PGA TOUR Superstore – Managed Growth in a Difficult Market

PGA TOUR Superstore hasn’t bought into all the doom and gloom used by some to describe the golf equipment industry. For them the glass isn’t half empty and in fact the Atlanta-based chain has been following a controlled plan of expansion to manage growth for the long term.

The opportunity for additional insight to this golf retailing success story came in an interview with Randy Peitsch, PGA TOUR Superstore’s Senior Vice President of Operations. Peitsch has been in the top spot guiding day-to-day operations for the past two years after a five-year stint as vice president in charge of hard goods prior to which he was in divisional management at Sports Authority.

We questioned Peitsch about how PGATSS can accomplish growth in an unfavorable golf retail environment.

“It begins with hiring really good people, training them and then backing them,” Peitsch responded. “We can then focus on the consumer experience. We are not in the transaction business. We are in the relationship business.”

Well said but it should be pointed out that for the past several years the golf equipment business has euphemistically been called a “difficult market” with several events adversely affecting both the makers and sellers of equipment.

Golf retailers of all sizes have closed including the 463-store Sports Authority plus Golfsmith shuttered most of their locations after being purchased by Dick’s Sporting Goods. Dick’s, the sports retailing behemoth with over 700 locations, has reduced store floor space allocated to golf though recent statements by top management indicate they may be encouraged with the prospects for increases in golf equipment and accessories, particularly their private brands such as Top-Flite.

Manufacturers too have struggled with the largest, Acushnet Holding Corp (NYSE: GOLF), making a tepidly received public stock offering in late 2016. The former Fila Korea subsidiary, maker of several of golf’s top brands including Titleist and FootJoy, reported flat sales in 2017 but an increase in net income of $47 million.

In May 2017 TaylorMade Golf, the third largest equipment maker, was sold by Adidas (OTCMKTS: ADDY) for a bargain-basement price to an investment company and in third quarter 2016 Nike closed its golf equipment division. Niche manufacturer Ben Hogan Golf filed for bankruptcy and during its recovery has opted for a consumer-direct strategy.

On the positive side the second largest equipment manufacturer Callaway Golf (NYSE: ELY) finished 2017 with 20% higher sales than the previous year mostly on the strength of its Great Big Bertha Epic line of metalwoods. Midsize manufacturers such as Tour Edge Golf, Bridgestone Golf and Cobra Golf also have said they did appreciably better last year and are looking forward to even more gains in 2018.

Many are saying we are seeing the first signs of some stability in golf retailing and certainly PGA TOUR Superstore is well positioned to take advantage. The company opened three new locations in 2017 for a total of 31 and number 32 opened in February with number 33 set for the Houston, Texas market.

Same store sales last year had a healthy increase of 15 percent plus overall sales increased 23 percent. Digging a little deeper there are even more signs of their expanding market presence:
-Black Friday 2017 same store sales up 20 percent and for the three-day Thanksgiving weekend up 15 percent
-Online sales for Cyber Monday increased an eye-popping 62 percent
-Customer club fittings topped 110,000 in 2017 and lessons hit almost 50,000
-Instore practice bays saw 100,000 participants during the year

Impressive, in fact very impressive, for a year when the number of U.S. golfers continued to decline. Golfer consumers are responding to PGATSS’s extensive inventory, competitive pricing and perhaps even more to the service they receive whether online or in-store.

A trip to PGATSS has been compared with a visit to Home Depot and it should be since the private-held PGATSS is part of the AMB Group one of the Blank family endeavors along with the Atlanta Falcons (NFL), Atlanta United (MLS) and Atlanta’s Mercedes-Benz Stadium. Family head Arthur Blank was one of the founders of Home Depot, retiring in 2001 as co-chairman.

Blank said of the success his stores have had in an uncertain retail environment, “At PGA TOUR Superstore we’re using the same philosophy that drove the Home Depot’s success and revolutionized the home improvement industry.  We offer a variety of products at value prices, incredible services and employ the best associates to provide a level of customer service that keeps visitors coming back because they love the experience.”

Most consumers acknowledge a visit to a PGATSS has a different feeling from the usual big box retailer. Employees invariably greet you and then thank you when you leave, an everyday example of customer relationship building. 

Peitsch pointed out, “We focus on the consumer experience. If we do everything the right way, we win out over the competitors.”

True certainly but beating the other guy also takes the proper pricing, inventory and profit margins.

According to Peitsch, “Margins have to be in the first sentence of any discussion and the partnerships with manufacturers are very important.” Then as if anticipating my next question, “The trend in our margins has continued upwards.”

Funds to pay for expansion must come from either borrowing or consistent profitability. Without the proper margins profits soon are nonexistent and discussing the entire business of PGATSS Peitsch made a critical observation, “Pay attention to the process and the results will come.”

Questioned about expansion plans Peitsch then said, “The cost of retail space drives the selection of new locations.” So, in addition to golfer demographics, brick and mortar economics dictate whether a site is viable or if even an entire market is suitable.

Peitsch commented that though they may be “under penetrated in the market we are the fastest growing and expect to open a store every other month, so we will have 50 by 2020.” That would be a 50 percent increase in just three years and average store size at the end of 2017 was 40,000 square feet making them the largest off-course retailer in golf in terms of average space.

It’s plain there is no “secret” to PGATSS success or maybe their secret is the relentless application of good business principles matched to an understanding of their customers.

Refreshing to say the least.

The Times They Are A-Changin’—Bob Dylan

dyaln_640x400Though Bob Dylan sang the lyrics to The Times They Are A-Changin’ in 1964 to reflect the social unrest of the time he could have been singing about the golf equipment business today.

The trials and tribulations of golf equipment manufacturers and retailers have been well reported with Dicks Sporting Goods (NYSE:DKS) purchasing Golfsmith out of bankruptcy and Nike’s (NYSE:NKE) decision to withdraw from the club market receiving the most attention. At the same time two of the largest club makers are undergoing major changes.

Potentially the sale to the public of Acushnet, makers of the number one ball brand Titleist and the number one golf shoe FootJoy, will have an impact that could be more far reaching.

Owners Fila Korea Ltd. and an investment group led by Mirae Asset Private Funding purchased Acushnet from Fortune Brands in 2011 for $1.23 billion and will not relinquish their entire ownership in the initial public offering only selling roughly one-third of their shares. The prospectus also states the proceeds from the public stock sale will not be used by Acushnet to reduce debt or for product development but retained by Fila and the others.

Fila also has told Pulse News in Korea they have plans to purchase more shares, up to 50 percent, from other current shareholders to keep control of the company.

As a publically traded company Acushnet (NYSE:GOLF) will be making decisions differently than when privately owned. The pressure from investors will place them in the same position as every other public company. Quarterly results will be closely scrutinized and management decisions will be made in light of that attention.

In other publicly-held corporations long-term strategy may be compromised for the sake of short term profits. One of the most obvious areas of change could be the balance of profits retained by the company to fuel growth and the amount distributed to stockholders. It wouldn’t be the first time short term decision making overrode long term product development.

TaylorMade Golf owned by adidas is for sale and after six months no deal has been signed leading some to ask why. Adams Golf and Ashworth brands will likely be included in any deal. Adidas CEO Herbert Hainer said in May, when the possibility of a sale was being investigated, they wanted to concentrate on other divisions of the company with better prospects for growth. A reason essentially the same as that given by Nike in August when they decided to leave the club business.

It may or may not be significant but TMaG has not announced any new models for the 2017 season even though during late summer and fall all the other makers are introducing their latest. TMaG has the leading driver on the PGA Tour and has the largest selling iron model, the M2, on the market so it would be expected new clubs would be introduced at this time or at least an announcement there would not be new club models for 2017.

One interesting possibility is, if the Acushnet IPO is popular with investors, TaylorMade could be seen as a more attractive acquisition.

The Dick’s/Golfsmith deal for a reported $70 million remains to be finalized and as yet unresolved is how many of the Golfsmith stores will remain open and if Dick’s other specialty retailer Golf Galaxy will assume Golfsmith locations. Dick’s bought another competitor, Sports Authority, also in bankruptcy earlier this year.

Stay tuned. The Acushnet IPO is Friday the 28th, more news about TaylorMade’s fate will surely be coming and Dick’s decisions about Golfsmith will to a large degree set the pattern for big box retailers.

Tiger’s In – Nike’s Out

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He hasn’t put his game on display for over a year and his last PGA Tour win was in August of 2013 but the soon to be 41-year old has created lots of attention by saying he will play in a charity event October 10-11 followed by the Safeway Open October 13-16.

And the company whose clubs he has played since 2002 is getting out, out of the club, bag and ball business to concentrate on shoes and apparel.

Tiger Woods and Nike, inseparable in the minds of many, have had an amazing run together. Woods currently has 79 Tour wins with 14 majors (not all using Nike equipment) ranking second all-time in both categories. Nike though, was never able to come up with a category-defining club in spite of having on the payroll Tom Stites, one of the most respected club designers in the business. What they did however, with Woods under the most lucrative contract in golf, was become the number one golf apparel brand.

It’s no wonder, with the equipment business having at best a minimal-growth future, the decision to leave that arena was made.

Woods and other staff members, most notably Rory McIlroy and Michelle Wie, will continue to wear Nike Swoosh apparel so they will still have a huge presence in the minds of consumers. Golfers just won’t be able to purchase Nike clubs.

The effect the Nike withdrawal from selling equipment is uncertain but a good estimate is it probably won’t be very large. The golf division never had more than $800 million (last year $706 million) in sales but since the breakdown between hard goods and soft goods was not reported, actual club sales are unknown. They never approached a 10% market share in hard goods.

Some in the media are saying Nike’s problems are because Woods hasn’t been playing and that’s incorrect. Nike didn’t have market leadership or even contend for leadership when Woods was at his best, winning multiple times in a season. His presence on Tour alone never could generate the amount of business Nike wanted to dominant the golf hard goods sector but did help push soft goods to the number one spot.

Golf for Nike was a tiny part of their overall business, less than two percent, and several factors virtually preordained their decision. The small market share plus an industry where product lifecycles are measured often in months with relatively large development costs meant staying just didn’t make sense. It was obvious golf equipment had to go.

With Nike paying more attention to golf performance and lifestyle soft goods, the biggest impact could be seen by competing shoe and apparel brands Acushnet’s FootJoy, adidas and Under Armour. Adidas is also leaving equipment and selling its golf brands TaylorMade Golf and Adams. The other major player Acushnet, owner of Titleist, is in the process of going public which typically can create uncertainly in corporate decision making.

This could mean Callaway picks up the major portion of Nike club sales however large it was and undeniably Callaway has been on an upwards trend since Chip Brewer took over as CEO. Privately-owned Ping and others potentially could see a bump in sales as well.

With all that in mind, which clubs will Woods switch to now that he plans to compete and again chase Nicklaus’ record of 18 majors?

Well, it’s not clear he will switch at all and for sure not right away though Woods has said companies are sending lots of clubs to try out. He hasn’t played a Tour event since August 2015 and it’s unlikely he will make a club change soon. Additionally any equipment company paying the amount of money Woods can demand will want their logo prominently display on his cap and shirt so there’s an immediate conflict with his Nike apparel contract. Nike is worth several millions each year to Woods and the contract doesn’t renew until the end of 2018 so he’s not going to put it in jeopardy.

One thing is for sure, fan interest will continue as will the speculation about Woods as he tries to get back to being top of the Tour.