As we proceed through earnings season, our concerns (read our “Par for the Course” article published in the June edition of The Cornerstone Journal of Sustainable Finance & Banking) about demographic secular headwinds is starting to play out. Our thesis, which began with near-term overhangs in the golf value-chain, are coming to fruition.
First, as of this writing, adidas Group (Bloomberg ticker: ADS.GY) shares are down by more than 15% after the sporting-goods maker cut FY14 earnings guidance to ~EUR650 million (versus initial range of EUR830-930 million and consensus EUR839 million), citing continued weakness in the golf market combined with recent turmoil in Russia/CIS. As it pertains to golf, ADS notes that “poor retail sentiment and the slow liquidation of old inventory in the golf category across the globe will lead to a significantly more challenging top-line and margin development…” and, as such, they will take further measures to reduce inventory in the marketplace and begin a restructuring program at TaylorMade-adidas Golf to align overhead with lower expectations for the golf industry.
Furthermore, Callaway (ELY) reported disappointing 2Q14 results on July 24 with sales down 7% (versus company guidance of 0-5% decline) and noted that market conditions were “more promotional and more challenging than anticipated.” ELY expects the environment to remain difficult in the second half of 2014, though they did say inventories improved during the quarter and that they’re at a manageable level for the remainder of the year.
Weakness in the golf industry is also evident in Puma’s (PUM.GY) 1H14 results where “golf equipment sales declined during the quarter due to the weaker golfing environment.” This led to more subdued growth in PUM’s Accessories category, up 3% (ex-FX) compared to prior quarters.
Finally, ESPN reported that Dick’s Sporting Goods (DKS) laid off all of the PGA professionals that it employed in its stores, while a less dire report from the Wall Street Journal said that DKS only let go 400 PGA golf instructors (of the 593 PGA and LPGA pros employed as of Feb. 1, 2014). As we observed in our prior note, DKS most recent quarter cited weakness in golf, pointing to excess inventory in the channel and said they were unsure of where the bottom is in golf.
Admittedly, a portion of this news is due to near-term pressure emanating from excessive inventory levels and aggressive promotional activity. While some investors are anticipating a turn in this cycle, we are more cautious from a longer-term perspective. The golf industry is facing demographic secular headwinds that are broadly leading to declining participation rates in developed markets. To this end, we suggest investors focus on the industry’s implementation of strategies designed to drive participation in the game, such as (but not limited to) building shorter, more playable and sustainable courses.
We will continue to monitor developments within the golf value-chain in order to assess long-term value and potential investment performance.