Callaway Continues Upward Trend, Hopes for Better From Top-Flite in Future…

Callaway Golf Company saw the initiatives it introduced in 2005 begin to bear fruit in fiscal year 2006 as the company continued the bottom-line expansion that began last year, while continuing to add revenues at the top. The bottom-line gains were slightly hindered by a decrease in margins that came from the very programs designed to turn things around. On a conference call with analysts, Callaway management continually referred to the “trade reception and early consumer buzz of the new 2007 product line-up” as signs of a bright future ahead. Management also said that the Callaway and Odyssey brands had a strong year, growing 9%, but that the Top-Flite/Hogan businesses “fell substantially short of expectations and dissipated much of the revenue gain achieved by Callaway and Odyssey.”

For the fourth quarter, net sales totaled $179.9 million, increasing 16.4% from $154.5 million for the same period last year. Domestic sales increased 23.7% to $95.8 million in the quarter from $77.4 million last year. International sales increased 9.2% to $84.1 million with strong gains in Europe, up 19.3% to $26.3 million, offset by a 1.0% decrease in sales in Japan to $22.3 million. Sales to the rest of Asia increased 2.3% in the quarter to $14.7 million, while Other International sales jumped 14.1% to $20.8 million.

Management attributed the softness in Japan to the current year “falling between two stools” as that market converts to product regulations that conform with U.S. standards in 2008, leaving current consumers stuck between buying a new club that will only be valid for a season or buying a conforming product that will not keep up with the outgoing models. This pain was especially acute in the drivers business, with management commenting that “uncertainty caused the driver market in the Japanese area to decline by 20%.”

The company saw strong gains in its Golf Balls business in the quarter, up 36.9% to $47.3 million, but the Accessories category provided a major boost, nearly doubling to $37.5 million from $18.9 million in last year’s quarter. Management attributed this category’s strength to the acquisition of its shoe business from the distributor and “just some of [the company’s] accessory businesses, gloves, bags, were up year-over-year.” However, the Woods and Putters categories both saw sales decreases in the quarter, down 9.4% to $39.3 million and 16.8% to $17.6 million, respectively.

Overall sales in the Clubs business, which includes Accessories, increased 10.5% in the quarter to $132.6 million from $120.0 million last year, with the segment’s operating loss slimming to $94,000 from $14.0 million during last year’s quarter. Operating loss for the Balls business, however, expanded 24.3% to a loss of $4.6 million from $3.7 million in the year-ago period. Management pointed towards the Top-Flite business as the culprit for the loss posted during the period, stating “the Callaway Golf ball business was in fact up and profitable at a pretty decent level. The issue we had was in Top-Flite.”

For the company as a whole, gross margins grew 150 basis points in the fourth quarter to 32.7% of sales from 31.2% last year. SG&A expenses, meanwhile, were down 760 basis points to 40.5% of sales, which helped the company to shrink its quarterly loss from $18.7 million last year to $10.2 million during this year’s quarter. Diluted loss per share also decreased for the quarter to 15 cents from 27 cents last year. On a pro forma basis, excluding one time charges, diluted loss per share for the fourth quarter was 11 cents, down from 22 cents per share during the same quarter last year.

Looking ahead to 2007, Callaway Golf offered sales and earnings guidance, expecting full year net sales to be in the range of $1.035 billion to $1.055 billion. Full year pro forma fully diluted earnings per share will be in the range of 75 cents to 85 cents, increasing approximately 45% as compared to the company's pro forma fully diluted earnings per share in 2006 of 51 cents. Estimated pro forma earnings for 2007 exclude charges related to employee long-term incentive compensation as well as charges related to the company's gross margin initiatives.

Though not providing official guidance, management offered a further clarification on the estimates, saying that they expect sales for the first half to range from $670 million to $690 million, with the “second quarter…slightly higher in sales than the first quarter.” Management also mentioned that they expect Europe to “face a very positive year” after weather issues and the World Cup hampering sales. Pro forma fully diluted earnings per share for the first half are estimated to be between 82 cents per share and 89 cents per share with the second quarter again expected to be slightly above the first.