Acushnet Holdings Corp. (NYSE:GOLF), the golf equipment manufacturer best known for the Titleist branded golf balls and clubs, has started 2024 off with a return to growth in Q1 after a weak end to 2023. The FootJoy golf gear segment has continued to perform slowly recently due to weak end markets, though, pushing down Acushnet’s total growth performance during Titleist’s continued momentum.
I previously wrote an article on Acushnet, published on the 6th of February, with the title “Acushnet’s Course Is On Par.” The article outlined the company’s strong and stable long-term financial performance, and the expected temporary Q4 weakness caused by the timing of certain club launches. In the article, I initiated Acushnet at Hold, as the valuation seemed to value the company properly. Since the article was published, Acushnet’s stock has returned 3%, trailing the S&P 500’s (SP500) 11% by a small margin.
Acushnet’s Q4 Weakness Was Temporary, As Expected
Acushnet’s reported Q4 showed a weak end to 2023 as was guided – revenues declined by -7.7% year-over-year to $413.0 million, and the GAAP operating margin was pushed into a negative -6.0%. The company guided for a middle point revenue decline of -9.5%, making the fall softer than the guidance of $380-430 million implied. The adjusted EBITDA came in at -$1.5 million, slightly negative, as the company had previously communicated to expect. The delivery timing shift of Golf clubs into Japan was a large driver behind the decline, as expected, but United States’ sales also trailed as prior year’s club launches and lower footwear sales dragged revenues.
As already expected, the Q4 result was only weak temporarily, as Acushnet returned to growth in Q1. Revenues grew by 3.1% in the quarter. Adjusted EBITDA reached $153.7 million, growing by 5.7% from the prior first quarter. Titleist’s golf ball & club growth of 10.5% clearly outpaced Topgolf Callaway’s (MODG) golf equipment segment growth of 1.4% in Q1 as the brand continued to grow with great momentum.
In terms of regions, the United States, responsible for the majority of Acushnet’s sales, grew by an incredible 13.1% while other regions’ revenues shrunk. Most notably, revenues in Japan and Korea declined by -19.8% and -15.4% respectively. The decline in Japan and Korea was caused mainly by a decline in apparel sales, with poor weather in Korea also playing a part, as rounds were told to be off -9% in the country during the quarter.
For 2024, Acushnet expects continued moderate growth as the revenues of $2450-2500 million represent a mid-point growth of 3.9%. The adjusted EBITDA is guided at $385-405 million, implying stable upcoming margins – the company continues to perform with stable momentum after temporary Q4 weakness.
FootJoy Golf Wear Still Shows Weakness
The FootJoy segment, selling golf gloves, footwear, apparel, and accessories, has started to perform poorly from 2023 forward, also responsible for the weak sales in Japan and Korea in Q1. In 2023, FootJoy revenues declined by -3.5% in 2023 into $596.4 million, representing a quarter of Acushnet’s total revenues in the year. The revenue weakness continued with -6.3% in Q1 in the segment. Over the long term, the segment has had very stable revenues, excluding the Covid pandemic’s effects.
The segment relies largely on footwear sales, which has seen weak demand in recent quarters – for example, Designer Brands (DBI) saw revenues decline by -7.3% in FY2023, Wolverine World Wide (WWW) by -16.5% in 2023, and Steve Madden (SHOO) by -6.6% in 2023. While golf shoes’ consumer demand trends should vary from the overall footwear market as golf participation still remains strong, the weak market seems to play a key role. The footwear market’s decline was also hinted as a reason behind recent FootJoy’s revenue weakness in the Q1 earnings call. Also, a correction in the Korean golf apparel market was attributed as a reason to current weakness.
The call still mentioned a positive reception to new FootJoy product lines, raising Acushnet’s confidence in better FootJoy momentum in the back half of 2024. It seems likely that weak markets play a major role in the segment’s weakness, although I wouldn’t still expect notable growth from the segment in the mid- to long-term. A small midterm growth boost could be achieved with a normalization of the footwear market, though.
Acushnet’s Stock Valuation Is Still Balanced
I updated my discounted cash flow [DCF] model to account for the recent financial performance and 2024 outlook. While very notable changes aren’t needed, I have updated the 2024 growth estimate to 3.9% from 2.0% previously as the growth resumed well in Q1. Afterward, I estimate very similar revenue growth with a CAGR of 3.3% from 2023 to 2033.
The EBIT margin has come in slightly softer than my previous model estimated, but I continue to estimate slight long-term margin expansion into a 13.1% EBIT margin.
The estimates put Acushnet’s fair value estimate at $59.68, 8% below the stock price at the time of writing – the stock continues to be roughly fairly valued in my opinion, as the price estimates modest continued growth momentum. The fair value estimate is nearly the same as the $59.40 estimate previously.
A weighted average cost of capital of 8.10% is used in the DCF model, up from 7.95% previously. The used WACC is derived from a capital asset pricing model:
In Q1, Acushnet had $13.1 million in interest expenses, making the company’s interest rate 6.06% with the current amount of interest-bearing debt. I continue estimating a 15% debt-to-equity ratio despite currently higher debt, as the debt is related to seasonal working capital increases that reverse from Q2 to Q4.
To estimate the cost of equity, I use the United States’ 10-year bond (US10Y) yield of 4.29% as the risk-free rate. The equity risk premium of 4.60% is Professor Aswath Damodaran’s latest estimate for the United States, updated on the 5th of January. I have kept the beta estimate the same at 0.89. Finally, I add a liquidity premium of 0.25%, creating a cost of equity of 8.63% and a WACC of 8.10%.
Takeaway
Acushnet Holdings Corp.’s growth resumed in Q1 after the expectedly weak Q4. While weakness in some markets has weakened growth, namely in Japan, Korea, and the FootJoy segment, overall financials continue to perform well. The company anticipates continued moderate growth momentum in the rest of 2024 with stable margins, still showing a stable investment case. The valuation again fairly reflects Acushnet’s earnings prospects, and as such, I remain at a Hold rating for Acushnet.