Gilford Securities Golf Research
2011 PGA Merchandise Show Report Part 2: The Club Review
January 26-29, 2011
Orange County Convention Center
A White World is Risky for Everyone
In the golf equipment business, as in most businesses, the market share leader tends to play it ‘down the middle’ and not take a lot of risk. This has been especially true ever since the disaster that was “New Coke”. This year we are witnessing a vast departure from playing it safe.
TaylorMade has been the acknowledged leader of the woods category for several years now. In 2011, TaylorMade is stepping out with the R11 driver and the TaylorMade Burner Superfast in all white instead of the traditional black head. TaylorMade has also expanded this vision to their fairway woods and utility woods. It is truly become a white world at TaylorMade. This achromatic 180 degree turn is stunning in terms of its impact both within and outside the industry.
In the most recent PGA Tour event TaylorMade had 42 white drivers in play. We actually see the sense in visually separating their product from the rest of the crowd on tour. With such a strong tour presence, TaylorMade has one out of every three players in the tournament sporting a white driver, and to the public watching on television it starts to look like the TaylorMade Tour. We get it from that standpoint.
We also have great respect for a market share leader that is willing to take such a significant product risk. It goes without saying that the white world of TaylorMade runs the risk of becoming a huge white elephant if the merchandise fails to sell through. TaylorMade intends to ship a massive amount of white product into the distribution channel by the 4th of July.
We listened to the snickering from the other equipment companies. We listened to them say that customers were going to avoid white like, well, like the black death plague. We also agree to a certain extent that the major innovation here may simply be color. With two methods of adjustability, was a third in the sole plate truly necessary? And we listened to the competitors suggest that they were going to have an excellent year as TaylorMade struggled to sell through the white whales.
In our opinion, every competitor better hope that TaylorMade does at least reasonably well with the white product. If they don’t we fear the price structure of the entire industry will crumble, and profit margins across the board will crumble with it. Based upon the amount of product that TaylorMade is putting into the channel, if white starts to pale on the shelves then TaylorMade will be forced to discount rapidly to insure that the white stuff clears the market. No one will be immune, and everyone will have to discount their own product or suffer the consequences of an over-stuffed channel.
So there it is. TaylorMade took a risk that put everyone at risk. By all early indications the TaylorMade white woods are selling pretty well thus far. We saw some enthusiasm at the ‘TaylorMade White Out’ in NYC. But all of that evidence is anecdotal, and most of it is from sources that have a vested interest in projecting success. So we will wait and see how things go once we open the shops in the Northern climes of the U.S.
To be sure, we saw some other good products while we were at the PGA Show. At $299 we think the Callaway Diablo Octane should sell reasonably well because it feels great and the ball reacts well off the clubface. And $299 is still an important sweet spot in driver sales. This is true despite what we suspect are over-stated technological claims regarding forged composite, which as best we can tell is simply bulk molding of chopped fiber, a process that has been around for many years. We also liked the Nike VR Pro driver, the Titleist 910 D2, and we are watching the Tour success of the Adams Speedline F11 with great interest. And for something a little off the rack, the Srixon Z-Star driver was phenomenal. The problem is that when the market leader is rolling the dice, everyone is subject to the same outcome. As Bill Murray said in the movie Meatballs “It just doesn’t matter, it just doesn’t matter.”
So there it is for 2011. Irons? Who Cares? Wedges? A down year due to re-grooving in 2010. Putters? The world of white exists here too. Golf Balls? An interesting battle, but the real news here will be made by the eventual sale/spin-off of Acushnet. Why don’t the other equipment categories matter? Simply put, for most equipment companies if you have a lousy year in woods, you have a lousy year because you can’t make up the margin dollars in the other categories. Yes indeed, as far as 2011 goes in the golf club equipment industry, a white world truly is risky for everyone.
ANALYST CERTIFICATION
I, Casey Alexander, certify that all the views expressed in this research report accurately reflect my personal views of the subject company (ies). I also certify that I have not and will not receive compensation with respect to the issuance of this report.
REQUIRED DISCLOSURES
In the normal course of business, Gilford Securities seeks to perform investment banking and other services for various companies and to receive compensation in connection with such services. As such, Gilford Securities intends to seek compensation for investment banking services from the subject companies in the next 3 months.
Callaway Golf is rated a Hold. No other company mentioned here is currently rated by Gilford Securities, Inc.
ANALYST STOCK RATINGS
Buy The stock should outperform its industry or peer group by 20% or greater within a 12-18 month time frame.
Sell The stock is expected to under-perform its industry or peer group by 20% or greater within a 12-18 month time frame, or where fundamentals of a company have deteriorated significantly and the stock is expected to materially depreciate.
Hold The stock does not have enough upside or downside potential to rate a Buy or Sell. The stock is either fairly valued or has too much uncertainty to have a Buy or Sell rating.
Casey Alexander
Special Situations Analyst
Gilford Securities, Inc.
777 Third Ave., 17th Floor
NYC, NY 10017
212-940-9276
Cell 516-313-8728
c.alexander@gilfordsecurities.com
