Golf Industry Recovery? Maybe Next Year...

by: Alex Morris
When the year started, the golf industry was hoping for a modest recovery. George Fellows, CEO of Callaway Golf (NYSE:ELY), told investors that he was “cautiously optimistic” for 2010. Management at Fortune Brands (FO), parent company of the Titleist and FootJoy brands, also sounded somewhat upbeat, expecting low single digit growth on the year. Nearly ten months later, the results are pretty across the industry are conclusive: better luck next year.

After consumer spending on golf equipment dropped 14% from 2008 to 2009, it appeared that the industry wouldn’t have too much trouble at least posting decent growth off of easy comps. Regardless, the economic headwinds blew like the wind at St. Andrews, leading to consumer spending on golf equipment falling another 3% this year (YTD) compared to 2009. As noted on the Fortune Brands Q3 call, U.S. rounds played are down 3.5% YTD in 2010, which are also compared to weak 09’ numbers. For the four big players in the industry (Fortune, Callaway, Nike (NYSE:NKE), and Adidas), results have been less than stellar (won’t hear Q3 results from Adidas until Nov 4th). Year to date, sales for Fortune Brands and Callaway are up 1.7% and 2.2%, respectively. The one company that has been surprisingly successful over the past year is Adams Golf (NASDAQ:ADGF) (Q3 release – 11/9/2010). In the most recent quarter ended June 30, 2010, revenues came in at $31.6 million (up 36% YOY), and net income was just shy of $5 million; not too bad for a company with a market cap of $33M. Adams Golf has benefited from selling a more value conscious product, and has been the middle ground for consumers looking to save money while also in need of new equipment. After the huge amount of promotional activity at the end of 2009, the big manufacturers have called it quits at the lower price points, leaving ADGF to pick up the scraps.
With optimism building for a 2011 recovery, the manufacturers are ready to pull in consumers with some innovative new products. From Fortune Brands, the new Titleist 910 driver will be released in Q4, along with the sixth generation of the Pro V1 golf ball launched in early 2011. From Callaway, the release of the Diablo Octane drivers and fairway woods should drive sales, as well as the development of Forged Composite technology for the crown of the club head, which weighs 26% less than a titanium crown. As usual, TaylorMade is also on the cutting edge and looking to increase their category lead in woods with the release of the R9 Supertri driver, as well as new Burner 2.0 irons. In aggregate, the industry is anxiously waiting to meet consumer’s needs in almost any way that is supplemental to their game.
Until the U.S. and Europe turn around, the focus remains on international growth in places like Japan, China, and India. Callaway has had some success internationally, with revenues for the first nine months coming in at $393 million, compared to $366 last year. Fortune Brands has also been successful internationally, building on the success of the Titleist DT #3 driver and balls, which are tailored to the swing characteristics of Japanese players. As noted by CEO Bruce Carbonari on the Q3 call, “Golf is focused on Asia.”
For the time being, the industry is stuck in a rut. While international growth is helping to salvage the P&L statements, the only sustainable strategy is a return of the consumer in both the U.S. and Europe. In 2009 the industry was slaughtered, and 2010 didn’t do much to mitigate the damages. Looking forward to 2011, the golf equipment business is in need of a birdie or two to get the scorecard heading back in the right direction.

Disclosure: Long ELY