Callaway Golf Company pulled the trigger last week to defend its market share position in Woods, lowering prices on the category by an average of 24%, effective immediately. The move comes as the company attempts to clean out inventory in the category after announcing in mid-June that it would fall short of its sales and earnings projections. The sales shortfall is due primarily to a consumer shift at retail to larger driver heads and lower prices on product that goes head-to-head with the companys Big Bertha series product.
ERC Fusion prices will drop by about $100 at retail, a move made possible as they learn how to make the product more efficiently. Any consumer that bought the ERC product at its regular price will get two dozen HX Tour golf balls to compensate for the price change. The Great Big Bertha 416cc driver will also see its price drop about $100 at retail and the Big Bertha driver will be reduced by $50 to the consumer. Callaway will also be giving away three dozen golf balls with any titanium driver purchase.
The Top-Flite business continues to be a drag on the company as they try to work through a glut of inventory at retail, cut back on overhead, and start to re-brand the Strata product.
On a positive note, the company is starting to see a more profitable and growing Callaway golf ball business, which grew about 81% from the year-ago period and posted operating income of $6 million versus a loss of $10 million in Q2 last year. The sales gain has enabled the brand to “nearly double” its share position in balls to 10% of the market. ELY said $12 million of the $16 million in OI improvement was realized from cost savings from the Top-Flite acquisition. The savings on the domestic side, coupled with the continued integration of Top-Flites international operations, is expected to yield about $9 million in annual savings in fiscal 05.
On a regional basis, U.S. Callaway brand sales were down almost 11% for the period, but were up more than 19% thanks to $43 million in Top-Flite sales added to the total. Europe sales were up 32% to $58 million, or up just 2.5% for the Callaway brand for the period. Top-Flite delivered approximately $13 million to the total gain for Europe. In Japan, the market continues to be tough, with sales falling 22% to $17 million. Top-Flite was just $200,000 of the total. Canada nearly doubled its sales, jumping 92% to $24 million, with nearly all of the gain coming from the addition of T-F.
Further cost reductions will come from cuts in the R&D group where 42 positions were eliminated, resulting in approximately $3 million in annual savings. ELY said they are working with suppliers to push more of the development work downstream. They have also merged their R&D team with the product management organization.
The recently-acquired FrogTrader business, which is generating about $20 million in annual revenues delivering about $2 million in pre-tax earnings, contributed roughly $2 million to the sales increase for second quarter.
Total consolidated sales would have increased roughly 19% on a currency-neutral basis.