Adidas (NASDAQOTH:ADDYY) recently released its 2014 first-half financials, and it isn't pretty for TaylorMade. The apparel maker reports sales at the subsidiary are down 18%, year over year, excluding foreign currency effects. While other segments like Reebok continue to grow, TaylorMade's woes could force Adidas to revamp its golf business. So why did sales fall off a cliff?
The industry is struggling
The company cites two driving factors behind the decline. The first, it reveals, is "poor retail sentiment," and it's not surprising. To say the golf industry has issues would be putting it lightly. An estimated 400,000 people quit the game in 2013, and more than 150 American golf courses were closed during the year, according to Bloomberg.
Costly equipment, high greens fees, and professional lessons make golf more expensive to play than many other sports. But accessibility may be an even bigger weakness. Roughly speaking, the U.S. offers one public course for every 27,000 people. Alternatives like basketball and soccer have fewer barriers to entry.
Look no further than Callaway Golf (NYSE:ELY) to see more proof that this space is struggling. The company recently reported second-quarter sales down 7%, with the biggest declines coming in its woods (-27%) and golf balls (-9%). When asked about the industry in a conference call, Callaway CEO Chip Brewer remarked, "It's my opinion that a lot of the PR is highlighting issues that are not new. The participation and some of those trends have been concerns for the industry for some time."
He's right. The warning signs began all the way back at the turn of the century. In every year between 2000 and 2008, the number of U.S. golfers either fell or stagnated, The New York Times reports. And over the past decade, participation has dropped from 30 million players to 25 million, CBS News says. It may be unreasonable to expect an industrywide turnaround unless golf undergoes major structural changes, or the next generation's Tiger Woods convinces fans to play instead of watching the sport on television.
The product life cycle may be too quick
Adidas lists "slow liquidation of old inventory" as a second problem. Translation: Retailers and pro shops are stuck with too many TaylorMade products, which they then must sell at a discount, if at all.
While poor sentiment is partially responsible, the company's product life cycle may be too swift. The schedule fluctuates, but industry sources tell me TaylorMade's clubs are typically upgraded annually, sometimes more frequently. Its RocketBallz brand, for example, received an update in 2013, a year after becoming golf's best-selling wood.
New technology is often the reason for a change, but it can confuse customers. A 2009 MyGolfSpy poll, in fact, indicates 81% of respondents believe TaylorMade releases new products too often.
Naturally, an inventory backlog can also result from this strategy, as buyers flock to new gear instead of older models. It's this exact phenomenon that's plagued Dick's Sporting Goods (NYSE:DKS), TaylorMade's biggest retail partner, of late -- the company fired more than 500 of its pros last month. An inability to sell the four different drivers TaylorMade unveiled in 2013 is partially to blame, ESPN reports. Ping, by comparison, released three driver models in the past two years combined, while Titleist introduced just two.
Looking ahead, sales declines will lead to lower financial goals and restructuring. Adidas CEO Herbert Hainer discussed the former in a recent press release.
"It is with disappointment that after such a great summer of sport, I have to report that our group has not been able to meet the high expectations we laid out in our Route 2015 agenda," Hainer said last week. Route 2015's estimates originally called for $23 billion in sales by next year, OregonLive reports. Now projections show Adidas should fall at least $2 billion short. Key competitor Nike broke the $27 billion mark last fiscal year.
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Jake Mann has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Nike. 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.