Grappling with weaker demand for golf equipment for the past several quarters, the sporting goods retailer, DICK’S Sporting Goods Inc. (DKS) has finally decided to reduce its exposure in the golf business, The Wall Street Journal reported yesterday.
As per the news source, the company has already started the process by laying off over 400 PGA professionals across its stores. As of Feb 1, 2014, the company had 593 such professionals. The news relating to employee cutback at DICK’S Sporting was initially reported by The Walt Disney Company’s (DIS) sports channel ESPN, and later confirmed by PGA of America’s spokesperson when enquired by The Wall Street Journal.
The company had immensely invested on expanding its golf business since it acquired the specialty golf retailer Golf Galaxy in 2007 for $226 million. The business also survived the great recession, which motivated DICK’S Sporting to increase the Golf Galaxy store count to 79 from 65 at the time of acquisition.
However, for over twelve months now, DICK’S Sporting has been witnessing declining revenues and profits at its Golf business. In its earnings release for the first quarter of fiscal 2014, the company registered a 10.4% decline in comparable sales (comps) at its Golf Galaxy stores and missed its own sales target of this division by $34 million. On the other hand, the company’s namesake stores witnessed a 2.3% rise in comps while total comps grew 1.5%.
Further, The Wall Street Journal revealed that as per The National Golf Foundation, approximately 400,000 U.S. golfers left the game in 2013, while a survey made by Sports & Fitness Industry Association states that a decline of 2.5% has been witnessed in the number of one-time golfers over the past two years.
We believe that a sluggish U.S. economic recovery lead to the downturn in golf participation. Moreover, the new generation’s least interest for the game and too much competition in the industry has hurt the company’s top and bottom lines so much that it is now contemplating whether to remain in the business or not.
During its first-quarter fiscal 2014 earnings release, the company had hinted that it may in the near term close, remodel or relocate its Golf Galaxy stores which are approximately 40,000 square feet in size. Moreover, the company also dedicate nearly 4,500 square feet of space for golf equipments within its namesake stores. DICK’S Sporting believes that by reducing exposure in the golf business, it can use the floor space to expand its merchandize for women’s and youth apparel.
We believe that the recent development and surveys in the golf equipment business suggests a further downfall in this sporting category.
DICK’S Sporting’s diversified product portfolio will facilitate its easy survival even if it shuts down the golf operations. However, this is an alarming situation for sporting goods retailers dealing only in golf equipments such as Callaway Golf Co. (ELY), Acushnet Company and Karsten Manufacturing Corporation.
Therefore, although the news of employee discharge was related to DICK’S Sporting due to weak performance of the company’s golf business, it was the shares of Callaway that fell the most during yesterday’s trading session. DICK’S Sporting’s shares dip 2% while Callaway’s shares plunged 4.8%.
Other Stock to Consider
Currently, DICK’S Sporting carries a Zacks Rank #3 (Hold). However, we may consider Polaris Industries Inc. (PII) from the same industry carrying a Zacks Rank #2 (Buy).
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