On the surface, the third quarter results for Callaway Golf Company appear to reflect a business that is experiencing meteoric growth after a very difficult period of integration with the acquired Top-Flite business and product launches in the woods category that fell short of consumer and market expectation. While SEW rarely covers the YTD numbers or two-year comparisons for most companies, it is necessary to do so here to get a better picture of the business at Callaway and its return to growth and profitability.

The rationale behind the shift in coverage for ELY is a reflection of the company’s mission to balance new products deliveries across the year. The other issue that clouds the picture for Q3 was the move in the year-ago quarter to basically give away drivers to retailers in an attempt to dump inventory and reduce prices of existing woods inventory at retail. So while the Woods category saw a 339% increase in sales in the third quarter to $62.9 million, the nine-month YTD number reveals that sales of Woods are still trailing behind last year. Sales for the category in the 2003 third quarter were roughly $44.0 million, so the number this year would still represent a very healthy 43.0% increase in sales over the two-year period for the third quarter, thanks in part to the inclusion of the Ben Hogan numbers.

In the other categories, Irons were up 66.0% to $60.3 million for the quarter versus last year’s period, but the two-year gain was just 7.3%. Putters, which posted a 43.5% increase in sales in the quarter to $22.4 million, actually declined 17.1% for Q3 versus the 2003 period. Golf Balls, which were up 22.5% for the third quarter to $50.4 million, posted a 257% increase compared to the 2003 third quarter, due in large part to the acquisition of the Top-Flite business.

Total Q3 sales were up 71.7% to $220.6 million, with highest regional growth coming out of Japan and the Rest of Asia. Sales grew nearly 44% from the 2003 third quarter. U.S. sales for the company increased 66.7% for the quarter to $119.1 million, while International sales grew 78.1% to $101.6 million.

The company was able to swing to an $8.7 million operating profit for all clubs and accessories in this year’s quarter, compared to an operating loss of $50.1 million in Q3 last year. The YTD number in the chart may be a much better barometer of the business, but is still impacted by the inventory liquidation efforts last year. Unfortunately, ELY saw the operating loss in the Golf Ball business expand nearly 49% to a $7.7 million loss in Q3, but the YTD stats reflect the broader picture.

Overall, Callaway narrowed its Q3 net loss to $4.8 million, or a loss of seven cents per share, compared to a net loss of $35.9 million, or a loss of 53 cents per share, in the third quarter of 2004.

The net loss per share for the third quarter of 2005 includes after-tax charges of eight cents per share associated with the integration of the Top-Flite operations acquired in late 2003 and the recently announced restructuring initiatives. The net loss per share for the third quarter of 2004 includes after-tax charges of seven cents per share associated with the integration of the Top-Flite operations. Excluding charges in both periods, ELY would have posted a one penny per share profit in this year’s quarter on a pro forma basis, while the pro forma net loss per share in Q3 last year would have been 46 cents.

While Callaway no longer provides advance guidance, management appeared to be tempering expectations for the fourth quarter. The year-to-date gains may get diluted a bit in Q4 due to fewer new product launches during the period versus Q4 last year.

Callaway Golf Company
Nine-Month YTD Results
(in $ millions) 2005 2004 Total Change
Total Sales $843.6  $790.2  +6.8%
U.S. Sales $485.6  $460.4  +5.5%
Int’l Sales $358.0  $329.8  +8.6%
Woods $197.9  $213.6  -7.3%
Irons $279.9  $219.8  +27.3%
Putters $88.2  $81.7  +7.9%
Golf Balls $180.2  $187.8  -4.0%
Access., Other $97.4  $87.3  +11.6%
GM % 43.4% 40.5% +290 bps
Net Income $31.9  $18.4  +74.0%
Diluted EPS 46¢ 27¢ +70.4%
Inventories* $211.2  $161.5  +30.8%
Accts Rec.* $141.5  $114.9  +23.2%