Tiger Woods and Rory McIlroy Look For New Clubs as Nike Drops Equipment Lines

Sometimes companies do the right thing even though they risk shocking their diehard fans. Nike (NKE, Weiss Rating B) did just that last Thursday, when it announced it was dropping golf equipment from its product lines to focus on its more profitable apparel lines (clothes and footwear).

Much as it might have surprised McIlroy, who is in the middle of a five year, $100 million sponsorship deal, at least now he will be able to go find some clubs that work.

Nike is no dummy. It is the giant of the consumer discretionary sector with a market cap of $93.7 billion. Everything at Nike is big, except where performance counts.

Looking at the numbers using our sector comparison tool, unlike the market cap, enterprise value and P/E ratio and Price to Book value that are all extreme, items such as price to sales, revenue per share and earnings growth are lagging behind the sector averages.

So why is the stock so desirable? Well in simple terms Nike is a brand, and it pretty much keeps the devotees who buy the stock out of brand loyalty, happy, as well as the more considered investors. Although returns are currently below average and underperforming, which is why the board has taken the steps it has, a 200.1 percent total return over the past five years is not too shabby.

In addition to the stock returns although the yield is a little low for the sector at 1.11 percent it does have the capacity to increase the payout ratio significantly from the measly 27.18 percent, if it chooses to.

From a business perspective, the return on assets is higher than average, as is the return on equity. Operating and net profit margins are also well above average. This is where most companies go wrong, and hang on too long to underperforming assets with no likelihood of improvement. Not Nike.

Nike has stated that it intends to expand its clothing and footwear sponsorships with more professional golfers, so Woods and McIlroy may stay involved with the brand. But it seems, with TaylorMade and Adams golf brands put up for sale by Adidas earlier this year, and now Nike giving up golf equipment, clubs and balls are no longer seen as the money makers they once were, but dressing to impress is still where it is at.

Proof of the desire to move to apparel is the Adidas partnership with Kanye West. Not to be outdone, the Nike-Michael Jordan brand Jumpman has just launched its first product, football team uniforms, in a $169 million, eleven-year deal with the University of Michigan.

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