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What is Callaway Doing Right?

It seems that everywhere you look, golf retailing stinks. Pure plays like Golf Galaxy and Golfsmith are sucking wind big time with no end in sight. Yet, Callaway, the venerable equipment leader, is doing quite well thank you very much. Why?

Unlike Golf Galaxy and Golfsmith who are only located in the United States market, Callaway is an international brand and can shift their marketing focus to countries that are growing like Korea, Japan and China. They can also benefit from currency exchange rates. Things don’t seem to be looking up for Golf Galaxy and Golfsmith, but it does for Callaway. Here are the most recent quarterly results (April/May) for each company:

Dicks/Golf Galaxy — Comparable store sales for Golf Galaxy on a 13-week to 13-week proforma basis decreased 8.8 percent, or 9.8 percent after adjusting for the shifted retail calendar. In contrast, the parent, Pittsburgh-based retailer Dicks Sporting Goods reported net sales of $3.89 billion, up 25 percent from $3.11 billion the previous year. Net income increased to $155 million compared with $112.6 million a year ago.

Golfsmith — For the quarter ended March 29, the company lost $5.4 million , or 34 cents per share, compared with a loss of $4.9 million, or 31 cents per share, a year ago. Revenue grew 2 percent to $79.2 million from $77.7 million, in the year-ago period. Golfsmith said its results came in below its expectations due in part to a decline in rounds played and the challenging economic environment.

Callaway Golf — Callaway Golf posted quarterly earnings that beat Wall Street estimates and said it now sees full-year profits at the low end of its previously forecast range. The company, which has been cutting costs and making its operations more efficient, said first-quarter net income grew to $39.7 million, or 61 cents per share, from $32.8 million, or 48 cents per share, a year earlier. Revenue for the quarter was $366.5 million, up nearly 10 percent. Among other things, Callaway said revenue got a boost from foreign currency exchange rates.

Dick’s Buys Golf Galaxy. Let the Consolidation Begin.

I had written in April that Dick’s had opened a prototype concept store called simply The Golf Shop. Now, it appears that Dick’s didn’t want to wait to see how it would perform. Instead they went out and bought Golf Galaxy for $225 million.

According to Edward W. Stack, chairman and CEO of Dick’s, he believes that the industry is ripe for consolidation, that’s why they swooped in and grabbed Golf Galaxy. With a sluggish industry firmly in a recession, some analysts wonder why Dick’s is willing to invest so much in the golf retailing space.

Dick’s Sporting Goods, with 300 stores and over $2.5 billion in sales, can afford to pick up Golf Galaxy and add its $250 million in sales to the balance sheet. They also will have more leverage with suppliers than Golf Galaxy did. Dick’s also has its own private label products and the Ben Hogan golf line that they can add to Golf Galaxy’s offerings.

What this is going to mean to the industry is that smaller retailers like GolfUSA, Golf, Etc., Nevada Bobs and others will continue to struggle and that franchised shop in your town might close. A small chain made up of independent franchised stores cannot compete with the better funded big box players. A Golf Galaxy or Golfsmith might have a 20-30,000 square foot store while a GolfUSA might have 2500 square feet.

Yet, these companies are not the competitors that Dick’s is worried about. It’s Golfsmith. With 62 stores and a strong balance sheet coming off an IPO, Golfsmith is the only pure golf retailer that Dick’s has to worry about.

As odd as this might sound, I believe that Golfsmith is a candidate for a takeover by one of the bigger fish in the sporting goods arena. With less than $400 million in sales, it might make a nice addition to The Sports Authority and their head-to-head, dog-eat-dog competition with Dick’s Sporting Goods.

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