The Conference Board released the most recent consumer confidence statistics for the month of May last week. Economists were expecting a modest increase in consumer confidence from the month of April with a reading of 71. The numbers hit the wires far above economist expectations with a reading of 76.2 in the month of May and upward revisions to 69 for the month of April.
The futures market immediately priced in the announcement which sent the broad market roaring higher. The reading of 76.2 represents the highest level of consumer confidence in the last five years. The rise in confidence can be attributed to a stronger housing market, rising stock market, lower than expected fears of inflation, and increased optimism regarding the employment market.
This release got me thinking about some unconventional industries which would perform well as confidence rises. Being an avid golfer myself, I realized that the golfing industry, which had been hit hard during the economic slowdown, should perform well during the economic recovery. Below, I would like to highlight some companies I expect to do well as consumer confidence rises and the housing recovery continues.
Following Mickelson
One of the iconic golf brands on the market, Callaway Golf Co (NYSE:ELY), has under performed the broad market this year, up only 5% year to date. My two part investment thesis behind Callaway Golf Co (NYSE:ELY) is simple and logical. First, Callaway Golf Co (NYSE:ELY) stands to do well as golfers trade up their aging equipment purchased pre-recession. Golf sales were hit hard during the recession as consumers could not afford the high price tags of new equipment. During this time, equipment wore out, sales slumped, and technology innovation continued. Amateurs with cash in hand, will now look to upgrade their out of date sets.
Second, as the housing market recovers and consumers shift from renters to buyers, it is likely consumers will be more inclined to sink the costs associated with a golf membership. More rounds of golf equals more revenues for Callaway Golf Co (NYSE:ELY) as grooves are worn out and balls are lost. In addition to these above catalysts, the company has greatly improved its manufacturing processes. Last month, the company announced it improved its assembly labor costs by 45% and its golf ball manufacturing productivity by 49% year over year. This improvements should translate into higher margins and earnings in the years ahead.
Lets take a look at some positives from the company’s first quarter earnings. I was pleased to see the company gaining market share both domestically and in major markets internationally. Market share rose from 12.6% to 13.4% in the U.S. market while rising from 10% to 12% in the key Japanese market. Management believes the company will continue to regain share throughout the remainder of the year on the back of a strong product pipeline. As a result of this growth, the company was able to grow revenues 7% on a year over year basis. Golf ball sales increased 22% to $43 million as a result of increased demand for mid-tier options. While not the high end, I think rising golf ball demand is a leading indicator to hard product growth.
Retail exposure
Sporting goods giant, Dicks Sporting Goods Inc (NYSE:DKS), a retailer offering a broad assortment of brand name sporting goods equipment, apparel and footwear in a specialty store environment has great exposure to the golf industry. Through its acquisition of Golf Galaxy, a chain of golf focus retail stores, the company stands to benefit from growth in the golf industry. Similar to Callaway Golf Co (NYSE:ELY), the company will benefit from the refresh cycle and the housing recovery. Dicks Sporting Goods Inc (NYSE:DKS)‘s offers investors a more diversified vehicle for exposure to the industry.
The company recently announced it plans to open an additional 40 Dick’s locations to finish out the remainder of the year in addition to a standalone Golf Galaxy location. Dicks Sporting Goods Inc (NYSE:DKS)‘s is looking to refresh its stores through a series of 80 remodels set to be finished this year. From personal experience, I have visited a few new locations where the company has placed increased focus on its “Pro Shop” which features expanded golf offerings. I would expect the company to place similar focus when remodeling current locations.
Dick’s has a great relationship with industry leader NIKE, Inc. (NYSE:NKE), whom recently reported a strong uptick in North American revenues. Nike Golf sponsors a long list of world class golfers including Tiger Woods, Rory McIlroy, and Paul Casey. In recent months golfing great, Tiger Woods, has improved his performance and is again a major contender in the remaining majors this year. Nike Golf stuck with Tiger, unlike many sponsors, during times of turbulence. NIKE, Inc. (NYSE:NKE) offers consumers an array of golfing merchandise including equipment, balls, shoes, clothes, sunglasses, watches, hats, and bags. The refresh cycle may be coming exactly at the time when Nike’s star performers sit at the top of the leader board. As a result, I think NIKE, Inc. (NYSE:NKE) stands in a great position to capture market share in the fragmented industry in the years ahead.
Conclusion
As consumer confidence rises and the housing market recovers, I believe the golf industry will recover from its recession lows. My two part thesis is built on a refresh cycle set to take place and the increased number of golf memberships which will result from a strong housing recovery.
The article Unconventional Consumer Confidence Benefactors originally appeared on Fool.com and is written by Nathaniel Matherson.
Nathaniel Matherson has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Nathaniel 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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