Callaway Golf Co. on Monday reported adjusted earnings per share loss for the fiscal fourth quarter of (26) cents, missing Wall Street’s targets by 3 cents. That EPS loss excludes 5 cents per share related to the non-recurring and acquisition-related expenses related to the Jack Wolfskin, TravisMathew and OGIO acquisitions.
The company reported an EPS loss of (31) cents, down 3 percent from the year-ago period. Callaway reported fourth-quarter revenue increased $131 million (73 percent) to $312 million, a new record for the company.
This increase reflects the acquisition of Jack Wolfskin in January 2019, which contributed $81 million in net sales in the fourth quarter of 2019. Excluding the Jack Wolfskin business, net sales increased 28 percent in the fourth quarter of 2019, or 27 percent on a constant currency basis, driven by growth in all product categories and all regions.
The company reported for the full-year 2019 record net sales of $1.7 billion, an increase of 37 percent compared to net sales of $1,243 in 2018. This $458 million net sales increase reflects increases in all operating segments, all major product categories and all major regions. The Jack Wolfskin business, which the company acquired in early 2019, contributed $356 million of this sales growth compared to 2018. The company achieved these record sales results despite a negative impact of $31 million from changes in foreign currency exchange rates.
The company also announced record operating profits of $133 million for 2019, a 3 percent increase compared to $128 million in 2018. On a non-GAAP basis, operating income increased 23 percent to $163 million compared to $133 million in 2018. The company’s earnings per share decreased to $0.82 for 2019 compared to $1.08 in 2018.
This $0.26 decrease is due to $30 million ($0.28) of non-cash purchase accounting adjustments and acquisition-related costs. Excluding such costs, non-GAAP earnings per share increased 2 percent to $1.10 compared to $1.08 in 2018. The company was able to achieve this 2 percent increase despite absorbing the $31 million unfavorable sales impact from changes in foreign currency rates, approximately $5 million related to the incremental tariffs, and a $34 million increase in interest expense, primarily related to the financing of the Jack Wolfskin acquisition, all of which was offset by the record operating performance discussed above.
“2019 was another successful year for our company,” commented Chip Brewer, president and CEO of Callaway Golf. “In addition to record sales and operating profit, we made great progress executing our corporate strategy of transforming Callaway into a premium golf equipment and active lifestyle company. The acquisition of Jack Wolfskin in early 2019 was an important part of that strategy and our TravisMathew business continues to grow at double-digit rates. All the while, we remained steadfast in our focus on the golf equipment business which grew over 7 percent, outpacing the overall golf market and further strengthening our brand positions.”
“Looking forward to 2020, the outbreak of the coronavirus will impact our business with regard to sales in Asia and on the supply side,” added Brewer. “The financial guidance we provided today reflects our best estimate of the impact of this outbreak on our business. It is very difficult, however, to provide an estimate with any degree of certainty given the dynamic nature of this crisis. Our thoughts and prayers are with the people of China, including our employees, customers and their families in that region, as well as those affected by the virus globally. We hope and pray for a speedy resolution.”
Brewer continued, “While the coronavirus, tariffs and foreign currency rates will provide headwinds in 2020, we are looking forward to another strong year of operational performance with growth in both our golf equipment and soft goods segments. We also intend to make additional investments in our business in furtherance of our corporate strategy of making Callaway a larger and more diverse company with higher embedded growth prospects and long-term earnings outlook.”
Summary of Full Year 2019 Financial Results
Net sales increased $458 million (37 percent) to $1,701 million, a new record for the company, and on a constant currency basis, net sales increased by 39 percent. The increase reflects the acquisition of Jack Wolfskin in January 2019, which contributed $356 million in net sales in 2019, and on a constant currency basis, Jack Wolfskin would have contributed $374 million in net sales. Excluding the Jack Wolfskin acquisition, net sales increased 8 percent in 2019 (up 9 percent on a constant currency basis) driven by strong growth in all product categories and all regions. The golf clubs category increased 7 percent (up 8 percent on a constant currency basis) driven by the success of market-leading products including the Epic Flash driver, Apex irons, MD5 wedges, and Stroke Lab putters. The golf balls category increased 8 percent (up 9 percent on a constant currency basis) driven by the success of the new ERC Soft Triple Track and Supersoft golf balls, as well as continued success with the Chrome Soft golf balls. The apparel, gear and other segments, excluding Jack Wolfskin, increased 11 percent (up 12 percent on a constant currency basis) driven by the continued brand momentum of TravisMathew.
Gross margin decreased 140 basis points to 45.1 percent compared to 46.5 percent in 2018. Excluding non-cash purchase accounting adjustments and non-recurring costs associated with the acquisition of Jack Wolfskin, non-GAAP gross margin decreased 70 basis points to 45.8 percent. This decrease was primarily due to the current year golf equipment product mix of higher-priced products which typically have lower gross margins due to more advanced technology, as well as increased tariff expense, and the negative impact of foreign currency exchange rates, all slightly offset by the favorable mix impact of the TravisMathew and Jack Wolfskin businesses, which are accretive to gross margin.
Operating expenses increased 41 percent to $634 million in 2019 compared to $450 million in 2018. Excluding non-recurring and acquisition-related expenses, non-GAAP operating expenses increased $172 million, or 39 percent, to $617 million compared to $445 million in 2018. This increase is primarily due to the addition in 2019 of operating expenses from the Jack Wolfskin business, which added an incremental $155 million excluding the acquisition-related expenses. The remainder of the increase was related to investments in the TravisMathew and golf equipment businesses to support sales growth.
Earnings per share decreased to $0.82, compared to $1.08 for 2018. On a non-GAAP basis, 2019 earnings per share were $1.10, which excludes $0.28 per share related to the non-recurring and acquisition-related expenses related to the Jack Wolfskin, TravisMathew and OGIO acquisitions. The non-GAAP earnings per share in 2019 also includes a $31 million ($0.26 per share) increase in other expenses primarily related to interest expense on the purchase financing for the Jack Wolfskin acquisition. The earnings per share for 2018 includes $0.01 per share of acquisition costs related to the TravisMathew and OGIO acquisitions.
Summary of Fourth Quarter 2019 Financial Results
Net sales increased $131 million (73 percent) to $312 million, a new record for the company. This increase reflects the acquisition of Jack Wolfskin in January 2019, which contributed $81 million in net sales in the fourth quarter of 2019. Excluding the Jack Wolfskin business, net sales increased 28 percent in the fourth quarter of 2019, or 27 percent on a constant currency basis, driven by growth in all product categories and all regions.
The golf clubs category increased 36 percent driven by continued success of third-quarter product launches, including Epic Forged irons, Epic Forged Star irons, and MD5 Jaws wedges, combined with two new Stroke Lab putters launched in the fourth quarter. The golf balls category increased 26 percent in the fourth quarter driven by continued success of the 2019 Supersoft and ERC Soft golf balls, as well as continued success of the Chrome Soft golf balls. Excluding Jack Wolfskin, the apparel, gear and other segment increased 19 percent driven by strong growth in the TravisMathew business.
Gross margin increased 300 basis points to 41.7 percent, compared to 38.7 percent in 2018. Excluding non-cash purchase accounting adjustments and non-recurring costs associated with the acquisition of Jack Wolfskin, non-GAAP gross margin increased 370 basis points to 42.4 percent. This increase was driven by a favorable mix impact of the Jack Wolfskin and TravisMathew businesses, which were both accretive to gross margin in the fourth quarter, and increased launch activity in the golf equipment business. This was slightly offset by increased tariff expense and a negative impact of foreign currency exchange rates.
Operating expenses increased 36 percent to $153 million in the fourth quarter of 2019 compared to $113 million for the same period in 2018. Excluding non-recurring and acquisition-related expenses, operating expenses increased $38 million, or 35 percent, to $148 million when compared to $110 million in the fourth quarter of 2018. This increase is due to the addition in 2019 of operating expenses from the Jack Wolfskin business, which added an incremental $41 million excluding the acquisition-related expenses.
Earnings per share decreased 3 percent to a loss per share of ($0.31), compared to a loss per share of ($0.30) for the fourth quarter of 2018. On a non-GAAP basis, 2019 fourth-quarter loss per share was ($0.26), which excludes $0.05 per share related to the non-recurring and acquisition-related expenses related to the Jack Wolfskin, TravisMathew and OGIO acquisitions. The non-GAAP loss per share in 2019 includes a $9 million ($0.09 per share) increase in other expenses primarily due to increased interest expense related to the purchase financing for the Jack Wolfskin acquisition. The loss per share for 2018 includes $0.02 of non-recurring gain related to the Jack Wolfskin acquisition.
Full Year 2020 Guidance
The company estimates full-year 2020 net sales growth of approximately 3-to-5 percent. This assumes a flat to slightly improving the overall golf market and the estimated impact of the Full-Year Macrofactors discussed above.
The company estimates that its full-year 2020 gross margin will be approximately 120 basis points higher than 2019. This increase is being driven primarily by a positive mix benefit of the margin-accretive apparel business and higher golf equipment gross margin associated with this cycle of product launches. In 2020, the company expects that gross margin will be negatively impacted by $5 million in non-recurring costs related to the warehouse consolidation projects in North America, Asia and Europe. The gross margin in 2019 was negatively impacted by $13 million of purchase accounting adjustments and non-recurring costs related to the Jack Wolfskin acquisition. The 2020 gross margin will also be affected by the Full-Year Macrofactors described above.
The company estimates that its full-year 2020 operating expenses will be approximately $46 million higher than 2019 operating expenses. This increase is being driven primarily by the continued investment in the company’s soft goods businesses, which includes new market expansion for Jack Wolfskin, continued infrastructure and brand investment for TravisMathew and investment in Asia to grow all of the company’s apparel brands. Normal inflationary pressures and on-going investment in the golf equipment business are also contributing to the increase. In 2020, the company expects that operating expenses will be negatively impacted by $6 million in non-cash costs related to purchase accounting adjustments as well as a small amount of non-recurring expense related to transitioning Jack Wolfskin’s information systems. The operating expenses in 2019 were negatively impacted by $18 million of purchase accounting adjustments and non-recurring costs related to the Jack Wolfskin acquisition as well as other non-recurring advisory fees. The Full-Year Macrofactors are also expected to have a positive impact on 2020 operating expenses, primarily from changes in foreign currency rates.
The company estimates full-year 2020 earnings per share of $0.82 to $0.94. The company’s 2020 earnings per share estimate assume an effective tax rate of approximately 18.0 percent which is slightly higher than in 2019. These estimates also assume a base of 97 million fully-diluted shares in 2020, approximately flat with 2019.
The company estimates full-year 2020 Adjusted EBITDA of $190 million to $205 million. The Adjusted EBITDA estimates will benefit from a reduction in acquisition-related costs, which were $28 million in 2019 compared to an estimated $6 million in 2020 of non-recurring expense related to the global warehouse consolidation activities as well as a small amount of non-recurring expense related to transitioning Jack Wolfskin’s information systems.
The earnings per share will benefit from a reduction in acquisition-related costs, which were $0.28 per share in 2019 compared to $0.09 per share of non-cash amortization expense in 2020 related to the Jack Wolfskin acquisition and non-recurring expense related to the global warehouse consolidation activities as well as a small amount of non-recurring expense related to transitioning Jack Wolfskin’s information systems. The projections also include the impact of the Full-Year Macrofactors discussed above.
First Quarter 2020 Guidance
The company estimates first-quarter 2020 net sales to be approximately flat to slightly down in 2020 compared to 2019 primarily as a result of the Q1 Macrofactors. This assumes a flat to slightly improving overall golf market and a slightly later launch date for the new Chrome Soft golf balls when compared to the ERC Soft golf ball launch in 2019.
The company estimates that its first-quarter 2020 gross margin will be approximately 10 basis points higher than the same period in 2019. This increase is being driven primarily by a positive mix benefit of the margin-accretive apparel business and higher golf equipment gross margin associated with this cycle of product launches. In the first quarter of 2020, the company expects that gross margin will be negatively impacted by $1 million in non-recurring costs related to the warehouse consolidation projects in North America, Asia and Europe. The gross margin in 2019 was negatively impacted by $5 million of purchase accounting adjustments and non-recurring costs related to the Jack Wolfskin acquisition. The 2020 gross margin will also be affected by the Q1 Macrofactors described above.
The company estimates that its first-quarter 2020 operating expenses will be approximately $7 million higher than 2019 operating expenses. This increase is being driven primarily by normal inflationary pressures and strategic investments in the new market expansions for the Jack Wolfskin business.
In 2020, the company expects that operating expenses will be negatively impacted by $1 million in non-cash costs related to purchase accounting adjustments as well as a small amount of non-recurring expense related to transitioning Jack Wolfskin’s information systems. The operating expenses in 2019 were negatively impacted by $6 million of purchase accounting adjustments and non-recurring costs related to the Jack Wolfskin acquisition. The Q1 Macrofactors are also expected to have a positive impact on 2020 operating expenses, primarily from changes in foreign currency rates.
The company estimates first-quarter 2020 earnings per share of $0.41 to $0.47. The company’s first-quarter 2020 earnings per share estimate assume an effective tax rate of approximately 18.0 percent compared to 16.5 percent in the same period in 2019. These estimates also assume a base of 97 million fully-diluted shares in the first quarter of 2020.
The company estimates first-quarter 2020 Adjusted EBITDA of $72 million to $79 million compared to $79 million for the first quarter of 2019. The Adjusted EBITDA estimates will benefit from a reduction in acquisition-related costs, which are estimated to be $2 million in the first quarter of 2020 related to the global warehouse consolidation activities as well as a small amount of non-recurring expense related to transitioning Jack Wolfskin’s information systems compared to $14 million in 2019.
The earnings per share estimates will benefit from a reduction in acquisition-related costs and non-recurring expense related to the global warehouse consolidation activities as well as a small amount of non-recurring expense related to transitioning Jack Wolfskin’s information systems, which are estimated to be $0.02 in the first quarter of 2020 compared to $0.13 in the first quarter of 2019. The projections also include the impact of the Q1 Macrofactors discussed above.
