Callaway Golf shares score off Nike's market duff
Nike's (NKE) decision to quit the golf equipment business could benefit much-smaller rival Callaway Golf (ELY) , whose shares surged Thursday on the news, even as the game that Mark Twain memorably described as a "good walk spoiled" struggles to retain its relevance.
According to the National Golf Federation, 24.1 million people played at least one round of golf in 2015, a slight drop from 24.7 million in each of the two previous years. The U.S. currently has about 15,372 golf courses, down from a peak of 16,052. Players have been giving up the game because of its time commitment, cost and difficulty, according to Steve Mona of the World Golf Foundation. Nike wasn't able to overcome those demographic challenges as sales for Nike Golf have slumped for three years.
One reason for the declining interest in golf has been Tiger Woods. The 40-year-old veteran, who has won 14 major tournaments, ranking him second in the sport's history to Jack Nicklaus, underwent back surgery in 2015 and hasn't indicated when he will return to competitive play. Woods, still popular among many golf fans despite personal scandals earlier this decade, hasn't won a PGA tournament since 2013.
"You have had a lot of the fringe and newbie golfers come and go," said Michael Swartz, an analyst with SunTrust Robertson Humphrey, adding that the game has plenty of passionate fans. "A lot of that was quite frankly driven by Tiger Woods."
Success in the golf business has also eluded Nike's top rival Adidas, which plans to sell its business that makes TaylorMade and Adams clubs, among other products. Acushnet Holdings Corp., the corporate parent of Titleist and Pinnacle golf balls, recently announced plans for an initial public offering, even though it lost nearly $1 million last year. Also faced with poor sales, Dicks Sporting Goods (DKS) in 2014 fired more than 500 PGA professionals it had employed in its stores.
The picture, though, isn't entirely bleak. Shares of Callaway Golf gained about 4 percent Thursday to close at $11 on expectations that it would benefit from Nike's departure for the golf equipment market. Swartz, who rates Callaway as "buy" estimates that Nike's revenue from golf equipment was between $100 million and $200 million annually -- pocket change for the sporting goods giant which earned more than $30 billion in revenue last. Indeed, golf is Nike's smallest sports business.
"Callaway being one of the industry leaders is best positioned to benefit from their departure," said Rommel Dionisio, an analyst with Wunderlich Securities, who rates Callaway as a "buy" and doesn't officially follow Nike, in an interview. "Nike over the last decade has been particularly aggressive in trying to buy their way into the marketplace through product development through endorsements from premiere golfers" like Rory McIlroy of Northern Ireland.
Callaway, for its part, is bullish on golf's future though it too was forced to undergo cost cutting and layoffs when supplies of golf equipment outstripped demand in recent years. Lately, though, the California company has sounded an upbeat note. During its recent earnings conference call, CEO Oliver Brewer noted the company's U.S. revenue rose 4.3 percent despite "soft" market conditions as it gained market share in both clubs and balls. "I am confident that Callaway Golf is in a much stronger position today than it has been in quite some time," Brewer said.
Callaway, though, will need to appeal to golf's passionate players who love the sport more than any particular player in order to be successful beyond the links.