Dick's Sporting Goods Finds Itself in a Sand Trap

The sporting goods retailer has been in the rough for a long time now.

Jul 23, 2014 at 6:18PM

Dicks

Source: Wikimedia Commons.

It hasn't been much of a surprise that following the heavy fire the gun industry has taken over the years, the ensuing lull in attempts to enact stricter gun control legislation would cause a cooling-off in what had been white-hot gun sales. 

On its most recent earnings call, Dick's Sporting Goods (NYSE:DKS) said it budgeted for the slowdown that began in earnest late last year, and though surprised by the magnitude of the pullback it experienced, it's still "enthusiastic" about being the premier destination for outdoorsmen. Golf, however, is a different story. The business has been in the rough for a long time and it's causing the sporting goods retailer to rethink just how exposed it needs to be to the sport. According to sports news outlet ESPN, not much: Hundreds of PGA professionals who worked in Dick's golf departments at all 560-plus stores have reportedly been fired.

A decade ago, golf in the U.S. was hot as the economy boomed and Tiger Woods burned up the links. Companies catering to the industry commanded valuations worth hundreds of millions of dollars in deals that saw Dick's buy the Golf Galaxy specialty shop for more than $200 million; Fortune Brands Home & Security once derived almost a fifth of its revenues from selling Titleist golf balls and Cobra golf clubs; and surf and skate clothing maker Quiksilver acquired the Cleveland Golf brand when it bought Rossignol skis for $320 million.

Images

Source: Wikimedia Commons.

The recession and Woods' extramarital peccadilloes, along with his struggles on golf tours, has left the industry's leaderboard a shell of its former self. Fortune sold its golf business for $1.2 billion in 2011 to a Korean private equity firm as it focused on being solely a spirits company; Cleveland Golf was sold to Japan's SRI Sports for $132 million in 2007; and golf club shaft maker Aldila voluntarily delisted its shares from the Nasdaq stock exchange in 2010 to save money before being bought out by a division of Mitsubishi last year.

Even one of the better known names in the industry, Callaway Gold, which is doing better today than it was in the recent past, saw its stock cut in half from its 2010 peak of just $10 per share. It took the golf club maker more than two years to regain those heights once more this past spring, though it's since pulled back some 15%.

In its conference call in May, Dick's said the golf business was one area more than others that was "more concerning and unpredictable." It pointed to the harsh 10% drop in same-store sales at its Golf Galaxy business as indicative of the malaise seen in the business, while Dick's own golf sales were down in the high single digits. Worse, it doesn't think that's the bottom, either, and this was in large part the reason the sporting goods retailer sharply revised its guidance, cutting it by as much as 30% because it missed expectations by some $34 million.

There's a threefold problem with golf: There's too much inventory, consumers aren't adopting the new technology being brought to market, and the number of rounds played continues to fall, pointing to structural problems in the industry itself.

So the layoffs the PGA pros suffered may have been shocking to the organization itself, but it was really a well-telegraphed occurrence that will see the business further marginalized at Dick's.

Although I'm horrible at the sport, I do enjoying playing a round of golf occasionally, but have long thought that the previous wall-to-wall coverage it received didn't necessarily make it a fad, but rather a sport in the midst of a bubble. I figure all the talk about soccer these days after the World Cup is a similar circumstance.

Dick's Sporting Goods got shot full of holes by both its hunting and golfing businesses, which have suffered dramatic pullbacks. The former, though, has the opportunity to turn itself around at a moment's notice the minute new anti-gun legislation is debated; the latter will find it much more difficult to get itself out of the sand trap it finds itself in.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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