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NOTE: We have resumed coverage of Acushnet Holdings (GOLF) for Investing Ideas. The temporary coverage restriction notice enacted on May 15 has been removed. We thank you for your understanding. |
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GOLF | Numbers Need To Go Lower
GOLF posted a headline miss, and worse than expected revenues (even worse than we thought). Club sales were a bit stronger than we expected, balls were quite a bit worse.
To summarize the P&L. Sales down 31%, gross profit down 28%, EBIT down 75%. EPS down 93%.
Adjusted EBITDA was only down 57%, though the company once again took some aggressive one-time charges including employee compensation for those not 'working'. If you aren’t laying them off, and therefore are not having to re-hire for the position, we consider that an ongoing business expense.
Every major region other than Korea was down 40%+. US was down 43%, EMEA down 42%, Japan down 44%. Korea is still the only bright spot up 14%, with a back to ‘normal’ growth trend having been one of the few countries that has quelled the virus.
The company highlighted the monthly cadence in a chart implying sales for April were down 68%, May down 52%, and June up 25%. Management stated July saw an “even greater impact” when commenting about rounds/consumer demand on sales trend. Management also stated that it expects August and September demand to be strong. Yet when it came to guidance, the only specific color management gave was to say that sales would be down in 3Q, citing a shifted driver launch from 3Q to 4Q. Something about that doesn’t really make sense. Let’s say the last driver launch in 2018, which was in September, created half of the club sales that Q, which would be a lot. Shifting that to 4Q from 3Q this year, would only be about a 12% total growth headwind. So if July is up more than 25%, management must either expect a material slowdown in Aug/Sept, or it's just sandbagging the revenue number to keep expectations low. Management also noted that the driver launch shift would be a gross margin headwind in 2H.
As it relates to inventory the company appears to be lean on balls after chasing a backlog for the last 2 months amid closed ball plants. Golf club inventories seem fine, our read from the golf shop channel is that they are a little heavy. The problem area looks to be apparel & footwear. The company says it has too much, and the shop channel indicated it also has too much. Management seemed to downplay the markdown risk citing “nothing out of the ordinary or out of our typical seasonal cycle”, but this is the category that needs to be cleared at retail more than any other, and what has transpired this year in US apparel in aggregate is anything other than ‘ordinary’ .
Looking at the balance sheet, the company noted its leverage ratio is 2.3x at Q end. We would flag that the company amended its credit agreement as recently as July 9th with the purpose of adjusting leverage covenants. Those covenants include a limit of 6.5x on the leverage ratio for the period ending December 31, 2020.
If we take a step back, the market seems to be pricing in a longer term scenario that looks highly unlikely to us. Let’s assume 2020 is irrelevant (even though it’s not) and say the market is trading on 2021 numbers with no discount rate. If we use the historical peak EBITDA multiple of ~11x, that would imply 2021 EBITDA of about $290mm. If we give the company a better than best seen incremental EBITDA margin of 25%, that would mean 2021 sales need to be about 12% higher than 2019, and 28% higher than current street 2020 numbers. We think that’s unlikely in the middle of a recession.
Now there are data points out there and mentioned by management about new players and much higher rounds played this year (at least in recent months). Could we be heading into a multi-year stage of growth in participation, play, and spending in the industry? Maybe, but the data points so far around new players and spend relative to play don’t appear bullish enough to justify that. The latest update from the NGF suggested that “beginning and returning golfers during the Q2 stretch appears equally significant – both about 20% higher than in recent years.” 20% higher new players is only about 500k players, the returning players impact is likely less, all on a base of 24.2mm, and its not including lost players (there are plenty that age out or leave for other reasons). Our own survey work shows a similar result. We think best case we’re talking about a mid-single digit increase in players, which is unlikely to be repeated over multiple years, and given that core golfers are 15% of players, but 70% of spending, we’d expect the industry sales impact to be less than the participation growth. What is historically better at driving golf industry spend, especially with the core golfer and the Acushnet customer, are macro tailwinds that drive discretionary spending like tax cuts (happened in 2018), the wealth effect (tailwind from 2017 to 2019), and improved employment (cycle peak in 2019). Those drove higher revs in recent years making for difficult comparisons to grow off of, and as a side note a democratic president (ie tax cut reversal) could be a risk creating a golf consumption headwind.
The best bull case we see right now is that 1H 2021 might see strong sales as delayed product launches shift some sales into 2021 and people who deferred buying this year do so next year. That’s a plausible result, but doesn’t change the underlying cash flow power of the business. Perhaps the expectation of that potential event presents a catalyst/timing issue for the short.
Overall we think the street is too high still in 2H and beyond. And given where we see the model going, EPS of $1.15 in 2021 (street at $1.43), we think a fair price for this stock is in the mid to high teens.
