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The short game

4 August 2016 By Ben Kellerman

Though many investors like to golf, it’s a pastime best relegated to the fairway. That’s a lesson to draw from Nike’s decision to stop manufacturing clubs, bags and other gear. Adidas already put most of its golf arm up for sale. Retailer Golfsmith is mulling bankruptcy. For incumbents like Callaway and Titleist, which is going public, the retreats herald a chance to increase market share. But a continuing slump in the sport’s participation rate suggests the uplift will be ephemeral.

The number of golfers has dropped steadily since Tiger Woods was winning tournaments. From 2000 to 2014, the percentage of Americans swinging drivers declined to 7.6 percent from 12 percent, according to Pellucid, an industry analyst. The financial crisis certainly didn’t help. Tee times are expensive, equipment costly and players need four hours to finish 18 holes.

As a result, golf has reverted back to its country club roots, with wealthy individuals playing on courses owned by the likes of Republican presidential hopeful Donald Trump. Last year, average household income for golfers was nearly double that of typical Americans, research firm YouGov estimates. For Nike, which is targeting $50 billion of annual sales by 2020, eschewing what looks like a narrowing market, to focus solely on apparel, makes sense.

The $92-billion behemoth’s target requires a focus on activities with wider appeal, like running, which brought in 10 percent more revenue in the year ended in May. Golf sales dropped 6 percent, and accounted for less than 3 percent of Nike brand revenues. Rival Adidas figured this out in May, when it put golf brands, including TaylorMade, on the block.

These exits are a boost for tee-time pure-plays like Callaway, whose shares jumped 8 percent on Thursday; and Acushnet, the parent of Titleist which is in the process of selling $100 million of stock. The latter also benefits from a higher reliance on sales of balls, which often need replacing, over clubs, which are expensive, durable purchases.

The trouble is Callaway and Acushnet have all their balls in one bucket without faster-growing sports to fall back on. Though millennials represent the largest group of beginners, it’s still a sport heavily reliant on older folks. Gen-X and baby boom players comprise two thirds of all U.S. golfers, according to Acushnet’s prospectus, and play more than twice as many rounds a year.

With demographics like these, making America golf again is a task best left for more intrepid investors.


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