Acushnet Holdings Corp.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Acushnet Holdings Corp. is a leading designer, developer, manufacturer, and distributor of golf equipment and apparel, primarily known for its brands Titleist, FootJoy and Vokey.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Acushnet Holdings Corp. operates primarily in the golf industry with a focus on performance and quality. The company is segmented into Titleist golf balls, Titleist golf clubs, and FootJoy Golf Wear. The operations include a vertically integrated supply chain and distribution system with a global presence, selling their products to players at every stage of experience.

Business Overview

Acushnet generates revenue primarily through three segments:

Titleist Golf Balls: This segment produces high-performance golf balls designed to suit various player preferences and skill levels.
Titleist Golf Clubs: This segment manufactures and markets premium-quality golf clubs including drivers, fairway woods, irons, wedges, and putters.
FootJoy Golf Wear: This segment encompasses golf apparel, gloves, shoes, and other accessories for both professional and amateur golfers.

The company’s products are sold through a variety of channels that include:

On-course (pro shops): The majority of its sales go through Pro shops at golf courses.
Off-course (retail): The company also sells in retailers specializing in golf products.
Direct to consumers: This channel is small and mainly exists online, with the intention to expand further.

While the company operates mostly in the golf industry, its revenue is well diversified over a good number of countries. The company sells in Japan, South Korea, United States, Canada, United Kingdom, and various regions of Europe and Asia.

Industry Trends & Competitive Landscape

The golf industry is characterized by strong brand loyalty, particularly for the equipment category, and is highly influenced by consumer preferences and trends.
Competition is strong in the market. The company competes with other well established golf brands (like Callaway, TaylorMade and PXG) as well as smaller, more regional brands.
The retail landscape for golf equipment and apparel is evolving with traditional brick-and-mortar stores facing competition from online retailers. This is forcing companies to adopt omnichannel strategies.
Technology and new innovations play a great role in demand and consumer preference. New products with better technology and performance get higher sales.

Moat Analysis

Acushnet possesses a narrow moat due to a combination of brand strength, loyal customer base and long history in the golf market.

Strengths (Moat Sources):

Brand Strength: Acushnet’s brand, particularly Titleist in golf balls and FootJoy in golf apparel and shoes, are highly valued and recognized by players of all levels. This brand recognition leads to a premium pricing strategy and attracts customers to repeat purchases. They are a trusted name in the golf market.
Customer Loyalty: The company’s emphasis on performance and quality has helped it establish a loyal customer base. Professional golfers and serious amateur golfers often show strong preference towards Titleist and FootJoy products, making them difficult to persuade and switch.
Specialized Expertise: The company has a high reputation in its research & development operations that produces new, highly acclaimed products, making the company a market leader in its own industry.
Established distribution network: The company’s established distribution network and long experience in its markets, make it harder for new companies to compete effectively.

Weaknesses:

Commodity-like Products: In the equipment category, new products with superior performance are readily copied by competitors. Although they enjoy some level of premium on their brands, the competition can readily bring something similar.
Low Switching Costs: Many of the apparel and accessories are subject to low switching costs since golfers may find another brand they like and switch without much difficulty.
Rivalry: The golf market is highly competitive, which means it is quite easy for new competitors to enter the market and take some market share.

Moat Rating

3/5 - Narrow moat due to a mix of strong brands and loyal customer base with high switching costs for golf balls, yet high competition and low switching costs for apparel and accessories.

Risks to Moat and Business Resilience

Risks:

Technological disruption: New advancements in golf equipment and performance technologies by competitors can make some products lose market share. The company needs to maintain a constant investment into R&D to overcome this risk.
Changing Consumer Preferences: Shifts in consumer preferences in terms of design and style may lead to reduced demand for certain product offerings. This is especially true for the apparel and footwear categories, but even the equipment is not immune to it. The company needs to be attentive to changing consumer preferences and trends.
Economic cycles: Sales of luxury and performance products are highly vulnerable to periods of recessions or economic slowdowns. These products are considered to be discretionary purchases, and people are likely to delay/defer their purchases when economic circumstances are not favorable.
Global Competition: Growing competition from low-cost manufacturers in Asia can affect their margins and competitive positioning in certain product categories. The company can suffer from price pressure, which leads to lower profit.
Supply chain constraints: Similar to many other companies, Acushnet was also exposed to logistical and supply chain issues. Recent tensions and supply chain shortages for some components that go into their golf products, may lead to an inability to produce and deliver as much products as possible.
Acquisition-related risks: Acquisitions are often difficult to execute, and it requires integration and management time and effort. Failing to properly integrate acquisitions may result in less profits.

Resilience:

Acushnet has a diversified portfolio of different brands. If any individual product underperforms or becomes less popular, the company can rely on its other products.
The company’s strong brands and a well-diversified customer base (professional golfers to general amateur players) provides them with good business stability.
The company also has a wide geographic diversification, which protects against market declines in individual markets.

Financial Analysis

Revenues: The company has shown consistent year-on-year revenue growth over the last few years (from 2019 to 2022). The latest nine months of 2023 have also shown good year-on-year sales growth of almost 9% (from $1.503 Billion to $1.630 Billion).

Most of the company’s revenue are from golf balls, golf clubs, and Footjoy brand golf wears. The company has shown strength to maintain consistent growth on all segments.

Margins: Acushnet consistently generates good gross margins over 45% which signifies they have an ability to maintain consistent pricing. In addition, they also achieve relatively high operating margins around 11%, reflecting good operational efficiencies. However, the company faces issues in increasing operating costs, thus making margin growth quite difficult. As a whole the company’s margins are fairly consistent.
Invested Capital: The company’s invested capital has consistently increased over time, signalling increased investment for growth.
Profitability: Acushnet has shown consistent profitability over the years. However, as per their latest reports, earnings per share (EPS) has been affected due to interest expenses related to their debt, as well as higher operating costs and taxes. All of these costs have put down their profitability as a whole.
Balance Sheet: The company has manageable debt levels and a good enough current ratio and quick ratio. This indicates that the balance sheet is healthy and stable. The only major point of concern in the recent balance sheet is a large goodwill amount from a previous acquisition.
Cash Flow: The company generates a positive operating cashflow which they have been using for investments for organic growth as well as share buybacks. This shows the company’s ability to generate cash and that they are making good use of this generated cash.
Capital Expenditures: The company spends a sizeable amount of money on capital expenditures, indicating the company’s intent on keeping its operations modernized for efficiency.

Understandability Rating

2 / 5 - The company’s operations as a golf equipment and apparel manufacturer are relatively easy to understand. However, the technicalities of their financial statements, as well as the complex relationships between earnings and prices, makes the business moderately difficult to analyze.

Balance Sheet Health Rating

4 / 5 - The company has a stable balance sheet with good liquidity and a manageable amount of debt. The only major downside is the goodwill it has generated from acquisitions which need to be closely monitored. It’s not enough of a concern to degrade the health of its balance sheet however, they need to be monitored in the future.

Recent Concerns / Controversies and Management’s Response

COVID-19 Impact The company faced considerable disruption during COVID, with supply chain issues and reduced demand for their products due to lockdowns and restrictions. The company has now fully recovered from it.
Higher Interest Rates: Company has expressed concern regarding the increase in interest expenses over time due to debt and rising interest rates. They have expressed commitment to try to reduce their debt to limit the effects of these higher expenses.
Inflation: Increase in input cost from materials or other factors has been noted as a potential point of concern for the company, that may affect their margins. The company has been actively working on minimizing these costs and maintain margins.

The recent reports and earnings calls show the management is very focused on the strategic goals and long-term targets for the company and they acknowledge the risks and actively work to solve it. The company is also confident in its future performance and growth as a whole.