Strong 3Q for GOLF. We removed this from our best ideas list to our short bias list last weekend due to our expectation of an earnings beat and solid rate of change. 3Q sales up 15% with balls the leading categories by far and US strength. Balls up 41% as there is definitely some shift from 2Q, alongside rounds up ~20% in 3Q boosting demand. Japan was the weak spot with sales down 23% as players have not flocked to the course in that region during the pandemic. Clubs were down as well (-4.7%) with the driver launch timing change expected to shift some revenue to 4Q. YTD golf gear is the best category, down only 4.3%, this is likely due to carry bag demand as restrictions increased walking rounds vs carts, pushing players to switch/upgrade to lightweight carry bags where the Titleist brand is one of the industry leaders. One interesting data point perhaps is that with rounds up 8.7% YTD in the US, GOLF’s ball sales are still down 10.4%. There is definitely a drag from less golf events and corporate outings as well as corporate promotional buying. That portion of ball sales should remain a headwind into 2021. Management is 'guiding' 4Q cautiously, perhaps just to keep expectations down. Overall the trend model is more bullish, as we expected, though at the same time the strength this quarter should take up street expectations and the market reaction puts even more pressure on the spring 2021 selling season and the need for the industry to demonstrate a long term growth profile it hasn’t seen since the 1990s.
We remain very skeptical of the TAIL bull call for GOLF. To justify a tail Long here you need to believe in a reversal to solid, multiyear growth in golf participation and equipment consumption. We still see little evidence to think that will be the case. The initial data point to observe is that despite elevated play and likely elevated participation this year, every category for GOLF is still down YY. On participation, there are new players this year like there are every year, we’ll have to see if they stick with the game at a higher rate than historic cohorts. The way participation will truly grow is if consumers change their minds about time allocation, activity alternatives, and perceptions of the game in terms of cost and inclusion. That has definitely been the case during the pandemic, will it be the case in 18 months when we can (maybe) return to normal activities?
There was also an interesting update from the NGF yesterday. It talks about the 80/20 rule it is observing in survey data results for play and consumption during the pandemic, implying high spending and frequent playing core golfers are driving a significant portion of the volumes in rounds and sales this year. Some math on rounds in particular. The top 20% of core golfers are indicating they are playing 37% more this year. Core golfers play about 30 rounds on average per year, if we assume that top 20%(~3mm golfers) to be average (which they are probably higher than average), 37% more rounds for them would equate to 33mm rounds or about 7.5% points of total round growth YY. That supports what we presented in our Golf Industry Survey Black Book this summer where 'power players’ appear to be driving more of the rounds upside than new or more engaged occasional golfers. Core golfers spend much more, so this increased engagement of the core would be bullish for near term sales, but less positive for long term industry growth.
Lastly, there doesn’t appear to be the ‘blue wave’ that was speculated for the election across the executive and legislative branches, however it appears to be more blue on the margin. Any potential reversal of the 2018 tax reform regulation would be very bad for discretionary income in the core golf equipment market. About 50% of core golfers (which make up the vast majority of spending) have HH income above $100k.
