Members Stay Loyal to the Country’s Largest Golf Club Operator

There is an element of stickiness when it comes to membership-based revenues. ClubCorp Holdings (NYSE: MYCC  ) , the largest owner-operator of private golf and country clubs, has a track record that bears testimony to this fact. From 2003 to 2012, ClubCorp's membership retention rates for its country and golf clubs remained stable within a narrow range between 82% and 86%. At its trough in 2011, ClubCorp's membership count of 79,656 was a mere 6% below its 2006 peak of 84,410 members.

Resilient customer base
ClubCorp's members boast an average annual household income of $180,000 to $200,000 and a primary home value of $500,000 to $600,000. In contrast, the cost of an annual golf club membership is usually a four figure sum, under 5% of an average member's household income. Moreover, when the economy is bad, members are likely to either de-stress by playing golf or keep their network alive in case they need another job.

In addition, ClubCorp is the best choice for its members because of its size. If you sign up with a golf and country club operator that has a single facility, you are typically limited to the use of that lone facility. In comparison, members can enjoy access to all of ClubCorp's clubs, and the facilities of its alliance partners,for incremental fees. The results speak for themselves--about four in 10 of ClubCorp's members opt to pay more to have access to other clubs outside of their basic memberships.

Last but not least, apart from leisure, people also join golf and country clubs for networking. This is validated by the high earning power of ClubCorp's members, as mentioned above. With more than 360,000 members and the right demographic of top earners, people are more likely to choose ClubCorp as their club of choice and stay on. There is also the network effect: consumers sign up with ClubCorp because of its scale, which in turn makes ClubCorp bigger, further attracting new members.

Asset right, not asset light
The asset-light business model, which was so popular in the early 2000's, seems to have faded away in recent years. Companies realized that certain assets were the source of their competitive advantages, and shedding assets just for the sake of it was not the right thing to do.

Along the same line of thought, ClubCorp has not blindly gone for an asset-light model. It understands that customers prefer to sign up with a golf and country club that is conveniently located, all other things being equal. ClubCorp owns the underlying real estate for more than three quarters of its golf and country clubs, giving it control over prime locations that will accentuate its advantages. Furthermore, it is easier for ClubCorp to implement relevant capital improvements to its assets without the hassle of seeking approval from landlords.

Revenue growth
For the second quarter of fiscal 2013, ClubCorp increased its quarterly revenues by 5.1% to $351 million. This is consistent with its annual revenue growth of 4.9% and 4.7% in fiscal 2012 and 2011, respectively. Besides growing its membership base, increasing average revenue per member drives ClubCorp's top line. In that direction, ClubCorp is making efforts to encourage more of its members to sign up for upgrade programs.

Peer comparison
ClubCorp's peers include Callaway Golf (NYSE: ELY  ) and Town Sports International (NASDAQ: CLUB  ) .

Town Sports is the third largest owner-operator of fitness clubs in the U.S. Similarly to ClubCorp's golf and country club business, location plays a key part in the success of fitness clubs. Town Sports is largely present in the Northeast and Mid-Atlantic parts of the country, with a cluster of clubs in large metropolitan areas. This allows Town Sports' fitness clubs to be located close to members' homes and workplaces, offering convenience.

Town Sports' financial performance for the second quarter of fiscal 2013 was less than impressive, with quarterly revenues and adjusted EBITDA decreasing by 1.7% and 4.3%, respectively. Although its recent results were affected by the weak macro environment, Town Sports' dominant market position in its key markets should see it benefiting from the health and wellness trend.

Compared with ClubCorp and Town Sports, Callaway Golf, a manufacturer and marketer of golf equipment and accessories, is more geographically diversified than its domestic-focused peers, with only slightly less than half of its revenues coming from the U.S.

Notwithstanding the geographical diversification, Callaway Golf's performance has been disappointing for the past few years. Its U.S. market share has fallen from the 2007 peak of 19.6% to 13.9% in 2012. Not surprisingly, Callaway Golf's revenues have fallen in tandem with the loss in market share. It registered 2012 net sales of $0.8 billion, compared with $1.1 billion in 2007. It has also been loss-making since fiscal 2009.

As of March 2013, Callaway Golf's market share improved slightly to 14.2%. Furthermore, it recorded earnings per share of $0.12 for the second quarter of fiscal 2013, a huge improvement from the same period last year where it just broke even. Management attributed the better financial performance to its new line of products, particularly the X Hot line of woods and irons. One swallow does not make a summer, and I will need to see significantly improved market share before I am convinced that a turnaround is successful.

Conclusion
ClubCorp made its trading debut on last Friday Sep. 20, 2013 and is currently about 7% above its IPO price of $14. I see ClubCorp as a rare opportunity to own a stake in the country's largest golf club operator, with high customer retention and stable revenues. In addition, it has strengthened its competitive advantages by owning the underlying real estate of a majority of its golf and country clubs.

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