S&P Global Rating signed a BB’ issuer credit rating and stable outlook to Titleist’s parent Acushnet Holdings Corp.’s planned offering of $350 million of senior unsecured notes. The rating reflects S&P’s expectation that Acushnet’s sales and profits will remain steady over the next year as post-pandemic golf activity decelerates, albeit at levels above pre-pandemic levels.
Acushnet plans to use the debt offering to pay down borrowings under its $950 million senior secured revolving credit facility. The transaction will be largely neutral for leverage with adjusted debt to EBITDA at transaction close of 2x.
S&P wrote in its analysis, “Our rating reflects Acushnet’s narrow focus on the highly competitive and discretionary golf products industry, in which it has a strong global market position.
“Our view of Acushnet’s business risk profile incorporates its industry-leading premium brands Titleist and FootJoy, good geographic and customer diversification, and pricing power. The company generates about half of its sales in the U.S., with additional strong market positions in South Korea, Europe, and Japan. We believe Acushnet’s Titleist and Pinnacle golf balls command about 50 percent of the global golf ball market, and FootJoy is one of the top shoes in the golf segment, while the company’s Titleist golf clubs are just behind TaylorMade and Callaway in terms of global market share.
“Industry players must continue to allocate significant resources to consistently deliver desirable products and growth and rely on innovation and player endorsements to drive product demand and maintain their market positions. We recognize Acushnet’s history of introducing innovative, high-quality products that have supported its solid sales growth over the past few years. This includes the recent release of its new Pro V1 and Pro V1x golf balls, TSR golf clubs, and Scotty Cameron Super Select putters that we believe helped Acushnet report higher revenue growth than its peers in the first half of 2023. Through its FootJoy brand, the company is a market leader in golf shoes and gloves, with an increasing focus on apparel.
“Although we believe the company’s good track record of innovative premium product development is a modest barrier to entry, we do not necessarily view Acushnet as having a distinct technological advantage over its primary competitors. While the company has good brand equity and a solid global market position, it is heavily reliant on the success of its Titleist and FootJoy brands. The business could suffer if product quality declines. Further, we view the golf equipment and apparel category as discretionary and vulnerable to economic downturns. If consumer discretionary spending is disrupted due to a severe recession, we believe the company’s financial performance would be hurt by golfers delaying equipment purchases or trading down to lower-priced products. However, we expect Acushnet’s focus on the dedicated golfer base–who typically spends more time and money than the average golfer–to provide some offset in a weak macroeconomic environment.
“We expect growth in the cyclical and mature golf industry to slow following a surge during the pandemic.
“After the early stages of the COVID-19 pandemic, the golf industry benefited from new participants and increased play by existing participants compared to pre-pandemic levels. This increase in golf participation drove Acushnet’s strong performance over the past couple of years, including about 33 percent sales growth in fiscal 2021 and 6 percent growth in fiscal 2022. We believe the larger base of new golfers will continue to support stronger sales and profits compared to pre-pandemic levels, although the frequency of rounds played in the U.S. in 2022 decreased marginally from 2021 levels after the pandemic subsided and consumers pursued other leisure activities. As such, we believe the company is entering a more normalized post-COVID environment and that it will not sustain these recent high growth rates.
“We expect growth in rounds played to moderate but the absolute number of rounds played to remain above pre-pandemic levels supported by a more permanent shift to a hybrid work environment, and increased women and junior participation in the sport. Notably, off-course participation, which includes driving range entertainment venues such as Topgolf, continues to grow and drive higher interest in golf. While Acushnet’s strategy excludes direct participation in this channel, the company could nevertheless benefit if more people are attracted to the game. Furthermore, we view the possible merger of LIV Golf and PGA Tour as a significant development in the golf industry. While uncertainties remain, the merger could result in golf reaching a larger fan base and creating opportunities for new events, which will increase interest in the sport.
Our assessment of Acushnet’s financial profile reflects our expectations for adjusted leverage at or below 2.5x through 2025.
“We estimate the proposed refinancing transaction will be neutral for leverage (excluding transaction fees) and estimate leverage at close will be about 2x (company-defined net leverage of 1.6x). Acushnet intends to maintain company-defined average net leverage below 2.25x on an annual basis (equates to around 2.5x S&P Global Ratings-adjusted leverage). We expect the company will generate substantial FOCF and will remain committed to returning capital to shareholders in the form of dividends and share repurchases. The company has spent close to $400 million since 2021 on share repurchases with another $267 million remaining under the current share repurchase program as of June 30, 2023. Management has consistently run the company with a fairly conservative financial policy since its IPO in 2016. Our base case assumes management will continue to repurchase shares opportunistically. In a downturn, we expect the company to decrease share repurchases to partially mitigate EBITDA deterioration. As a result, we expect the company will operate at leverage at or below 2.5x over our forecast period. Furthermore, we do not believe the company will engage in sizable mergers and acquisitions (M&A) but believe it will remain open to bolt-on acquisitions of complementary businesses.
“We view Acushnet’s marketing strategies as a competitive advantage.
“Acushnet relies on a most-played strategy whereby it has endorsement agreements with more professional players than rivals. This is contrary to key rivals that have expensive endorsement contracts with a limited number of top players. We note that Acushnet’s strategy has been beneficial overall to its growth and given that many professional players use its products in tournaments (primarily golf balls), we believe its products are high quality. Its ability to leverage a large professional player base to reach the dedicated golfer has enabled the company to achieve and sustain high returns over the years and further underpins our outlook for continued growth.
“We expect the fallout from supply chain constraints will moderate.
“Acushnet’s strong performance has overshadowed some supply chain constraints. In its golf ball business, the company faced issues with meeting demand for its Pro V1 and Pro V1x golf balls due to constraints with one supplier. We believe the company has taken actions to improve production capacity and ensure product availability by diversifying its supply sources. Furthermore, its footwear business continues to be constrained by oversupply, which has led to elevated inventory levels and increasing promotional activity across the industry. As a result, we assume revenue and margins in the FootJoy segment will remain constrained over the next few quarters until industry inventory levels normalize; however, footwear is a small portion of Acushnet’s consolidated business and will not materially impact credit metrics.
“The stable outlook reflects our expectation that Acushnet’s sales and profits will remain steady over the next year as post-pandemic golf activity decelerates, albeit at levels above pre-pandemic levels, supported by continued innovation, and sustained market share. We also expect the company to continue to generate healthy positive FOCF and maintain S&P Global Ratings-adjusted leverage at or below 2.5x.”
Photo courtesy Acushnet/Titleist
