ~~2010~~2011:

Three Months Ended

~~Nine Months Ended~~

October 1,2011

October 2,2010

$Change

%Change

October 1,2011

October 2,2010

$Change

%Change

March 31,2012

April 2,2011

$Change

%Change

Comparable stores (1)

7971,~~459~~003,~~783~~319

7665,~~813~~418,~~193~~987

25,~~646~~584,~~590~~332

38.45

~~242,531,392~~

~~225,913,534~~

~~16,617,858~~

~~7.4~~

Non-comparable stores

45,~~147~~320,~~800~~700

1,~~019~~252,~~055~~165

34,~~128~~068,~~745~~535

~~307~~324.09

~~17,115,168~~

~~5,540,832~~

~~11,574,336~~

~~208.9~~

Total stores (2)

8376,~~607~~324,~~583~~019

7766,~~832~~671,~~248~~152

59,~~775~~652,~~335~~867

714.45

~~259,646,560~~

~~231,454,366~~

~~28,192,194~~

~~12.2~~

Direct-to-consumer

1412,~~820~~152,~~332~~121

1312,~~323~~752,~~430~~769

1(600,~~496,902~~648

)

11-4.27

~~45,881,337~~

~~40,690,539~~

~~5,190,798~~

~~12.8~~

International distributors and other (3)

21,~~568~~979,~~963~~928

2,~~116~~091,~~473~~116

~~452~~(111,~~490~~188

)

21-5.43

~~7,203,900~~

~~6,822,001~~

~~381,899~~

~~5.6~~

Net revenues

~~100~~90,~~996~~456,~~878~~068

9381,~~272~~515,~~151~~037

78,~~724~~941,~~727~~031

811.30

~~312,731,797~~

~~278,966,906~~

~~33,764,891~~

~~12.1~~

(1)

We consider sales by a new store to be comparable commencing in the fourteenth month after the store was opened or acquired. We consider sales by a relocated store to be comparable if the relocated store is expected to serve a comparable customer base and there is not more than a 30-day period during which neither the original store nor the relocated store is closed for business. We consider sales by retail stores with modified layouts to be comparable. We consider sales by stores that are closed to be comparable in the period leading up to closure if they meet the qualifications of a comparable store and do not meet the qualifications to be classified as discontinued operations.

(2) Included in total stores’ net revenues ~~related~~is to$2.7 ~~sales~~million ~~transacted online~~ and ~~either picked up by the customer at our stores or shipped to the customer from one of our retail stores is,~~ $4.25 million for ~~each of~~ the three months ended ~~October~~March 131, ~~2011~~2012 and ~~October~~April 2, ~~2010~~2011, respectively, ~~and~~related ~~$14.8~~to ~~million~~sales transacted online and ~~$14.1~~either ~~million~~picked ~~for~~up by the ~~nine~~customer ~~months~~at ~~ended~~our ~~October~~stores 1,or ~~2011~~shipped ~~and~~to ~~October~~the 2,customer ~~2010,~~from ~~respectively~~one of our retail stores.

(3) Consists of sales made through our international distributors, ~~through~~and our distribution and fulfillment center near London, England, ~~and~~ gift card breakage revenue and other miscellaneous revenue.

Three Months ended March 31, 2012 compared to Three Months ended April 2, 2011

Net Revenues. Net revenues increased 11.0% to $90.5 million for the three months ended March 31, 2012 from $81.5 million for the three months ended April 2, 2011. The increase was primarily due to a $9.7 million increase in our store revenues, partially offset by a $0.6 million decline in sales from our direct-to-consumer channel. Our comparable store revenues increased $5.6 million, or 8.5%, during fiscal 2012, as compared to fiscal 2011. In addition to an increase in sales among our existing retail locations, net revenues benefited from $4.1 million in sales associated with expansion of our store base. Retail revenue also benefited from an improvement in weather conditions and marketing initiatives targeted at our niche customer base. During the three months ended March 2012, golf rounds played, a leading indicator of golf participation tracked by Golf Datatech L.L.C., increased 22.0% compared to the same period in the previous year. The decline in revenue from our direct-to-consumer channel year-over-year is primarily attributable to sales decreases in clubmaking components and clubs. Internet sales also declined 3.5% due to a change in process for delivering clearance apparel from stores.

Gross Profit. Consolidated gross profit, as a percentage of net revenues, decreased to 33.5% for the three months ended March 31, 2012 from 33.6% for the three months ended April 2, 2011. Gross profits for the current period were primarily affected by a decline in merchandise margins of 0.8%, as percentage of net revenues, as compared to the first quarter of fiscal 2011. Margins during the first quarter of fiscal 2012 were also negatively impacted by clearance on apparel which was launched immediately following the holiday shopping season. This decrease in gross profits over the prior year was partially offset by an increase in the amount of vendor funding received in excess of direct advertising expenditures and a decrease in shipping and freight expense, as a percentage of net revenues.

~~Three~~Selling, ~~Months~~general and administrative expenses. Selling, general and administrative expenses increased to $33.6 million, or 10.5%, for the three months ended ~~October~~March 131, 2012 from $30.5 million for the three months ended April 2, 2011. ~~compared~~As a percentage of net revenues, selling, general and administrative expenses decreased to ~~Three~~37.2% ~~Months~~for fiscal 2012 from 37.4% for fiscal 2011. The increase in selling, general and administrative expenses over the previous year in absolute dollars primarily relates to five new stores, three of which opened in the current fiscal quarter, two store relocations and an increase in credit card fees of $0.5 million driven by an increase in sales over the previous year. The first quarter ended ~~October~~March 231, ~~2010~~2012, was also affected by an increase in chargebacks of approximately $0.4 million as a result of credit card processing complexities arising from our system conversion in the fourth quarter of fiscal 2011, partially offset by a $0.3 million reduction in our allowance of doubtful accounts that was recorded at as of December 31, 2011. In addition to these charges, selling, general and administrative expenses include $0.2 million in severance for a former executive and $0.2 million in expenses for legal and other professional services associated with the transaction as discussed under “Recent Developments.” (See also Note 8 to our unaudited condensed consolidated financial statements).

~~Net Revenues~~Store pre-opening. ~~Net~~Store ~~revenues~~pre-opening ~~increased~~expenses ~~8.3%~~were to $~~101~~1.02 million ~~for~~and ~~the three months ended October 1, 2011 from~~ $930.3 million ~~for~~in each of the three-month ~~months~~periods ended ~~October~~March 231, ~~2010.~~2012 ~~The increase was primarily due to a $5.8 million increase in our store revenues~~ and ~~an increase of $1.5 million from our direct-to-consumer channel. Our comparable store revenues increased $~~April 2~~.6 million~~, ~~or 3.4%, during fiscal~~ 2011, ~~as compared to fiscal 2010~~respectively. InFiscal ~~addition~~2012 toreflects anoccupancy ~~increase~~charges inprimarily ~~sales~~related ~~among~~to ~~our~~ten ~~existing retail locations~~new stores, ~~net~~three ~~revenues~~of ~~benefited~~which ~~from~~opened ~~a $3.1 million increase~~ in ~~sales~~the ~~associated~~current ~~with~~quarter, ~~expansion~~one ~~of our~~ store ~~base~~ relocation and antwo ~~11.2%~~additional ~~increase~~relocations inwhich ~~direct-to-consumer~~are ~~revenue,~~scheduled ~~driven~~to byoccur anlater ~~increase~~ in ~~Internet~~the ~~sales of over 18%~~year. ~~Despite~~The ~~adverse~~previous ~~weather~~year ~~conditions~~consists inprimarily ~~some critical markets, net revenue benefited from sales~~ of ~~apparel~~occupancy ~~and~~charges ~~shoes,~~related ~~in addition~~ to ~~continued demand~~three ~~for~~ new, ~~higher~~store ~~priced~~openings in ~~drivers~~fiscal ~~and iron sets~~2011.

~~Gross~~Lease ~~Profit.~~termination ~~Consolidated gross profit, as a percentage of net revenues, increased to 34~~charges.5% ~~for~~During the ~~three~~first ~~months~~quarter ~~ended~~of ~~October 1~~2012, ~~2011~~we ~~from~~recorded ~~34.3%~~a ~~for the three months ended October 2, 2010~~$0.4 ~~The~~million ~~continued~~charge ~~execution~~for ofestimated ~~our strategy to increase the penetration of higher margin goods, such as apparel and~~lease ~~shoes,~~termination ~~delivered~~costs ~~merchandise~~associated ~~gross~~with ~~profit growth of approximately 1.5%, as~~ a ~~percentage~~store ofrelocation ~~revenue,~~which ~~over~~occurred ~~the~~in ~~same~~March ~~period~~ of the ~~previous~~current year. ~~This~~(See ~~increase~~Notes in6 ~~gross~~and ~~profits over the prior year was offset by an approximate 0.~~7% ~~increase~~to ~~in shipping and freight driven primarily by free shipping offers through~~ our ~~direct-to-consumer~~unaudited ~~channel,~~condensed asconsolidated ~~well~~financial ~~as higher freight costs resulting from increased carrier costs and increased inventory receipts~~statements). ~~The current quarter also reflects a 0.5% increase in shrink expense related to a timing difference in actual physical inventories and increased shrink in certain key product categories.~~

~~Selling,~~Interest ~~general~~expense ~~and administrative expenses~~. ~~Selling,~~Interest ~~general~~expense ~~and~~consists ~~administrative~~primarily ~~expenses~~of ~~increased~~interest ~~4.6%~~incurred toon ~~$32.9~~borrowings ~~million~~under ~~for~~our ~~the three~~Credit ~~months ended October 1, 2011 from $31~~Facility.5 ~~million~~For ~~for~~ the three months ended ~~October~~March 231, ~~2010. As a percentage of net revenues~~2012, ~~selling,~~interest ~~general~~expense ~~and~~increased ~~administrative expenses decreased~~ to 32 $0.6%5 ~~for~~million ~~the three months ended October 1, 2011~~ from 33$0.7%4 million for the three months ended ~~October~~April 2, ~~2010~~2011. ~~The~~As ~~increase~~a inpercentage ~~selling, general and administrative expenses over the previous year in absolute dollars primarily relates to the opening~~ of ~~four~~net ~~new stores as well as an increase in performance bonuses and $0.6 million in charges for legal and other professional services incurred outside the ordinary course of business. The decline~~revenues, asinterest aexpense ~~percentage~~remained ofconstant ~~revenue,~~year over ~~the same period in the previous~~ year ~~was~~at ~~primarily due to our ability to continue to leverage our fixed cost structure and to improved labor productivity in the stores~~0.5%.

~~Store~~Other ~~pre-opening expenses~~income (expense), net . ~~Store~~There ~~pre-opening~~were ~~expenses~~minimal ~~for~~changes in other income (expense), net during the three months ended ~~October~~March 131, ~~2011~~2012 ~~and~~as ~~October~~compared to the three months ended April 2, ~~2010~~2011. ~~consist~~Included ~~primarily~~in ofother ~~occupancy~~income ~~charges~~(expense), ~~related~~net toare ~~store~~realized ~~openings~~foreign incurrency ~~fiscal~~exchange ~~2011~~rate gains/losses and ~~2010,~~other ~~respectively~~miscellaneous income.

~~Store~~Income ~~closing~~tax benefit. During the three-month periods ended March 31, ~~lease~~2012 ~~termination~~and April 2, 2011, we recorded income tax benefits of approximately $1.7 million and ~~impairment~~$0.6 ~~charges~~million on pre-tax losses of approximately $5.3 ~~Included~~million inand $3.7 million, respectively. Our benefit for income taxes reflects an effective tax rate of approximately of 31.5% and 16.8% for the three months ended ~~October~~March 231, ~~2010~~2012 isand $1April 2, 2011, respectively.6 ~~million~~The increase in ~~store closing~~the effective tax rate, ~~lease~~year ~~termination~~over year, was driven primarily by the estimated deferred tax expense from the amortization of our indefinite-lived intangible assets. The amortization of indefinite-lived assets results in deferred tax expense and ~~asset~~a ~~impairment~~deferred ~~charges~~tax ~~associated~~liability ~~with~~without ~~store~~a ~~closures~~corresponding reduction in our valuation allowance. (The income tax benefit for the periods differed from the amount which would have been recorded using the U.S. statutory tax rate of 34% primarily due to a change in our valuation allowances. See Note 73 of the notes to ~~our~~Unaudited ~~unaudited~~Condensed ~~condensed~~Consolidated ~~consolidated~~Financial ~~financial~~Statements ~~statements)~~included in this Form 10-Q for further discussion.

~~Interest~~Liquidity ~~expense, net. Interest expense consists primarily of interest expense incurred on borrowings under our Credit Facility. For each of the three months ended October 1, 2011~~ and ~~October 2,~~Capital ~~2010,~~Resources ~~interest expense was $0.4 million.~~

~~Other~~As ~~income~~of ~~(expense)~~March 31, ~~net.~~2012, ~~There~~our ~~were~~primary ~~minimal~~sources ~~changes in~~of ~~other~~liquidity ~~income~~consisted ~~(expense),~~of ~~net~~cash ~~during~~and ~~the~~cash ~~three~~equivalents ~~months~~totaling ~~ended October~~$8.7 1,million ~~2011~~and as$35.7 ~~compared~~million toof ~~the~~available ~~three~~borrowings ~~months~~under ~~ended~~our ~~October 2,~~Credit ~~2010.~~Facility ~~Included~~which is more fully described in ~~other~~Note ~~income~~4 ~~(expense),~~of ~~net~~the ~~are~~notes ~~realized~~to ~~foreign~~our ~~currency~~unaudited ~~exchange~~condensed ~~rate~~consolidated ~~gains/losses~~financial statements, ~~gains~~included ~~from the~~in ~~sale~~this Form 10-Q. As of ~~assets~~March 31, ~~and~~2012, ~~other~~we ~~miscellaneous~~had ~~income~~outstanding debt obligations under our Credit Facility of $54.3 million.

~~Income~~Historically, ~~tax~~cash ~~(expense)~~flows ~~benefit.~~generated ~~During~~from ~~the~~operations ~~three-month periods ended October 1, 2011~~ and ~~October 2,~~our ~~2010,~~borrowing wecapacity ~~recorded~~under ~~income~~our ~~tax~~Credit ~~expense~~Facility ~~and~~have anallowed ~~income~~us ~~tax~~to ~~benefit~~meet ofour ~~approximately~~cash ~~$0.1 million and $0.2 million~~requirements, ~~respectively,~~including oncapital ~~pre-tax~~expenditures ~~income~~ and aworking ~~pre-tax loss of approximately $1~~capital needs.4 ~~million~~In ~~and $1.4 million~~addition, ~~respectively.~~future ~~Our~~cash ~~provision~~outflows ~~for~~related ~~income~~to ~~taxes~~new ~~reflects~~store ~~an effective tax rate of approximately of 6.2% and 16.7% for the three months ended October 1~~openings, ~~2011 and October 2~~advertising, ~~2010,~~store ~~respectively. The decrease in our effective tax rate~~remodels, ~~year~~ ~~over~~and ~~year,~~other ~~was~~expenditures ~~driven~~have ~~primarily~~been byadjusted ~~a reduction in our provision for state, federal~~ and ~~international~~may ~~income~~need ~~taxes primarily due~~ to abe ~~change~~further inadjusted ~~state~~accordingly ~~taxes~~from astime ~~a percentage of income before income taxes. The income tax benefit for the previous year related~~ to ~~the~~time ~~uncertainty~~in ~~regarding deductions taken on late filed foreign tax returns which had not been examined by~~ the ~~applicable tax authorities~~future. ~~The~~For ~~period of inquiry related to~~ the ~~foreign~~remainder ~~tax returns expired during the fourth quarter~~ of ~~2010~~fiscal 2012, ~~and~~we ~~the~~anticipate ~~Company~~incurring ~~decreased~~approximately ~~this previously unrecognized tax benefit liability to zero at the end of fiscal 2010~~$6.2 ~~The~~million ~~provision~~in ~~for~~capital ~~income~~expenditures, ~~taxes~~excluding ~~for~~tenant ~~the~~improvement ~~periods~~allowances, ~~differed~~related ~~from~~primarily ~~the~~to ~~amount~~our ~~which~~new ~~would~~store ~~have~~openings, ~~been~~various ~~recorded~~store ~~using~~remodels ~~the~~and ~~U.S.~~investments ~~statutory tax rate of 34% due to a change~~ in our ~~valuation~~information ~~allowances~~technology infrastructure. ~~(See Note 3 to our unaudited condensed consolidated financial statements).~~

Also, additional expenses are being incurred in 2012 for legal and other professional services associated with the transaction as discussed under “Recent Developments.” (See also Note 8 to our unaudited condensed consolidated financial statements).

If cash generated from operations and available borrowings under our Credit Facility are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or arrange additional debt financing. If cash from operations and cash available under our Credit Facility are not sufficient to meet our needs, we cannot be certain that we will be able to obtain additional financing in sufficient amounts and/or on acceptable terms in the near future or when our facility expires in July 2014.

Nine Months Ended October 1, 2011 compared to Nine Months Ended October 2, 2010

Net Revenues. Net revenues increased 12.1% to $312.7 million for the nine months ended October 1, 2011 compared to $279.0 million for the nine months ended October 2, 2010. The increase was primarily due to a $28.2 million increase in our store revenues and an increase of $5.2 million from our direct-to-consumer channel. Our comparable store revenues increased $16.6 million, or 7.4%, during fiscal 2011, as compared to fiscal 2010. In addition to an increase in sales among our existing retail locations, net revenues benefited from a $11.6 million increase in sales associated with expansion of our store base and a 12.8% increase in direct-to-consumer revenue, driven by an increase in Internet sales of over 22%. Revenue also benefited from sales of apparel, shoes and several key product launches among our newest line of drivers and from one of our fastest growth initiatives, custom fitting, leading to purchases of higher ticket clubs and irons. While competitive closings and expansion of our store base have, in our opinion, added momentum to revenue growth, golf participation and demand for our products has been negatively impacted by less than favorable weather throughout much of the country. During the eight months ended August 31, 2011, golf rounds played, a leading indicator of golf participation tracked by Golf Datatech L.L.C., declined 3.3% compared to the same period in fiscal 2010. To better navigate these trends, our strategy has been to secure a greater share of the market and the loyalty of our customers.

Gross Profit. Consolidated gross profit, as a percentage of net revenues, increased to 34.5% for the nine months ended October 1, 2011 from 34.4% for the nine months ended October 2, 2010. The continued execution of our strategy to increase the penetration of higher margin goods, such as shoes and apparel, delivered merchandise gross profit growth of approximately 1.1%, as percentage revenue, over the same period of the previous year. This increase in gross profits over the prior year was offset by an approximate 0.6% increase in shipping and freight driven primarily by free shipping offers through our direct-to-consumer channel, as well as higher freight costs resulting from increased carrier costs and increased inventory receipts. The current year also reflects a 0.2% decrease in the impact of vendor funding now reflected as an offset to advertising expense, in addition to a 0.1% increase in shrink resulting from higher shrink in certain key product categories.

Selling, general and administrative expenses. Selling, general and administrative expenses increased 6.5% to $98.9 million for the nine months ended October 1, 2011 from $92.9 million for the nine months ended October 2, 2010. As a percentage of net revenues, selling, general and administrative expenses decreased to 31.6% for the nine months ended October 1, 2011 from 33.3% for the nine months ended October 2, 2010. The increase in selling, general and administrative expenses over the previous year in absolute dollars primarily relates to the opening of four new stores as well as an increase in performance bonuses, $0.3 million in consulting fees for a one-time project designed to improve our marketing effectiveness and $0.6 million in charges for legal and other professional services incurred outside the ordinary course of business. This increase was partially offset by savings which resulted from our closure of three stores during 2010. The decline, as a percentage of revenue, over the same period in the previous year was primarily due to our ability to continue to leverage our fixed cost structure and to improved labor productivity in the stores.

Store pre-opening expenses. Store pre-opening expenses were $0.6 million and $0.5 million in each of the nine-month periods ended October 1, 2011 and October 2, 2010, respectively. Store pre-opening expenses for the nine months ended October 1, 2011 and October 2, 2010 consist primarily of occupancy charges related to store openings in fiscal 2011 and 2010, respectively.

Store closing, lease termination and impairment charges. During the second quarter of 2011, we recorded $0.2 million in lease termination charges associated with a lease previously assigned to a subtenant which declared bankruptcy. The previous year includes $1.6 million in store closing, lease termination and asset impairment charges associated with store closures during the third quarter of fiscal 2010. (See Notes 6 and 7 to our unaudited condensed consolidated financial statements).

Interest expense, net. For the nine months ended October 1, 2011, net interest expense increased to $1.2 million as compared to $0.8 million for the nine months ended October 2, 2010. As a percentage of net revenues, interest expense increased to 0.4% for the nine months ended October 1, 2011 from 0.3% for the nine months ended October 2, 2010. The previous year includes a $0.2 million adjustment to reverse the impact of bank overcharges in previous periods. The remaining increase in interest expense is primarily due to an increase in the average balance outstanding under our Credit Facility to facilitate store expansion and working capital requirements during the current fiscal year.

Other income (expense), net. There were minimal changes in other income (expense), net during the nine months ended October 1, 2011 as compared to the nine months ended October 2, 2010. Included in other income (expense), net are realized foreign currency exchange rate gains/losses, gains from the sale of assets, and other miscellaneous income.

Income tax (expense) benefit. During the nine month periods ended October 1, 2011 and October 2, 2010, we recorded income tax expense of approximately $0.5 million and a nominal income tax benefit on pre-tax income of approximately $7.0 million and $0.2 million, respectively. Our provision for income taxes reflects an effective tax rate of approximately of 7.2% and 10.4% for the nine months ended October 1, 2011 and October 2, 2010, respectively. The decrease in our effective tax rate, year over year, was driven primarily by a reduction in our provision for state, federal and international income taxes primarily due to a change in state taxes as a percentage of income before income taxes. The income tax benefit for the previous year related to the uncertainty regarding deductions taken on late filed foreign tax returns which had not been examined by the applicable tax authorities. The period of inquiry related to the foreign tax returns expired during the fourth quarter of 2010, and the Company decreased this previously unrecognized tax benefit liability to zero at the end of fiscal 2010. The provision for income taxes for the periods differed from the amount which would have been recorded using the U.S. statutory tax rate of 34% due to a change in our valuation allowances. (See Note 3 to our unaudited condensed consolidated financial statements).

Liquidity and Capital Resources

As of October 1, 2011, our primary sources of liquidity consisted of cash totaling $0.9 million and $29.1 million of available borrowings under our Credit Facility, which is more fully described in Note 4 of the notes to unaudited condensed consolidated financial statements, included in this Quarterly Report on Form 10-Q. As of October 1, 2011, we had outstanding debt obligations under our Credit Facility of $35.4 million.

Historically, cash flows generated from operations and our borrowing capacity under our Credit Facility have allowed us to meet our cash requirements, including capital expenditures and working capital needs. In addition, future cash outflows related to new store openings, advertising, store retrofits, and other expenditures have been adjusted and may need to be further adjusted accordingly from time to time in the future. For the remainder of fiscal 2011, we anticipate incurring approximately $2.4 million in capital expenditures, excluding tenant improvement allowances, related primarily to our new store openings, various store remodels and investments in our information technology infrastructure. In addition for the remainder of fiscal 2011, additional expenses for legal and other professional services outside the ordinary course of business may be incurred.

If cash generated from operations and available borrowings under our Credit Facility are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or arrange additional debt financing. If cash from operations and cash available under our Credit Facility are not sufficient to meet our needs, we cannot assure you that we will be able to obtain additional financing in sufficient amounts and/or on acceptable terms in the near future or when our facility expires in July 2014.

Cash Flows

	Nine Months Ended
	Three Months Ended
	October 1,2011			October 2,2010
	March 31,2012			April 2,2011
Net cash provided by operating activities	$	153,~~384~~729,~~523~~134		$	32,~~431~~315,~~267~~911
Net cash used in investing activities		(910,~~709~~103,~~211~~199	)		(94,~~652~~447,~~926~~422	)
Net cash (used in) provided by financing activities		(5,009,312	)		6,300,827
Net cash provided by financing activities		12,410,982			2,471,796
Effect of exchange rate changes on cash		~~(228~~10,221	)		(72,~~734~~494	)
Change in cash	$	665,772		$	71,434
Change in cash and cash equivalents	$	6,047,138		$	342,779

Operating Activities

Our cash flows from operations are seasonal. Operating activities provided $153.47 million and $2.3 million of cash for the ~~nine~~three months ended ~~October~~March 131, ~~2011~~2012 and ~~provided $3.4~~April ~~million of cash for the nine months ended October~~ 2, ~~2010. In addition to the increase in net income~~2011, ~~the~~respectively. The increase in cash provided by operating activities during the ~~nine~~three months ended ~~October~~March 131, ~~2011~~2012, as compared to the ~~nine~~prior ~~months ended October 2~~year, ~~2010,~~ primarily reflects ~~a significant improvement in~~ the timing of ~~accounts~~rent ~~payable~~and ~~payments~~other inworking ~~fiscal~~capital ~~2011 as compared to the prior year as a result of extended vendor payment terms negotiated during the fourth quarter of 2010 as part of company wide initiatives to increase operational efficiencies~~requirements.

Investing Activities

Cash used in investing activities primarily relates to building out new stores, remodeling or relocating existing stores, purchasing information technology, as well as capital expenditures for our distribution facilities and corporate headquarters. Investing activities used $910.71 million and $4.5 million of cash for ~~each of~~ the ~~nine~~three months ended ~~October 1~~March 31, ~~2011~~2012 and ~~October~~April 2, ~~2010~~2011, respectively. Cash was used during the ~~nine~~current ~~months~~year ~~ended~~quarter ~~October 1,~~to ~~2011~~build ~~relates~~out ~~to four~~ten new ~~store openings~~stores, ~~several~~three ~~store~~of ~~remodels~~which ~~and~~opened ~~costs~~during the ~~associated~~three ~~with~~months ~~the~~ended ~~development~~March 31, 2011, and ~~deployment~~to ofrelocate ~~software~~two ~~systems~~of ~~designed~~our toexisting ~~facilitate~~locations ~~the~~as ~~expansion~~part of our ~~operations~~plan for fiscal 2012. Cash was used during the ~~nine~~prior ~~months~~year ~~ended~~quarter ~~October 2,~~to ~~2010~~build ~~includes costs~~out ~~related~~two ~~to three~~ new ~~store~~stores ~~openings~~ and to remodel several ~~remodels.~~of our existing locations.

Financing Activities

Financing activities ~~used~~provided $512.04 million ~~of cash for the nine months ended October 1, 2011~~ and ~~provided~~ $62.35 million of cash for the ~~nine~~three months ended ~~October~~ March 231, ~~2010.~~2012 ~~Cash~~and ~~used~~April 2, in2011, ~~and~~respectively. Cash ~~provided~~flow byfrom financing activities primarily relates to the net of borrowings and principal payments under our Credit Facility.

Indebtedness

As of ~~October~~March 131, ~~2011~~2012, we had approximately $3554.43 million in aggregate indebtedness outstanding and $2935.17 million in available borrowings under our Credit Facility, after giving effect to all reserves. At ~~October~~April 2, ~~2010~~2011, the Company had $42.6 9 million in aggregate indebtedness outstanding and $1834.47 million in available borrowings under our Credit Facility, after giving effect to all reserves. As of ~~January~~December 131, 2011, we had approximately $4041.49 million ofin ~~outstanding~~aggregate ~~borrowings~~indebtedness ~~under~~outstanding ~~our Credit Facility~~ and $1829.5 6 million ofin ~~borrowing~~available ~~availability~~borrowings under our credit facility, after giving effect to all reserves.

Our Credit Facility contains customary affirmative covenants regarding, among other things, the delivery of financial and other information to the lenders, maintenance of records, compliance with law, maintenance of property and insurance and conduct of our existing business. The Credit Facility also contains certain customary negative covenants that limit the ability of the Credit Parties (as defined in Note 4 of the notes to our ~~unaudited condensed~~Unaudited ~~consolidated~~Condensed ~~financial~~Consolidated ~~statements~~Financial Statements) to, among other things, create liens, make investments, enter into transactions with affiliates, incur debt, acquire or dispose of assets, including merging with another entity, enter into sale-leaseback transactions, and make certain restricted payments. As of ~~October~~March 131, ~~2011~~2012, we were in compliance with all applicable covenants. See Note 4 of the notes to our ~~unaudited~~Unaudited ~~condensed~~Condensed ~~consolidated~~Consolidated ~~financial~~Financial ~~statements~~Statements for further discussion of the terms of our Credit Facility.

Borrowings under our Credit Facility typically increase as working capital requirements increase in anticipation of peak selling periods in late spring and in advance of the December holiday gift-giving season, and then decline following these periods. In the event sales results are less than anticipated and our working capital requirements remain constant, the amount available under our Credit Facility may not be adequate to satisfy our needs. If this were to occur, we may not succeed in obtaining additional financing in sufficient amounts, if at all, and/or on acceptable terms.

Off-Balance Sheet Arrangements

As of March 31, 2012, we did not have any off-balance sheet arrangements as defined by the rules and regulations of the SEC.

Critical Accounting Policies and Estimates

Our significant accounting policies are more fully described in Note 1 of our Audited Consolidated Financial Statements in our Annual Report on Form 10-K filed with the SEC on ~~February~~March 2330, ~~2011~~2012. Certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations. In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions to be used in making certain estimates. Those estimates are based on our historical experience, the terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. These estimates are subject to an inherent degree of uncertainty. We have chosen accounting policies that we believe are appropriate to report accurately and fairly (in accordance with Generally Accepted Accounting Principles), our operating results and financial position, and we apply those accounting policies in a consistent manner. Our critical accounting policies have not changed significantly since the filing of our Annual Report.

Recent Accounting Pronouncements

In ~~October 2009~~June 2011, the FASB issued ~~guidance~~Accounting onStandards ~~revenue~~Update ~~recognition~~No. 2011-05, ~~that~~Comprehensive ~~provides~~Income ~~clarification~~(Topic on220) ~~whether~~— ~~multiple~~Presentation ~~deliverables~~of ~~exist,~~Comprehensive ~~how~~Income ~~the~~(ASU ~~arrangement should be separated~~2011-05), ~~and~~to ~~the~~require ~~consideration~~an ~~allocated. An~~ entity ~~is required~~ to ~~allocate~~present ~~revenue in an arrangement using estimated selling prices of deliverables in~~ the ~~absence~~total of ~~vendor-specific~~comprehensive ~~objective~~income, ~~evidence~~the orcomponents ~~third-party evidence~~ of ~~selling~~net ~~price.~~income, ~~These~~and ~~amendments eliminate~~ the ~~use~~components of ~~the~~other comprehensive ~~residual~~income ~~method~~either ~~and~~in ~~require~~a ansingle ~~entity~~continuous tostatement ~~allocate~~of ~~revenue~~comprehensive ~~using~~income ~~the~~or ~~relative~~in ~~selling~~two ~~price~~separate ~~method. These~~but ~~amendments~~consecutive ~~significantly~~statements. ~~expanded~~ASU ~~the disclosure requirements for multiple~~2011-~~deliverable~~05 ~~revenue~~eliminates ~~arrangements.~~the ~~These~~option ~~provisions are~~ to bepresent ~~applied~~the oncomponents aof ~~prospective~~other ~~basis~~comprehensive ~~for~~income ~~revenue~~as ~~arrangements~~part ~~entered~~of ~~into~~the orstatement ~~materially~~of equity. ~~modified~~ASU in2011-05 ~~fiscal~~is ~~years beginning~~effective onfor orus ~~after~~in ~~June 15,~~our ~~2010,~~first ~~with~~quarter ~~earlier~~of ~~application~~fiscal ~~permitted~~2012. The adoption of ~~the~~ASU ~~guidance~~2011-05 ~~did~~has ~~not~~had ~~have~~no ~~a material~~ impact on our ~~consolidated~~statements ~~results~~ of financial position, operations or ~~financial~~cash ~~position~~flows.

May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (Topic 820)—Fair Value Measurement (ASU 2011-04), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. ASU 2011-04 became effective for us in our first quarter of fiscal 2012 and should be applied prospectively. The adoption of ASU 2011-04 has had no impact on our consolidated financial statements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide the information otherwise required by this ~~item~~Item.

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial and accounting officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based upon, and as of the date of this evaluation, the ~~chief~~principal executive officer and the ~~chief~~principal financial officer concluded that our disclosure controls and procedures were effective such that the information required to be disclosed in our SEC reports ~~(i)~~ is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and ~~(ii)~~ is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

During the quarter ended ~~October~~March 131, ~~2011~~2012, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

See Note 6 of the Notes to the ~~unaudited~~Unaudited ~~condensed~~Condensed ~~consolidated~~Consolidated ~~financial~~Financial ~~statements~~Statements for a description of our legal proceedings.

ITEM 1A.

RISK FACTORS

As a smaller reporting company, we are not required to provide the information required by this ~~item~~Item.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. ~~REMOVED~~ ~~AND~~MINE ~~RESERVED~~SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

31.1		Rule 13a-14(a)/15d-14(a) Certification of Martin E. Hanaka.
31.2		Rule 13a-14(a)/15d-14(a) Certification of Sue E. Gove.
32.1		Certification of Martin E. Hanaka Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002., furnished herewith
32.2		Certification of Sue E. Gove Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002., furnished herewith
101.INS**		XBRL Instance Document
101.SCH**		XBRL Taxonomy Extension Schema Document
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**		XBRL Taxonomy Extension Label Linkbase Document
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

101.INS**		XBRL Instance Document
101.SCH**		XBRL Taxonomy Extension Schema Document
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**		XBRL Taxonomy Extension Label Linkbase Document
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

XBRL information is furnished, not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under those sections.

2119

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

GOLFSMITH INTERNATIONAL HOLDINGS, INC.


GOLFSMITH INTERNATIONAL HOLDINGS, INC.

	By:	/s/ Martin E. Hanaka
		Martin E. Hanaka
		Chairman and Chief Executive Officer
		(Principal Executive Officer and Authorized Signatory)
		Date: May 15, 2012

	By:	/s/ Sue E. Gove
		Sue E. Gove
		President, Chief Operating Officer and Chief Financial Officer
		(Principal Financial and Accounting Officer and Authorized Signatory)
		Date: May 15, 2012

				By:		/s/ Martin E. Hanaka
						Martin E. Hanaka
						Chairman and Chief Executive Officer
						(Principal Executive Officer and Authorized Signatory)
						Date: October 27, 2011
				By:		/s/ Sue E. Gove
						Sue E. Gove
						Executive Vice President, Chief Operating Officer and Chief Financial Officer
						(Principal Financial and Accounting Officer and Authorized Signatory)
						Date: October 27, 2011

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

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