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Home TAKING INVENTORY:

As the calendar year winds down with a little over seven weeks left in 2014, evidence continues to emerge that the best-laid plans still often go astray. The loosely translated Robert Burns quote remains as relevant today as it did when it was first published in 1785. 

                   The best laid schemes o’ Mice an’ Men,

                   Gang aft agley,

                   An’ lea’e us nough but grief an’ pain,

                   For promis’d joy!

                   (The best laid schemes of Mice and Men oft go awry,

                   And leave us nothing but grief and pain,

                   For promised Joy!)

In the last issue, Callaway Golf’s operating results were examined. Its chief rival in the hard goods side of the business, TaylorMade delivered its third quarter results that indicate the fun times appear to be a fleeting memory. The fact of the matter is, the company that was enjoying the last laugh when it came to equipment sales, has fallen on tough times in the last 12 months. While some will bristle at that characterization, consider some of the facts and draw your own conclusions. It appears the pain on display today has been self-inflicted.

Before examining the recently announced quarterly results, a peek into the past represents the beginning of what some could be calling the end. 2013 started out somewhat promising as TMaG reported first quarter numbers that were up 9.4% from 2012. The company delivered 423 million euros back to its parent company, adidas. The 2013 second quarter is when it began to go off the rails as sales fell 13.2% (348 million euros versus 401 million). Nothing to get overly concerned with (at the time) as management’s track record spoke for itself. But the third quarter became the equivalent of the infamous smoking gun! Sales slumped 25.8% (210 million euros versus 283 million in 2012). Meanwhile, TMaG was throwing the equivalent of everything but the kitchen sink to make its numbers in the quarter as it released the R1 Black and SLDR (the company’s longest driver ever!) along with the Ghost Tour Series putters. Adams contributed an oldie but a goodie, in the revised/updated Tight Lies fairways, while adidas Golf introduced adizero Tour Custom shoes and Gore-Tex 3L rain suits. Outerwear is pricey, even for retailers but it looks good on the company books, if you know what I mean! Nevertheless, it wasn’t enough to pull the quarter out versus the previous year. And pivoting back to black on its driver was likely intended to see some sort of a replacement shift, but alas it gang aft agley!

TMaG was able to pull its 2013 fourth quarter together, largely thanks to the intro of JetSpeed driver, fairways and hybrids. Sales came in at 304 million euros, up 11% from 2012 when it reported 273 million. It’s revealing to look back and see a sales increase in a quarter that is largely devoid of recreational golf being played globally. Nevertheless, TMaG was able to surpass its 2013 third quarter in the fourth quarter by nearly 100 million euros, which helped to give the impression all was back on plan. Keep in mind the painful reminder that retailer Edwin Watts was undergoing bankruptcy protection at the time and therefore restricted on its buying power with all of its vendors as it awaited its fate. In a dysfunctional way, it helped to disguise the fourth quarter numbers in a more positive light.

Last year TMaG reported sales of 1.285 million euros, which trailed 2012’s results of 1.344 million. On the surface it doesn’t appear the discrepancy of 59 million euros was anything to get overly alarmed with especially given the harsh climate for the golf biz. But bear in mind the fourth quarter save and the inclusion of Adams Golf for the first time in 2013’s numbers after the company acquired it! Now it doesn’t appear quite as endearing, does it and this was well before Dicks Sporting Goods would throw a flag on the field in 2014 when it came to its golf business! What propelled sales in the fourth quarter of 2013 has come home to roost in 2014 and it hasn’t been what the company was expecting.

Despite the best of intentions (I’ll give them the benefit of the doubt), 2014 wasn’t going to be what the good doctor ordered. First quarter was only a fraction of what it once was, not so long ago. TMaG reported 264 million euros (below Q4 2013?), which were off 37.7% from 2013’s Q1 level of 423 million euros and below the fourth quarter of 2013. So much for JetSpeed being the answer to what ailed sales! Second quarter numbers were down another 21.9% (272 million euros versus 348 million and also below Q4 2013) and so the proverbial wheels were officially off!

“We announced this already, during the summer months last year (2013), that we would start shipping higher volumes in the fourth quarter, because we want to give them a longer life cycle from January through to April, May, June, etc.,” explained Herbert Hainer, adidas’ CEO stated in August 2014. “But unfortunately, in the first quarter, the weather was very bad and rounds played were down again. ” This helps to provide some insight into the inventory build up that was beginning to take place in part due to the rapid new product introductions in the back half of 2013 and lack of cooperation from the infamous weatherman. Nevertheless, Germany wasn’t deterred in its expectations for its golf division, despite the poor start to 2014. “We will bring new products into the golf market during the course of the year and this will help us to get close to similar sales results as last year (2013). But this is still a lot as with sales of approximately 1.3 billion euros we are, by far, the number one golf brand,” Hainer declared. However, he recognized the inventory situation wasn’t going to make the job easy. “Honestly, I believe it will take all of 2014 before the entire inventory in the market has flushed through. And I am speaking not only about just TaylorMade products, it is the entire golf market,” he said.

Over the first six months of 2014, TMaG’s product launches have been somewhat stifled compared to a historical basis for the company. In the first quarter it released Tour Preferred MB, MC and CB irons along with Project (a) golf ball. The adizero One golf shoe also made its debut. In the second quarter SLDR irons and mini driver arrived along with Tour Preferred wedges. adidas Golf introduced adicross gripmore shoes, while Adams Golf added Pro Series hybrids. The Ashworth Major Collection of apparel also came to be. Yet, the line up was severely weakened as its past sins were still being dealt with in the form of excess retail inventory. This in turn influenced TMaG’s future results.

“What we can see in the golf market is that the market is completely over-inventoried and this has two negative effects,“ Hainer stated after the second quarter to the investment community. “On the one hand, it means that we have to help the big retailers with markdowns to flush through the current or the existing inventory. And secondly, obviously we cannot therefore bring that many new products into the market, which ensures a shortfall on revenues and a shortfall in terms of margin. So we get a double negative hit. As a result, we definitely do not want to oversell the market again in 2014 and then run into the same problems in 2015. We do however believe that, as the market leader, we have a responsibility for the golf market and for the longevity of our TaylorMade brand and, therefore, we are doing two things. Firstly, we are helping the golf retailers to clean up the market and specifically our inventory. And secondly, we are being very careful about what products and how much we introduce in 2014. But what I can promise you is that our pipeline of new innovative products is full and we will launch them as soon as we see that the market is ready and the inventories are back to normalized or healthy levels.”

And so we come to the third quarter of 2014 and TMaG sales of 138 million euros, down 34.4% from 2013 when it was 210 million. It’s worth pointing out that two years ago the third quarter yielded 283 million euros in sales. By 2014, sales for the same period were halved!

Nine-month sales in 2014 are already trailing 2013’s by 308 million euros (673 million versus 981 million in 2013). Ironically, after last year’s third quarter, TaylorMade’s bravado was still on overdrive as Mark King, proclaimed the following in a company press release. “Strong equipment sales combined with our growth in the footwear and apparel categories have us on track to surpass the unprecedented $2 billion sales barrier by 2015,” said Mark King (former CEO) last November. “We believe the industry will rebound in 2014 from the 10% YTD drop in the U.S. metalwood market size and 6% drop in U.S. rounds played that have impacted growth in 2013.” King, who is no longer in the golf business, was clearly projecting not only to the industry but his superiors that 2014 was going to be a bounce back year led at the time with the strategy of overselling to retailers. Similar to lambs being led to slaughter, retailers equally complied by signing off on the company’s programs.

TaylorMade’s strategy to extend product cycles backfired famously as the company was simultaneously contributing to the inventory pile up that it would be forced to contend with in 2014. Ironically, 2014 hasn’t been as bad in some ways as 2013. For example, rounds played in the US in 2013 were down 4.9%, according to Golf Datatech (not the 6% King cited) yet year-to-date through September 2014, it is off 1.7%. The majority of recreational rounds have been played in 2014 and it didn’t fall off a cliff despite the late start that came from an over aggressive winter. Its just one data point, granted, yet TaylorMade aggressiveness combined with its arrogance are its biggest issues in terms of why it wasn’t able to sustain, let a lone, expand its sales in 2014. It has acknowledged its largest retail partner is Dicks Sporting Goods, which this year decided to part ways with a number of its employees that are also PGA of America members. The TMaG/Dicks partnership by virtue of the extended product cycle trial provided collateral damage for several unsuspecting individuals.

An inherent observation of the failed experiment also speaks to the markets over reliance for new products for manufacturers, retailers and consumers. Consider it the golf industry’s heroin. Some equipment companies, like TaylorMade, learned a long time ago that the frequency rate of new products represent a potential spike in revenues. The fourth quarter of 2013 can be considered exhibit A in the self-incriminating evidence left on display by the company. TaylorMade has been forced to go cold turkey to some extent in 2014 in an effort to put this all behind it. And like any junkie that is attempting to get clean, it hasn’t been pretty.

Its unknown but to a select few, whether TMaG was able to pull the same amount or more of forward sales into its previous years. Yet, 2014 is trailing 2013 by more than 300 million euros and its bloated retail inventory is a byproduct of management’s attempt to squeeze more blood that what was available. Was it a clear case of greed? Was it simply trying to force the issue of producing higher results regardless of market conditions? Did its corporate (and individual) ego blind it? Was this simply an exercise for management to make bonus plans?

One thing is certain and that TaylorMade is no longer has the momentum TaylorMade it once did. Responsible retailers (I’m sure there are at least a few of them) are going to question the volume needed once the new product merry-go-round is back in high gear. Some might even question other brand’s strategy in that area too, but that’s a story for another day. Its clear TaylorMade’s focus was a game of sell in to retailers with little attention or concern paid towards sell through to the consumer. It came back to bite hard on more than just the company.

Soon this will be forgotten and in some perverse sense all will be forgiven in pursuit of making a buck. Will history repeat itself as it has been prone to do? Will any retailer be cautious going forward with regard to getting too deep with any single vendor? These answers can appear simplistic in conversational form in the 19th hole, especially when hindsight is applied. But if a hot product appears, perception-wise or otherwise, will any of these hard lessons be retained?