Let’s look at three different ways to participate in the industry as an investor: a golf equipment company on the comeback trail; a huge sportswear and equipment company that sells across many sports, including golf; and an aggressive and innovative sports-equipment retailer.
Is Callaway still deep in the rough?
Callaway Golf Co (NYSE:ELY) reported improved results in the first quarter of 2013 compared to the previous year. Sales and gross margin percentage both rose, while operating expenses declined. More than half of its sales now come from outside the U.S., reflecting the rapid growth of the sport in places like Asia. Net sales for the quarter were $288 million compared to $285 million in 2012. This appears to be a miniscule increase, but currency rate fluctuations had a significant negative impact on sales. In addition, Callaway Golf Co (NYSE:ELY) sold two of its golf equipment brands in 2012, Top-Flite and Ben Hogan, so the company had to make up for those lost sales by stepping up its game with the brands it is focusing on now. In early 2013, Callaway’s sales were buoyed by the successful introduction of two new lines, the X Hot Woods and Versa putters. Callaway Golf Co (NYSE:ELY)’s gross margin showed a healthy increase, from 43.6% to 45.3%. The company seemed especially proud of the success of its cost-reduction initiatives. If you’re wondering what a cost-reduction initiative is, just ask your neighbor down the street who was laid off two years ago and still hasn’t found a job. In total, Callaway slashed operating expenses by $6.2 million.
Net sales of its products in the U.S. were up a brisk 7% year over year. Golf ball sales increased just slightly from $42.5 million to $43.0 million. I would imagine this is due to high handicap golfers hitting fewer than expected balls into water hazards (wouldn’t it be fun if companies included reasons like this in their analysis of results?). Net income was up nearly $10 million. Yes, Callaway Golf Co (NYSE:ELY) is out of the rough, but it’s not exactly on the green putting for eagle with one of its popular new Versa putters.
Mighty, mighty Nike
NIKE, Inc. (NYSE:NKE) offers products that span many sports and are marketed to appeal to customers who want to play these sports better, want to improve their health and fitness, and want to look good – wearing the sportiest sports fashions – while doing it. This company’s fiscal year ends May 31, In April it announced excellent third-quarter results. Revenues rose 9% compared to the same quarter last year, topping $6 billion. That’s right $6 billion. If you’re thinking that’s a heck of a lot of shoes, you’d would also be correct – NIKE, Inc. (NYSE:NKE)’s footwear segment had revenues of $3.7 billion. To me, one of this company’s signature accomplishments in golf was bringing flair to golf footwear. Just because you play badly doesn’t mean you shouldn’t try to look good. Being known as a snappy, trendy dresser on the links can actually help distract your opponents from noticing you have a really, really awful swing.
Nike certainly had snappy profits in the third quarter. Net income from continuing operations rose 16% compared to the previous year. Roughly 60% of the company’s revenues came from footwear and 25% from apparel. The star performer in year to year revenue growth was their equipment segment, which rose 23% — but still only accounted for about 5% of total sales.
The remaining 10% of its sales came from a category called “other.” When analyzing potential investments, I always look for companies whose “other” category is performing well. No matter what the economic conditions, “other” offers an opportunity for growth that should not be underestimated.
America’s favorite sport: Shopping
What would you say about a retail company that was able to expand from 355 stores at the end of 2007 to 518 in 2012 – a 46 percent increase? It would be that rare corporation whose executives take a long-term view rather than cowering in the face of the Great Recession. A management team with guts, in other words. Dicks Sporting Goods Inc (NYSE:DKS) clearly earned that distinction. In its 10-K filed March 22, the company says the potential for significantly more growth is there – to 1,100 stores in the U.S. It intends to open 40 more stores in 2013. It also plans to spend more than $250 million on capital projects this year, with particular emphasis on upgrading existing stores to provide a more exciting shopping experience.
Dick’s 2012 results were impressive indeed. Same store sales – that crucially key performance indicator in retail – rose more than 4% year over year. Net sales and net income both showed double-digit growth, 12% and 10% respectively. The gross profit percentage rose nearly a full percentage point.
Dicks Sporting Goods Inc (NYSE:DKS) is a merchandising innovator that uses a concept of mini-stores within the store to concentrate and showcase the most popular brands. Both NIKE, Inc. (NYSE:NKE) and Callaway products are sold at Dicks Sporting Goods Inc (NYSE:DKS). Think of the more upscale department stores and how they have designated spaces, complete with signage, for their most popular clothing brands. The same idea works well in sporting goods, in Dick’s case.
Where Would I Invest?
You have to love the growth potential of overseas markets for Callaway Golf Co (NYSE:ELY) and other major golf equipment brands. The difficulty of predicting the performance of Callaway is that the company must constantly innovate. Sustainable success depends on successful new product introductions. Golfers are always seeking a miracle cure, the Wonder Club that will transform them from lowly hackers into hackers who are at least showing modest signs of improvement and not embarrassing themselves. Watch any golf telecast and you see all the other formidable brands that Callaway Golf Co (NYSE:ELY) is competing against. To me, golf equipment manufacturers are like cosmetics companies: They sell hope. Golfers are willing to switch equipment brands if they like the hope the other guy is selling this year.
A year or so ago Cleveland Golf, whose parent company is Dunlop Sports, traded on the Tokyo Stock exchange, introduced this cool-looking retro-style metal driver made to look like the classic persimmon wood drivers Arnold Palmer and Jack Nicklaus would have played in the ’60s. The minute I saw this club in a magazine, I knew I had to buy it — just had to. Such is the unassailable logic we golfers use in our purchase decisions. See why it’s a challenge for club manufacturers to predict what golfers might want to buy, and why?
The question for a company as large as NIKE, Inc. (NYSE:NKE) is whether it can continue its pace of sales growth. Having one of the most well-known brands in the universe is certainly an advantage, but there are always upstarts who come into the market and grab your customers’ attention. In the corporate world, mighty doesn’t necessarily mean achieving the most dramatic sales trajectory.
Continued improvement in the economy bodes well for Dicks Sporting Goods Inc (NYSE:DKS), as consumers that may have wanted to buy new sports gear or take up new sports postponed these purchases because of lingering recessionary fears. Dick’s expansion plans are aggressive and an indicator to those following the company that there are many cities and towns that currently do not have a sporting goods store of this quality. Its stores are fun places to shop — a kind of paradise for the sports enthusiast. From an investment standpoint, I am most enthusiastic about this company. Remember all the money the brand-name manufacturers spend on advertising and promotion brings customers into Dicks Sporting Goods Inc (NYSE:DKS) stores looking for those brands.
Brian Hill has no position in any stocks mentioned. The Motley Fool recommends NIKE, Inc. (NYSE:NKE). The Motley Fool owns shares of NIKE, Inc. (NYSE:NKE).
The article How to Play Better Golf (Stocks) originally appeared on Fool.com.
Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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