GOLF reports 1Q earnings Thursday AM
We made GOLF a best idea short on 4/7/20. The COVID-19 closures and distancing procedures mean golf will see an awful year of sales and earnings, but our call is not just virus related. The lasting economic recessionary impacts on the US will mean several years of pressure on the golf industry. Golf was just starting to stabilize from the impacts of 2008/09. COVID-19 is another secular shock to the industry meaning lost players, lost businesses, and lost courses, and therefore lost long term equipment demand.
Since we made the short call numbers have come down, but the stock has barely budged, putting GOLF at all time high multiples over 21X PE. For 2020 the street expects sales to be down 6% and EPS to be down 30%. We see those sales and earnings expectations as being wildly off from what will be reality. As a reference in 2009 ELY sales were down 15%, EBIT was down 125%.
Perhaps some investors are getting more bullish as the narrative around golf is that courses are opening up, and golf is a game that can be played (under certain conditions) in compliance with social distancing.
But the problem is “open” simply means allowing play. There is still very little of the golf “economy” in existence beyond greens fees, which means GOLF's sales remain under significant pressure.
- The vast majority of club buildings remain closed, and most employees are not supposed to be on site. That means no clubhouse/golf shop selling balls and accessories.
- There are no gatherings allowed so there are no demo days, no club tournaments, not golf charity/corporate outings, and no club events.
- Social distancing makes club fitting very cumbersome (many Titleist buyers would want custom fitting).
- A significant amount of ball an accessory sales happen around tournaments or outings with custom logos on the balls. Pretty much all of those events have been cancelled until at least mid summer if not all year.
- There is little desire for players to seek out a new set of clubs when part of the season is lost, and the game is not quite “normal” this year.
- Golf retail stores both big and small are largely deemed unessential and not open for business. Many of golf retail sellers are seeing tough liquidity conditions meaning stocking or ordering the appropriate goods is tough to do with no visibility to demand.
That leaves regular rounds played as the main driver of demand, mainly for balls but maybe also gloves and shoes, and the only channel for purchase really is online. But google trends indicate there is still clearly significant weakness in product interest online.
On this quarter specifically, the street expecting sales down just 2.5%, and EPS down 20%. We think revenue pressure will more like 10%, and EPS pressure potentially 50% or more.
On the fiscal year we think the earnings will be down over 50%, and even as we model 2021 “recovery” earnings, given what we think the state of the consumer will be, we see earnings struggling to get to levels half of what was seen in 2019.
With current peak multiples on EPS expectations that are way too high, we think the stock has 50% downside from current levels.
