Callaway Golf Company reported net earnings in the third quarter ended September 30 rose 69 percent as sales grew 12 percent. The gains were driven by a 27 percent hike in golf equipment.
“The world is embracing golf in a way that has led to a record quarter for the industry and our company,” commented Chip Brewer, president and CEO. “Our golf business is now experiencing unprecedented demand, and our soft goods business is recovering significantly more quickly than we expected; our third-quarter results reflect this momentum. Our recent investments into our e-commerce capabilities have proven particularly valuable, showing strong growth across all of our business segments this year including 108 percent growth in e-commerce for our apparel brands in Q3.”
Brewer continued, “Although we expect some level of continued volatility due to the ongoing pandemic, Q3 trends have thus far continued into Q4 and, perhaps more importantly, we also now appreciate even more that all of our businesses are likely to be favored in both the realities of the current world and likely consumer trends post-pandemic. All of our business segments, as well as the Topgolf business, support an outdoor, active and healthy way of life that is compatible with a world of social distancing. These are key factors that will likely be important for consumers over the next several months and will also likely continue post-pandemic.”
Summary of Third Quarter 2020 Financial Results
For the third quarter of 2020, the company’s net sales increased $50 million (12 percent) to $476 million, a new third-quarter record for the company, compared to $426 million for the same period in 2019. This increase was driven by a 27 percent increase in the Golf Equipment Segment resulting from an unexpected escalated interest in golf and demand for golf products as well as the strength of the company’s product offerings across all skill levels. The company’s soft goods segment is also recovering faster than expected with third-quarter 2020 sales decreasing only 3.4 percent versus the same period in 2019. Changes in foreign currency rates had an $8 million favorable impact on third-quarter 2020 net sales.
For the third quarter of 2020, the company’s gross margin decreased 270 basis points to 42.2 percent compared to 44.9 percent for the third quarter of 2019. Non-GAAP gross margin decreased 220 basis points to 42.7 percent compared to 44.9 percent for the third quarter of 2019. The decrease is primarily attributable to a decline in gross margin in the soft goods segment due to the impact of COVID-19 on that business, including the decreased sales and the company’s proactive inventory reduction initiatives, and was partially offset by favorable changes in foreign currency exchange rates, an increase in the company’s e-commerce sales and a slight increase in golf equipment gross margins.
Operating expenses decreased $14 million to $137 million in the third quarter of 2020 compared to $151 million for the same period in 2019. Non-GAAP operating expenses for the third quarter of 2020 were $135 million, a decrease of $12 million compared to the third quarter of 2019. This decrease was primarily driven by lower travel and entertainment costs as well as the cost reduction efforts the company began implementing in March 2020 in response to COVID-19.
Third-quarter 2020 fully diluted earnings per share were $52.4 million, or 54 cents a share, compared to fully diluted earnings per share of $31.0 million, or 32 cents, for the third quarter of 2019. Non-GAAP third quarter 2020 earnings per share were 60 cents, compared to fully diluted earnings per share of $36 cents for the third quarter of 2019.
When it reported plans to acquire Topgolf, Callaway Golf pre-announced third-quarter earnings, projecting sales of $476 million, adjusted EPS of 60 cents a share, and adjusted EBITDA of $87 million.
Summary Of First Nine Months 2020 Financial Results
For the first nine months of 2020, the company’s net sales decreased $174 million (13 percent) to $1,215 million, compared to $1,389 million for the same period in 2019. This decrease reflects decreased sales in both golf equipment and soft goods operating segments globally due to the negative impact of COVID-19 including the temporary closure of most of the company’s operations and retail doors during the second quarter of 2020. This decrease was partially offset by a significant increase in the company’s e-commerce sales for the first nine months of 2020 compared to the same period in 2019. Changes in foreign currency rates had a $2 million positive impact on the first nine months of 2020 net sales.
For the first nine months of 2020, the company’s gross margin decreased 310 basis points to 42.7 percent compared to 45.8 percent for the same period in 2019. Non-GAAP gross margin decreased 330 basis points to 43.3 percent compared to 46.6 percent for the first nine months of 2019. The decrease in non-GAAP gross margin is primarily attributable to the decrease in sales related to COVID-19, the proactive soft goods inventory reduction initiatives and costs associated with idle facilities during the government-mandated shutdown. The decrease in gross margin during the first nine months was partially offset by an increase in the company’s e-commerce business.
Operating expenses increased $111 million to $592 million in the first nine months of 2020 compared to $481 million for the same period in 2019. The increase is primarily due to a pre-tax non-cash impairment charge related to the Jack Wolfskin goodwill and trade name. Excluding the non-cash impairment charge and other items mentioned above, non-GAAP operating expenses were $410 million for the third quarter of 2020, a decrease of $58 million compared to the first nine months of 2019. This decrease was driven by the cost reduction actions the company began in March 2020 in response to COVID-19 as well as lower variable expenses.
For the first nine months of 2020, loss per share was $0.92, compared to fully diluted earnings per share of $1.13 for the first nine months of 2019. Excluding the impairment charge and the other non-recurring items mentioned above, the first nine months of 2020 non-GAAP fully diluted earnings per share was $0.98, compared to fully diluted earnings per share of $1.35 for the first nine months of 2019. The non-GAAP earnings for the first nine months of 2020 included foreign currency-related gains of approximately $0.20 per share (including approximately $0.09 per share related to the settlement of a cross-currency swap program), compared to approximately $0.01 per share of foreign currency-related gains for the comparable period in 2019.
Outlook
The company previously reported that it suspended its prior financial guidance for 2020 due to the uncertainty around COVID-19. Furthermore, while both the company’s golf and apparel businesses have been recovering more quickly than the company expected, there has been a recent uptick in COVID-19 cases globally as well as an increase in regulatory restrictions designed to mitigate the COVID-19 impact. As a result, the company is not providing financial guidance for the fourth quarter of 2020.
The company’s brands include Callaway Golf, Odyssey, OGIO, TravisMathew and Jack Wolfskin.
