Normally, lightning and golf aren't the most ideal of partners. But this time around, golf club shaft manufacturer Aldila (NASDAQ:ALDA) is hoping lightning does strike twice.
Though the number of units sold rose 14% in the fourth quarter, Aldila was selling them at a significant discount -- average selling prices were down 12% -- which led to revenues being flat and gross margins suffering a drop of 1,000 basis points from last year.
Aldila broke onto the leader board with its NV shaft introduction in 2003. That branded shaft has made up a good portion of Aldila's revenues and profits for the past few years, but customers like golf club manufacturers Callaway (NYSE:ELY), Fortune Brands' (NYSE:FO) Acushnet Golf, and privately held Karsten's have moved away from the higher-priced shafts and switched instead to lower-priced, lower-margin OEM stock type shafts.
This led to a 17% drop in branded shaft sales for the quarter, while co-branded sales were down 75% from last year. That follows a 32% drop in branded sales last quarter and another 73% drop in co-branded sales. Together, branded and co-branded sales represented just 39% of golf shaft sales in the fourth quarter, down from 68% last year. OEM shaft sales, on the other hand, nearly doubled due to an 83% increase in unit volume.
While the NVs have been a popular choice among many participants of the pro tours, Aldila hasn't really had a product to replace it. Until now, or so it hopes -- whether that second lightning strike is possible remains to be seen. Aldila's new VS line of shafts was introduced last year, and first-year sales are ahead of those recorded by the NV shaft when it was introduced. As much as management likes its new product, though, even it believes the NV phenomenon was a unique experience.
When sales of its NV shaft were hotter than Tiger Woods in the 2001 Masters, Aldila invested in new manufacturing capacity in Vietnam that will be going online now. The plant, though, will be a drag on operations and might not begin to pay for itself until the very end of the year. By then Aldila is hoping the golf shaft market will have turned around.
Aldila's graphite shafts have primarily been used in the manufacture of drivers. Golfers have been resistant to graphite being included in irons, which is why graphite-shaft irons only comprise about one quarter of the clubs sold across the industry in 2005. Therefore Aldila is beholden to new designs in drivers to help push sales. It hopes a new square-shaped driver will be such a catalyst, but when it sells its shafts to Nike (NYSE:NKE), it has no control over how the manufacturer will use them. While Aldila shafts are available as an option on such clubs, they're not traditionally being included right now.
Although unit sales have finally risen this quarter by 14% after a couple of quarters of double-digit declining unit sales, it's come at the expense of margins. With dozens of shaft maker manufacturers competing for club manufacturer business, pricing has been key. Right now Aldila still enjoys a competitive advantage because of the success of its NV shafts, but that is obviously starting to wane. Aldila needs to introduce new brands more often, but development costs will slice into margins. It seems that, with the golf market as flat as it is, Aldila will have a tough time avoiding the hazards in the coming year.
Fore more reading before tee time:
- Foolish Forecast: Aldila Still in the Rough
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
