TaylorMade has an Epic Problem

A few days ahead of the release of the adidas-Group’s 2016 annual report, Josh Kosman of the New York Post has offered up a brutal and likely accurate look at the state of the TaylorMade Golf Business and its potential sale.

I would encourage you to read the article in its entirety, but here are a couple of the key points from the Post’s story.

  • TaylorMade is losing an estimated $75-100MM per year.
  • TaylorMade’s annual sales are just a bit above $500 Million today.

Kosman’s loss figures are close to what we’ve been told. $75 million is certainly a solid ballpark 2-year average. Despite a fair amount of cost-cutting measures, TaylorMade is deep in the red, and that’s still not sitting well with adidas shareholders.

The Post's numbers suggest that TaylorMade is roughly 1/3 of what it was at its peak. That's not entirely true. The $1.7 billion total includes both TaylorMade and adidas sales, while the $500 million is an estimate of current TaylorMade-only sales. It is estimated that TaylorMade accounted for more than a billion of that $1.7, so we're still talking about a rapid and substantial decline. More bad news; the reality is that TaylorMade is unlikely to do another 500 million in sales this year. That’s due in no small part to stiffer than ever competition industry-wide, and particularly from Callaway.

One of Kosman’s sources describes Callaway’s Epic lineup as “a big threat to TaylorMade.” That’s understating the severity of TaylorMade’s Epic problem.

In January, not only did Callaway overtake TaylorMade as the #1 driver brand on the market (on/off-course USA dollar sales), it also disrupted TaylorMade’s decades-long reign as the #1 Metalwood brand (combined on/off-course USA dollar sales of drivers, fairways, and hybrids).

To the average golfer, that may sound like a small thing, but that #1 Driver, #1 Metalwood stuff isn’t just at the core of TaylorMade’s identity. It is TaylorMade’s identity.

The company has continued to claim a #1 Driver position based on PGA Tour play, but that metric doesn’t put money in the bank the way retail success does.

Who is TaylorMade as a golf company without the best-selling metalwoods on the market? That’s a difficult question.

The January sales data hit TaylorMade with such force that its legal department felt compelled to send Callaway a preemptive letter; presumably in an attempt to lay some ground rules for how Callaway can and cannot market its new position.

Let me repeat that. Preemptive letter. TaylorMade actually sent Callaway a warning before it had time to create its first #1 Driver in Golf ad.

Let’s call that what it is: BUSH LEAGUE. It reeks of desperation.

If that’s any indication of TaylorMade’s operating plan moving forward, Callaway is going to need a significantly bigger mailbox. The sources we spoke with, including both industry insiders and retailers, told us that Epic is currently outselling M at a rate of between 2 and 3 to 1.

Keep in mind, January’s report includes less than a week’s worth of Epic and M sales, so by the time the February report is released (mid-March), the expectation is that Callaway will have opened up a sizeable lead in both categories.

In response, TaylorMade will likely do what it has always done; pull resources from its other lines – irons, balls, etc. – to try and regain control of the driver (and now the metalwood) category.

The likelihood is that any maneuvers that don't involve deep discounts will have about as much impact on sales as the recent Tiger Woods signing. That is to say zero. And that doesn’t bode well for TaylorMade’s potential sale price.

As Kosman points out, potential buyers must now weigh the impact of Epic against TaylorMade’s ability to generate revenue. This new reality will assuredly drive down the sale price even further.

As recently as last week it was suggested that adidas would be lucky to get 120MM for its struggling golf brand, and the longer this plays out, the lower the price is likely to tumble. We could be looking at a war of attrition of sorts, where potential buyers hold firm on lowball offers while waiting to see if adidas will ultimately capitulate for the purpose of getting TaylorMade off its books.

That could prove to be the best-case scenario for TaylorMade.

The most damning, though admittedly speculative, quote from Kosman’s article is this:

Adidas needs to find a buyer for the golf equipment brands in the next three months, or it will likely have to either shut them down or keep them in house and work at reducing losses, sources said.

There’s some room for interpretation here, but one read is that if adidas isn’t able to sell TaylorMade, it will have to clean up the mess on its own. That means substantial cuts and likely the trimming of unprofitable product lines. The alternative, Kosman suggests, is a complete shut down the golf equipment business.

Let’s hope it doesn’t come to that, and for what it's worth, a recently distributed internal TaylorMade memo has stated in no uncertain terms that the company has no interest whatsoever in shutting down the TaylorMade business. Doing so wouldn't make much sense.

When golf companies struggle, we don’t always consider the trickle-down impact. While there may be some beneficiaries (direct competitors), any downsizing of the TaylorMade equipment operation will have measurable consequences, as it did when Nike left the equipment space, for shaft companies, grip companies, and other ancillary partners you may have never considered. And of course, there’s TaylorMade’s labor force too.

These are unpleasant realities within a larger unpleasant reality. The golf equipment industry is larger than what is sustainable in the current market.

There’s still some downsizing to be done. Exactly how much remains to be seen.

UPDATE: The original text of this article was updated after we were made aware of an internal TaylorMade-adidas document that explicitly contradicts the NY Post's suggestion that TaylorMade could be shut down. The original text was also updated to reflect the fact the Post's 1.7 billion figure represents sales from TaylorMade, adidas-Golf and other golf-related businesses, while its current sales number of $500 million is based exclusively on TaylorMade Golf sales,